When we're young, we tend to think about retirement as though it's just a really long, really great vacation.
We picture a house near the beach or a golf course. We can get out of bed when we please, stay up all night if we want, and never worry about another missed deadline. A frosty beverage is always at hand, and there's a hammock waiting in the shade.
But as we grow older and retirement gets closer, that enthusiasm often turns to angst. We have to figure out how the heck we're going to pay for the lifestyle we want when the paychecks stop -- and that can be a challenge, even for the savviest of savers.
Here are six mistakes to avoid when planning your dream retirement:
1. You do not have a plan.
Your No. 1 goal in retirement should be to know how much you will have coming in each month from all of your income streams -- and how you'll make that money last. Most prospective clients I meet with have a broker who helps them choose and purchase investments, but they don't have a holistic, written retirement plan that covers five key areas:
· Income (how you will pay yourself)
· Investments (how you will keep growing your money while also keeping it safe)
· Taxes (how you will hold onto more of the money you worked so hard to save)
· Health care (how you will deal with the short- and long-term care expenses that could significantly reduce your nest egg as you grow older)
· Estate (how your spouse, children and favorite charities will be taken care of when you die)
Your plan is your guide to and through a successful retirement.
2. You have never had your portfolio stress-tested.
One of the first questions I ask clients is how much money they're willing to lose if there's a market downturn. They always say zero. Of course, that isn't an option in investing; to earn a return, you must take on some risk. But we usually can land on an amount they can handle, both financially and psychologically. Software (such as the Riskalyze program we use) can help determine your risk tolerance -- and whether that's what your current portfolio is built for. Most people are surprised to see how aggressive their investments are compared with their comfort level. This can be fixed -- but first, you have to know where you stand.
3. You do not have a tax plan.
Investors often underestimate how much they will pay in income taxes after they retire. Some aren't aware that up to 85% of their Social Security benefits can be taxed. Others forget that Uncle Sam owns a portion of their 401(k) or IRA if they aren't in a Roth account, and when they take out their money, they'll have to pay him his share. Many are under the (usually mistaken) impression that they'll be able to live on far less income during retirement. I recommend working with a CPA who understands retirement income tax planning. And it's always a plus if your financial adviser and tax professional are working as a team to maximize tax efficiency.
4. You have an unrealistic income plan.
Many of the income plans my prospective clients come in with use a high rate of return that, at best, is a reach; they use minimum inflation protection rates and low tax rates; and there are no assets set aside for health care costs. A plan like that could leave you in a vulnerable situation. I prefer to build a more conservative plan, and if it turns out you have more money to work with than you thought, its gravy.
5. You do not understand investment fees.
Most investors don't know how much they pay in fees, which can be layered and complicated. When we run software to identify those fees, we find some people are paying as much as 3%. That may not seem like a lot, but if you look at a $1 million portfolio with an 8% rate of return over a 30-year period:
· A portfolio with 3% in annual fees will have $4.0 million.
· A portfolio with 2% in annual fees will have $5.5 million.
According to the 2017 Retirement Confidence Survey, about 24% of workers said they had less than $1,000 saved for retirement, and a whopping 55% had less than $50,000. Only 20% had socked away $250,000 or more -- and even that seemingly hefty sum won't provide for the comfiest of retirements.
Clearly, many of us have not set ourselves up to have the money we'll need in retirement. Fortunately, though, there are some ways to get more money in our golden years.
Here are seven ways you can get more money in retirement.
1. Work a little longer before retiring
Most people probably don't want to put off retiring, but it can be a very effective strategy, giving you a bigger nest egg to retire with and fewer years that it will have to last. You might enjoy your employer-sponsored health insurance for additional years, too, perhaps while collecting a few more years' worth of matching funds in your 401(k).
