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Plan a financial Independence Day for retirement

July 4, 2017

Kate Stalter

Santa Fe’s Independence Day tradition of Pancakes on the Plaza — and the classic car show — is something I look forward to each year. It’s always fun to see a wide spectrum of city residents enjoying the day while also supporting good causes.

But the concept of Independence Day doesn’t only mean pancakes, cars, fireworks and flags. It can also be applied to your personal finances. Are you currently financially independent, or headed in that direction?

For Baby Boomers who have retirement in their sights, and are aiming for financial independence, here are some planning items to consider:

Where will you get retirement income? According to research firm Standard & Poor’s, Americans 65 and older, on average, derive 33 percent of their income from Social Security, 32 percent from earnings from work, 21 percent from pensions, 10 percent from investments and 4 percent from that catch-all category dubbed “other.” That last category may include rental income and gifts.

If you are preparing to retire in the foreseeable future, now is a good time to evaluate the various income streams available to you.

Will your money last as long as you do? The number of Americans living to age 100 is skyrocketing. According to 2016 data from the Centers for Disease Control and Prevention, the number of people reaching the century mark grew 43 percent between 2000 and 2014. It’s true that medical science and lifestyle improvements, such as car safety and reduced rates of smoking, are lengthening our life spans. Nonetheless, a longer life requires more money — and therein lies the problem for many people. Long gone are the days when people retired at 65 and passed away a few short years later. Today’s 60-something retiree needs to be certain his or her available resources will cover the expenses for several more decades. It doesn’t cut it anymore to estimate your life expectancy based on how long your parents lived.

Will your investments weather a severe market downturn? The market crash of 2008 is still fresh in most of our minds. Unfortunately, many investors panicked and sold out, locking in steep losses. Others invested only in big American stocks, which suffered a “lost decade” between January 2000 and December 2009, posting a total decline of 9.1 percent. During that same decade, other types of assets, such as bonds, smaller U.S. stocks, real estate investment trusts and international stocks, finished with sizable gains.

An overreliance on any one type of investment results in inappropriate levels of risk. In the next major downturn, these risky portfolios are likely to fall sharply, which could lead to new round of panic selling. Before that occurs, determine the level of risk you are taking. Will your portfolio generate the return you’ll need for the next few decades, while allowing you to sleep at night without worrying about losing all you have?

How much can you spend in retirement? You may have heard of the 4 percent rule, popularized in the 1990s by financial planner William Bengen. In a nutshell, this formula suggests withdrawing 4 percent a year from your investment portfolio, increasing the dollar amount each year to adjust for inflation. In theory, this amount should give you enough income for the next three or even four decades. However, that rule has been questioned recently for one glaring reason: Interest rates are significantly lower today than 25 years ago.

Instead of relying on a quite-possibly-outdated formula, start by getting a handle on your expenses. Forget the tired old advice that your expenses will decrease in retirement. As it turns out, plenty of research shows that expenses may actually go up for younger, active retirees who want to travel and engage in long-neglected hobbies. Maybe it sounds like fun to spend $15,000 or $20,000 per year on world travel, but is that realistic? Consider doing a financial plan, which will show how much you can spend, how your investment mix is likely to perform over time, how much you can leave to your family or favorite causes, and whether an event like a major illness could dash your hopes.

Unfortunately, there’s no one-size-fits-all number or rule for retirement. Each situation is unique, and each requires its own deep dive into not only the numbers, but also the human factor: How do you envision your own financial independence? That’s hardly something you can find in a mathematical equation.

If you would like more information about planning for the retirement of your dreams, I am hosting a seminar, “Secrets To Achieving Financial Independence” from 12:30 to 1:30 p.m. July 12, at the La Farge Branch Library, 1730 Llano St. Call me at 844-507-0961, ext. 702, to reserve your space.

Kate Stalter, founder of the independent firm Better Money Decisions, helps people throughout Northern New Mexico plan for retirement. Contact her at 844-507-0961, ext. 702, or kate@bettermoneydecisions.com.

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