Creating retirement goals is essential as you progress through your moneymaking years, and determining where your income will come from when you stop working is a vital step in the process. Many retirees have investments they plan to cash out when the time comes, but other options are available.
Interest-only retirement is intriguing because it provides income through your golden years without touching your principal balance. The gist is that you’ll invest your savings in assets that pay out interest and then you live off interest those investments earned.
This method ensures you still have money to pass on to your heirs when you perish while providing you with a steady retirement income.
Retiring off of interest isn’t foolproof because you’ll need a significant nest egg to start and could see your income decrease if interest rates drop. This guide shows you how to live off interest and provides tips for an interest-only retirement.
Ways to Invest Your Money
The first step in creating an interest-only retirement is figuring out where to keep your money. You’ll have a few options, and most are low-risk vehicles that will likely keep your capital safe. Some ways you can protect your savings include the following:
High-Yield Savings
A high-yield savings account may offer the lowest return but is preferable to some other options because you can access your funds if needed. Your money will sit in a bank account and yield interest, providing you with income in retirement.
The catch is that you’ll need significant cash in the bank to generate a worthwhile return, and your income will depend on interest rates.
Certificates of Deposit
Putting your money in a certificate of deposit (CD) allows the bank to hold your funds for a predefined period, but in some cases, the bank will give you a higher interest rate than with a high-yield savings account.
This method is reliable and safe, but you must be confident you won’t require the cash over the term of the agreement because you typically can’t access it before then. There are, however, a few no-penalty CDs at some banks that allow you to withdraw some or all of your funds early if needed.
Treasury Bills
You’ll encounter multiple options when looking at government bonds and bills, so you can choose one depending on your needs. These bills are some of the safest places in the world to keep your money because the U.S. government backs them. The return is better than a bank account, although it still isn’t great, and falling interest rates could reduce your yield.
Consider all your options as you learn how to live off of interest and select the best method for you. These investment vehicles are low risk, but you’ll need to save significant money to generate a meaningful return.
Six Steps to Take for an Interest-Only Retirement
Deciding to live off interest is only part of the battle. You’ll still have to save enough money to generate adequate income in retirement, which will require you to follow the correct process. Some tips for an interest-only retirement include the following:
1. Develop a Plan
Preparing for retirement requires a plan. Living off of interest will necessitate putting 20% or more of your annual income into savings, so you’ll likely have to alter your lifestyle and figure out where to save. Your plan could take significant willpower to bring to fruition because of the amount of money you’ll need.
2. Create an Investment Strategy
The next step is determining where you’ll hold your money. You can start by looking at the risk and interest rates of the various methods available and selecting the option that matches your goals.
You might also look for ways to increase your savings by creating a list of optional and essential expenditures and cutting items you don’t necessarily need.
3. Set Up Automatic Savings
Retiring off of interest requires significant willpower, so setting up a system where money is automatically withdrawn from your bank account and placed in your savings account is advisable. This system ensures you won’t spend the money on items you don’t need and can help keep your plan on track.
4. Hold Your Investments Long Term
There could be the temptation to eat away at your retirement savings when you need money for a big ticket item or encounter an emergency, but do everything possible to avoid touching your account.
Having your money in a high-yield savings account is particularly alluring because you can access the cash anytime. Your investment needs time to grow, so removing this money is something you should avoid.
5. Live Below Your Means
You can reduce the temptation of using your retirement money by learning to live economically. Buying used vehicles, eating at home, shortening your vacations, and brewing your own coffee are ways to cut expenses, leaving you with more money to put away for retirement.
Living frugally also prepares you for retirement when you won’t have as much income.
6. Remember Inflation
Things will likely cost more when you retire than they do today. Inflation can quickly erode your purchasing power in retirement, so you’ll have to put more money away than you’d need if you were currently at retirement age. Inflation hit 13.5% in 1980, so there’s no absolute cap on how high it can go, which you’ll need to prepare for in the future.
There are many aspects to consider as you plan for an interest-only retirement, and the reality is that saving enough money will take a lot of work. You have other retirement methods at your disposal, though, so all your money doesn’t have to come from your savings account.
Creating a Retirement Plan
Thinking about retirement can bring anxiety, especially as you approach your golden years, but meeting with a financial advisor can provide the clarity you need.
Your advisor can assist as you map out your retirement goals and develop a plan to reach them, dispelling your concerns and answering any questions that pop up along the way. They can also provide insight into multiple retirement income options.
Bogart Wealth offers financial and retirement planning services in Northern Virginia and Houston, Texas. Our advisors can plot out your finances and align your career goals to your retirement plan, alleviating your financial stress.
Contact Bogart Wealth to speak with an expert about your retirement concerns.