Not convinced it's worth it? Well, imagine that you save and invest $10,000 per year for 20 years and it grows by an annual average of 8%, growing to about $494,000. That's pretty good. But if you can keep going for another three years, still averaging 8%, you'll end up with more than $657,000! That's more than $160,000 extra just for delaying retiring for a few years. If you're somewhat close to retiring, the table below will show you how much more you might amass over several time periods if your money grows by an annual average of 8%:
2. Work a little – in retirement
Whether you delay retiring or not, you should consider working a little while retired. Sure, it might seem to defeat the goal of living work-free, but many retirees actually find that they miss the structure and opportunities for socializing that their job provided. Many find themselves restless and a bit lonely in retirement, and a low-stress job on the side can be quite helpful.
Working just 12 hours per week at $10 per hour, for example, will generate about $500 per month -- a useful sum. If you're imagining being a cashier at a local retailer or delivering newspapers and you're not excited by that, think a little harder about work possibilities. You might do some freelance writing or editing or graphic design work. You might tutor kids in subjects you know well, or perhaps give adults or kids music or language lessons. You might do some consulting -- perhaps even for your former employer. You could babysit, walk dogs, or take on some handyman-type jobs. These days the internet offers even more options. Make jewelry, soaps, or sweaters and sell them online.
3. Get -- and stay -- debt-free
When you're living on a reduced income, it will be extra hard to pay off credit card debt or other high-interest debt, and those payments can hurt your ability to make other necessary payments. Paying off your debt before you retire will leave you with more money.
It can be OK to be still carrying a mortgage in retirement, but many people aim to have their homes paid off before retiring. Credit card debt is a different matter, though, as it can be financially devastating. Aim to pay that off pronto, no matter whether you're in retirement or are only 37 years old. It's not unusual to be charged annual interest rates of 25% or more, and on $8,000 of debt, that can cost you around $2,000 each year!
4. Make the most of retirement savings accounts
The more you contribute to tax-advantaged retirement savings accounts such as IRAs and 401(k)s, the more money you'll have in retirement. There are two main kinds of IRA -- the Roth IRA and the traditional IRA -- and for 2017 and 2018 alike, the contribution limit for both kinds of IRAs is $5,500 for most people and $6,500 for those 50 and older. Meanwhile, a 401(k) has much more generous contribution limits -- for 2017 it's $18,000 for most people and $24,000 for those 50 or older, and for 2018 it rises to $18,500 for most people, while the $6,000 catch-up limit is unchanged.
Those contribution limits might not seem like a lot of money, but they're quite powerful if your money can grow for many years. As an example, socking away $5,000 annually for 25 years will get you nearly $400,000 -- and you'll likely be able to invest larger sums over time, as you earn more and contribution limits rise. Roth IRAs and Roth 401(k)s (which are increasingly available) can be especially powerful retirement income generators, as they let you withdraw money in retirement tax-free!
5. Buy fixed annuities
Another good way to set up regular income for you in retirement is through annuities. Yes, some annuities, such as variable annuities and indexed annuities, can be quite problematic, often charging steep fees and sporting restrictive terms. But another kind -- fixed annuities -- is well worth considering. They're much simpler instruments and they can start paying you immediately or on a deferred basis.
Below are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
Annuities remove worries about stock market moves and the economy's current condition and keep paying you no matter what is going on in the economy. A deferred annuity can also be smart, starting to pay you at a future point, such as when you turn a certain age. A 60-year-old man, for example, might spend $100,000 for an annuity that will start paying him $957 per month for the rest of his life beginning at age 70. Deferred annuities are a good way to avoid running out of money late in life.
6. Borrow against your life insurance
Here's a retirement-income strategy many don't think of: Borrow against your life insurance. This can work if you've bought "permanent" insurance such as whole life or universal life. It won't work if you've bought term life insurance that generally only lasts as long as you're paying for it. (A note to insurance buyers, though: Term insurance is preferable in many ways.) You'll be reducing or wiping out the value of the policy with your withdrawal(s), but if no one really needs the ultimate payout, this strategy can make sense. Plus, the income is often tax-free.
