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It is difficult to predict how much money retirees will need to carry forward into their golden years. There are health costs, housing costs and groceries to consider – and that’s without budgeting for any vacations or other discretionary expenses. When it comes to knowing exactly what they need during their retirement years, each person is a little different.
Renowned financial expert Suze Orman has a recommendation that can help guide retirees when calculating future needs. Here’s the advice he gave.”“Women and Money” episode About how much to save for retirement.
Don’t rely solely on 401(k), Roth or IRAs
Before many people retire, they assess what they have in their retirement accounts to get an idea of how much they will have to spend in the coming years. Orman highlighted that these accounts are subject to the health of the stock market, so they could decline significantly at any time.
“It’s not always the case that stocks go down and bonds go up, or bonds go down and therefore stocks go up. Sometimes everything can go down,” Orman said on the podcast.
Keep cash reserve for 3 to 5 years’ expenses
To protect yourself from stock market volatility, Orman recommends keeping at least three to five years’ worth of living expenses in an account that can be easily cashed in without selling any stocks or bonds.
This could be a retirement account, a checking account or a high yield savings account. The important thing is that its amount is not affected by the stock market. This way, if the market falls, you still have a large chunk of money that is not affected and is accessible for living expenses.
She recommends this because if the stock market experiences a significant decline, it may take three to five years to recover.
“If you really want to be safe, it’s five years,” Orman said. “If you just want to play it out so that you have at least three years, fine, you can do that too. Maybe you split it up, and you play for four years.”
Retiring soon? Take a look at the underperforming stocks
For those who are planning to retire in the near future and are trying to build up that cash reserve, Orman recommends looking at their portfolio and seeing which stocks aren’t performing well.
“The markets are pretty high right now. If you know you’re going to retire soon, you’ll take it out of stocks that either haven’t performed well, or that in your opinion aren’t going to perform… and just do it from there,” he suggested.
Orman said people who want to retire early can also look at their highest-performing investments and start taking small amounts from them to build a cash reserve.