Warren Buffett’s No. 1 Rule for Not Running Out of Money in Retirement
If you fear running out of money in retirement, you’re not alone. People build nest eggs for decades to help ensure they can do everything they want once they’re retired, whether that’s travel, dine out or pick up a new hobby.
But there are ways to prevent that fear from becoming a reality, including making prudent financial decisions and managing your portfolio like legendary investor Warren Buffett. The famed investor has picked plenty of stocks that have soared, but his long-term mindset and emphasis on compound interest are key to his financial success.
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The risks of cash and investing
This fear of outliving your nest egg has become more apparent in recent years due to longer life expectancies and higher inflation. You have to stretch your money across more years as it continues to lose purchasing power. That’s why you need assets that can outperform inflation and compound over time.
But while an all-cash approach comes with inflation risk, you also don’t want to invest every penny. The risk with that approach is that you may end up being forced to sell assets during a market correction to cover your living expenses.
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Buffett’s approach
One of the core principles of Buffett’s approach is to invest for the long-term and let compound interest — which is the interest you earn on interest — power your portfolio. As your balance grows, compound interest means your assets do much of the work for you.
Buffett stays invested in productive assets and doesn’t sell due to short-term volatility and market noise. It’s also important to avoid selling just because you are getting close to retirement without a proper strategy. If you have a long-term growth mindset, you can get more out of your nest egg and help ensure that your wealth outpaces inflation.
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Balancing growth and safety after 50
The best asset allocation for you will depend on your goals, risk tolerance and time horizon. While keeping everything in cash can result in significant opportunity costs, leaving all of your money in equities comes with a lot of risk, too. Sensible asset allocation gives you enough cash to cover living expenses in the short term, so you don’t have to sell during down markets. This balance lets investors capitalize on growth opportunities while maintaining a solid cash buffer for various expenses. You can adjust your allocation gradually based on changes to your risk tolerance.
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For instance, some risk-averse investors may prefer putting money into dividend stocks that they won’t need for the next three to seven years and put the rest into growth stocks. Investors who are more keen to take risks may opt to have enough cash to cover one year of expenses, money in income-producing assets that they won’t need in the next three years, and the rest of their funds going toward growth stocks.