7. Make the most of Social Security
Finally, think strategically about Social Security. You can increase or decrease your benefits by starting to collect Social Security earlier or later than your "full" retirement age (which is 66 or 67 for most of us), and you can get more out of the program by coordinating with your spouse when you each start collecting. For example, if you and your spouse have very different earnings records, you might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get to enjoy some income earlier, and when the higher earner hits 70, you can collect their extra-large checks. Also, should that higher-earning spouse pass away first, the spouse with the smaller earnings history can collect those bigger benefit checks.
There are even more ways to maximize your Social Security income -- so learn more about them and see which ones you can act on.
It's often assumed that retirees live on fixed incomes, but that's not entirely true. Social Security checks are increased over time, and there are many ways to increase the income you expect to be living off of in your golden years. Much of your future financial security is under your control.
The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.
Here are some solid words of wisdom on generating wealth and being generous with it as well.
You may be looking for an edge in your personal finances -- something that can help you rethink your approach to money and start getting ahead financially. If so, you might benefit from hearing what billionaires have to say and learning from their experiences. So, here are a few lessons on frugality, investing, and generosity from some of the wealthiest people in the world.
1. Live simply and be frugal
Most people don't associate billionaires with penny-pinching, but that's how famed investor and billionaire Warren Buffett approaches his personal finances. Buffet bought a relatively modest house back in 1958 for just $31,000, which was around $275,000 in today's dollars, and he continues to live in it to this day. For context, the median home price in July of this year was $313,700.
Buffett has summarized his views on success and happiness like this:
Success is really doing what you love and doing it well. It's as simple as that. Really getting to do what you love to do every day -- that's really the ultimate luxury ... your standard of living is not equal to your cost of living.
Buffett also holds on to his vehicles for a long time, as does Wal-Mart founder Sam Walton. And IKEA founder and billionaire Ingvar Kamprad once shared why having lots of money doesn't mean you should indulge yourself to no end:
I'm a bit tight with money, but so what? I look at the money I'm about to spend on myself and ask myself if IKEA's customers can afford it.... I could regularly travel first class, but having money in abundance doesn't seem like a good reason to waste it.
2. Have a long-term investing strategy
There's no better way to build up your wealth than let your money earn even more money for you by investing in stocks or index funds. John Bogle, the founder of The Vanguard Group and the creator of index mutual funds, says many things will try to distract you from your long-term goals, but you have to stay the course: "Do not let false hope, fear and greed crowd out good investment judgment. If you focus on the long term and stick with your plan, success should be yours."
Bogle's words aren't puffery, either. The index funds offered by his company are some of the easiest ways to build long-term wealth because of their historic 10% annual returns and low expense ratios.
3. Be generous
Microsoft founder and billionaire Bill Gates is well known for his philanthropic work, and his views on being generous can inspire all of us to support causes we believe in, no matter what our income levels.
"My wife and I had a long dialogue about how we were going to take the wealth that we're lucky enough to have and give it back in a way that's most impactful to the world," Gates told The Telegraph three years ago.
When it comes to his fortune, Gates has said, "Its utility is entirely in building an organization and getting the resources out to the poorest in the world."
The good news is that the United States is already one of the most generous countries in the world, according to the Charities Aid Foundation World Giving Index report from last year. And according to Giving USA's annual report about philanthropy in America, individual charitable donations increased last year by 2.6% (adjusted for inflation) to $281.8 billion.
4. Pay down your debt, especially credit cards
Before he became a billionaire, the outspoken owner of the Dallas Mavericks, Mark Cuban, said there was one thing he wishes he had known about personal finance when he was in his 20s:
That credit card is the worst investment that you can make. That the money I save on interest by not having debt is better than any return I could possibly get by investing that money in the stock market. I thought I would be a stock market genius. Until I wasn't. I should have paid off my cards every 30 days.
Unfortunately, Americans are racking up more debt than ever before. The Federal Reserve says that Americans now have over $1 trillion in outstanding revolving credit, which tops the previous record set back in April 2008.
Be smart with your money
It's easy to skim through a list like this and assume that just because the people mentioned above are billionaires, their ideas aren't applicable to our own personal finances. But these simple, straightforward approaches to spending, investing, and giving are all practical ideas that any of us can put to use now.
