Retirement Planning is a Game of Chess

Keep Retirement Strategy in Mind This Holiday Season

With the holidays rapidly approaching, a goal often set during these times is to diversify your retirement funds. With retirement investment there are two main focuses: investing/saving and distribution. During retirement you are at your most vulnerable financially because a regular paycheck is not coming in. It is the longest self-imposed period of unemployment most folks face. The following is fantastic advice for when you are trying to invest.

Your retirement planned around living and may seem expensive to support. Remember, roughly 55% of folk live beyond their life expectancy. So, it is important to plan for the long haul. A long-term investment sustains a better savings, but there are risks being found there. Short-term investments usually have higher yields. It is important to balance these.

Spending now can save more money for the long road. An example of this is withdrawing properly to avoid provisional income.

Be reasonable when it comes to expectations. Historical returns may not be what your portfolio does. Returns typically fall below the average. However, this can be balance with a diversification of accounts. Though we have historically low interest rates, this means bond returns will not impact retirement much. This will affect those who have retired most.

Heedless of where you are at in retirement planning, relying solely on plans that require higher returns is dangerous. If you expect to make more in the future, that means spending much more upfront. Stocks carry a higher risk than bonds, so they will yield higher return rates. Simply put: Spending more today and expecting higher returns in the future is risky business. The risks and consequences must be evaluated on a case-by-case basis.

Strategy should always be a top priority. Diversifying your retirement portfolio is just a start. Considering all the risks you will face in retirement is the next stop. Putting all your funds in one bucket will expose you to much more risk—taxable, tax-deferred, and tax-free. Integrate different approaches and accounts to combat inflation, tax rates, rate of return, and even long-term care.

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Understanding Financial Independence, Retire Early (FIRE)

Brought to light from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominquez, the Financial Independence, Retire Early (FIRE) community was born as a movement that analyzes spending in terms of working hours as the ‘payment.’ For example, if your hourly pay is $12, a tube of toothpaste at $4 is 20 minutes of work. Being founded on the extreme frugality of spending, the movement is heavy on saving and investing, too.

With their dedication to saving and investing, FIRE followers aim to retire decades before 65. Those within the community typically work to save, invest that money, and when their assets are about their 25-30 times their projected annual expenses, will retire fully in their 30s or 40s. Some may work part-time. To maintain their desired lifestyle, FIRE folks will withdraw 3-4%. There have been various FIRE perspectives come to life since its rise in 1992 depending on lifestyle needs. The core three are as following:

  • Fat FIRE – This style takes aggressive savings and investment strategies and is more suitable for those with larger incomes than the average worker. Oftentimes this is the FIRE lifestyle for someone who does not want to reduce their standard of living.
  • Lean FIRE – With extreme saving and investing methods and a minimalistic lifestyle, the restricted living often has these folks living on $30,000 or less a year.
  • Barista FIRE – As the mid-grounds for Fat and Lean, folks here typically quit their traditional full-time jobs and use a combo of minimalistic living with freelance or part-time work. This is typically to maintain health benefits, support themselves, and not touch their retirement funds.  

More to FIRE than Meets the Eye:

FIRE does not mean entirely quitting work nor does just apply to retiring early. There are many accessible elements that could be applied to your retirement planning and financial health. Planning for your future is the core of the FIRE community. It is about getting better with your money—be it better saving, methodical investing, or intentional spending:

  1. Planning – In 2021, a study showed 25% of Americans did not have a retirement savings at all. Of those, almost 40% felt they would never get on track to have the retirement they want. FIRE emphasizes the importance of planning and saving.
  2. Discipline – To achieve what your plan entails there is a great amount of discipline involved. FIRE is about maximizing your income and minimizing your overall expenses. Setting a budget, strictly sticking to it, creating income streams now and saving.
  3. Invest wisely – Ideally, taking a certain percentage of your monthly income to invest is the idea of FIRE. The money adds up over time and grows. Strategies under FIRE are a little more extreme, encouraging to sometimes invest large amounts than the typical working person.

For further information on FIRE and much more, listen to our podcast episode “F.I.R.E., Side Hustles, and Retirement with the Financial Panther” of The Retirement Risk Show.

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