For most people, the longest stage in their financial life cycle is the accumulation phase. It’s common to spend decades working, saving, and building wealth before retiring. As you stop working, you enter the wealth preservation phase, and managing your money well becomes even more important. Otherwise, it may not last, your quality of life could suffer, and you might not recover!
Whether you realize it or not, one of the most important questions in personal finance is, “what is enough money?” Without an answer, you may end up chasing money to no end. Not only that, but you could waste precious years of your life in the process, too!
But, when you determine what is enough, you have a definitive number to work towards and thus a stopping point. Upon reaching it, you can meet your needs and wants without having to work for the foreseeable future. At this point, continuing to chase money for the sake of having more is a complete waste of your time!
Wealth preservation has to do with managing your money when you’re no longer working full-time. Rather than receiving earned income from an employer, you’re now reliant on your nest egg to provide for you. To make it last while also enjoying life, you have to manage it well!
In the wealth preservation stage, you have the financial freedom to do as you please. Even though some people will continue to work in some capacity; others will pursue hobbies, work on passion projects, or start small businesses. Still, they’re able to fulfill their lifelong dreams because now they have the time and money!
In addition, the wealth preservation stage gives many people the opportunity to reflect on life. It’s common to reminisce on the good times as well as the bad. Not only that but also on the people who had a positive influence on you. As a result, you may begin thinking about how you can do the same!
For many people, the ultimate goal of preserving their wealth is making it last throughout their lifetime and beyond. By building legacy wealth, they’re able to give to future generations, support causes, and make a difference long after they’re gone!
William Vanderbilt once said, “Any fool can make a fortune. It takes someone with brains to hold on to it!”
With that being said, managing your money well in the wealth preservation stage, or in any stage for that matter, is a key part of keeping it. If you don’t, you run the risk of spending too much too quickly. Living beyond your means and depleting your assets at this stage may prove to be disastrous. Not only could it push you back into the workforce, but it may also force you to abandon your lifelong dreams!
However, looking after your money allows you to live free and do as you choose. As long as you take care of it, it can provide for you, your family, and even generations to come!
Aside from the financial and lifestyle advantages, preserving your wealth has emotional benefits, too. For starters, you’re going to have fewer financial worries. With a healthy financial statement, you’re not going to stress about making ends meet or running out of money. By avoiding these financial problems, you’re able to be more present. Not only can you fully experience life without distraction, but you can also focus on the priceless things that money can’t buy!
Although the wealth preservation stage may still be years away, it’s important to begin thinking about it now. In doing so, you’re putting yourself in a better position to reach your financial goals and live out your dreams!
Here are 5 ways to manage your money in the wealth preservation stage, ensuring that it lasts!
Truth be told, budgeting is a lifelong money skill. Not only is it an important part of building wealth, but it’s key for keeping and preserving it as well!
Once you’ve stopped working and are no longer accumulating assets, your spending has the largest impact on how long your money will last. If your monthly expenses get out of control or your lifestyle creeps too high, then your money will not sustain you!
But with a budget, you’ll have a spending plan for your money. It helps you figure out the places you need to spend as well as the places you want to spend. Not only that, but it helps you realize the limitations of your income, too!
Even if your Golden Years are years away, it can still be helpful to estimate your retirement budget today. Start by figuring out how you would like to spend your time. Will you use it to travel, volunteer, or relax with family and friends? Nonetheless, answering these questions allows you to start designing your ideal retirement lifestyle and thus the amount of money you plan to spend.
At this point, you’re able to get a better idea of what your yearly spending will be. With it, you can calculate your freedom number and determine what is enough for you to live free!
Another way to make sure that your assets persist throughout the wealth preservations stage is by not spending your principal. If you do, you’re going to have fewer assets that can work and generate income for you. Over time, your retirement income won’t just decline, it may not last you!
But, if you only spend the interest, dividends, and other forms of mailbox money that you receive, then your income won’t decline. Not only that, but you can never run out of money, either!
For example, imagine you have a portfolio of equity investments and rental real estate that generates a net income of $100k per year. As long as you live within your means and don’t spend more than $100k per year, then your money will last forever!
The wealth preservation stage is not the time to be taking big risks. Rather than investing large amounts of money in start-up companies, you should be playing it safe. After all, if an investment doesn’t pan out late in life, you may not have the time or health to make a full recovery!
Conversely, even if the investment did provide you with a financial windfall, it wouldn’t matter all that much. Because when you stopped accumulating wealth, you had enough money to achieve your lifestyle goals, and having more wouldn’t change that!
Leading up to and as you enter the wealth preservation stage, it’s important to start reducing your risk. In doing so, you’re limiting the chances that a financial crisis will impact your lifestyle. Besides that, it can shield you from the emotional pain that can stem from dealing with large financial losses, too!
One common way to reduce your risk is by allocating a larger percentage of your portfolio to low-risk assets. If you own stocks, you may sell them and hold more cash, bonds, or other streams of predictable income. This way, your retirement income is safe and secure which allows you to maintain your lifestyle and pay your bills with ease!
One of the largest threats you face in the wealth preservation phase is sequence of return risk. It happens when financial markets and thus your portfolio take a dive early in retirement. To maintain your standard of living, you’re forced to withdraw a larger percentage of your portfolio. Now, your assets are getting depleted faster, putting the odds that you have a happy retirement at risk!
For example, imagine your retirement lifestyle is expected to cost $100k per year. If you rely on a 4% safe withdrawal rate, then you need to accumulate $2.5 million in assets.
But if the market drops and your portfolio falls to $2 million, then you have to withdraw 5% of your assets to generate $100k in income. As a result, you’re burning through your assets at a faster rate which has a significant impact on how long they’re going to last you!
One way to combat sequence of return risk is by holding more cash. Depending on your risk tolerance, consider setting aside 12 to 24 months of expenses, if not more. This way, if the market drops you won’t be forced to sell. Instead, you’ll have a cash cushion to rely on, giving your portfolio time to recover!
When it comes to wealth preservation and leaving a financial legacy, it pays to be conservative. It’s far better to over-save and over-prepare than to come up short!
Having said that, consider being more conservative when planning your financial future. For starters, you may want to overestimate the amount of money you plan to spend. Not only is it impossible to predict the financial surprises you’ll encounter, but you don’t know how inflation will affect the cost of healthcare and medical treatment, either. By over-saving, you’ll have a margin of safety to protect yourself from whatever may come your way!
Another way to be conservative is by underestimating your investments’ expected rates of return. Rather than using historical averages, consider being more modest. In doing so, you’re going to save and contribute more to your retirement accounts today. Over time, your portfolio will compound to a greater amount which further cements that you’ll be financially secure in retirement!
Unfortunately, entering the wealth preservation stage underprepared can prove to be catastrophic. A financial loss or hardship late in life can impact your well-being and quality of life. Not to mention, you may not have time to recover from it, either!
Rather than waiting, start preparing for the wealth preservation phase now. This way, by the time you retire, you’ll have the financial means to live the life of your dreams without worry!
What are you doing to prepare for the wealth preservation stage? Comment below.
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Agreed on all accounts! In our wealth preservation stage, we decided to take a few small risks, so that we can help to set ourselves up for the future. We bought an affiliate website to bolster our cash flow, and we invested in a small amount of crypto. Otherwise, we are holding onto two years of cash at all times (re-balanced quarterly), and are trying to stay flexible and conservative to help manage sequence of return risk. Fingers crossed.
Awesome! I'd love to learn more about buying an affiliate website. I haven't heard of many people that have done that before.