There are many factors to consider when you start investing – such as what to invest in and how much it will cost. But what many people might not realize is that one of the most important considerations is your age.
How old you are determines how long you have to invest, and that can help decide how much investment risk you should take.
Ryan Hughes of pension provider AJ Bell says: ‘The rule of thumb is that the longer timeframe you have the more risk you can afford to take.
‘But, of course, you should never take more risk than you are comfortable with. There is no point investing in a way that will give you sleepless nights.’
Beginning as young as possible can give you a head start. For many people, the investment journey may begin as a child. Parents and grandparents can squirrel away up to £4,128 a year tax-free for children through a Junior Isa.
Not only will starting early give the investment pot longer to grow, it can also get youngsters into a good savings habit for later life. Grandparents who invest £50 a month into a Junior Isa from a child’s birth could see the investment grow to more than £17,500 by age 18 if it grew at 5 per cent a year.
The younger you are, the more risk you can afford to take – for if there is a stock market crash there is more time for your money to recover.
Hughes says of savers starting in their 20s: ‘Investing for retirement could involve someone investing for 40 years, so higher-risk investments such as emerging markets and technology stocks could be appropriate.’
He suggests Fidelity Index World as a core investment choice for a young person’s portfolio. The fund is a cheap way to invest in stock markets worldwide and has returned 47 per cent over the past three years.
He also likes fund Invesco Perpetual Asian which focuses on companies based in China, South Korea and Hong Kong, such as electronics firm Samsung and internet specialist Baidu. It has returned 68 per cent over three years.
A racier choice is Polar Capital Technology fund, which aims to tap into key technology trends. It invests in internet giants such as Amazon and Facebook, plus lesser-known outfits with growth potential such as semiconductor maker Advanced Micro Devices.
The fund has returned 100 per cent over three years.
Rob Morgan, investment analyst at Charles Stanley, likes Franklin UK Smaller Companies fund. He says: ‘Investors sometimes overlook smaller companies. But they tend to be more dynamic and quick to react to growth opportunities.’
The fund, which has returned 45 per cent over three years, aims to find fast-growing companies.
The manager likes software companies and support services firms such as Clipper Logistics and shipping company Clarkson.
Mid-life Money Management
When you reach your 40s, it is time to start taking a more conservative approach.
As you get closer to retirement you may want to start being more cautious and reducing the proportion of your portfolio which is equity-based.
Michael Martin of investment house Seven Investment Management likes Troy Trojan fund as an ‘all-weather option’.
The fund, which has returned 22 per cent over three years, invests in a mix of company shares, government bonds and gold. This should mean the fund offers steady growth regardless of what the economy is doing.
He also likes Fundsmith Equity fund, run by veteran City investor Terry Smith. His strategy is to invest in companies which are so successful you never need to sell the shares.
The fund favors firms with strong brands such as Pepsico and Microsoft – with two-thirds of its money in US firms. It has returned 87 per cent in the past three years.
Another favorite is Lindsell Train Global Equity fund which invests in ‘boring’ firms renowned for paying a good income.
An increasing number of people keep their money invested even after they stop working. But investment choices should be cautious and focus on paying an income. Hughes says: ‘Generating income is vital. A good quality equity income fund can fulfill this purpose.
He likes Evenlode Income fund, which currently yields 3.4 per cent. The fund invests in firms such as Johnson & Johnson and AstraZeneca, which consistently grow their dividends.
Another favorite is Newton Global Income which invests in dividend-paying firm across the globe. It has a focus on larger businesses such as Microsoft and Unilever and currently yields 3.2 per cent.
A fixed income fund is a sensible choice for income. These invest in government and company bonds. Henderson Fixed Interest Monthly Income invests in the debt of companies including Barclays and Nationwide Building Society.
One-Stop Shop Choices
For many investors, the idea of picking their own investment funds can be daunting. There are now some 2,500 funds available through fund supermarkets such as Fidelity and Hargreaves Lansdown.
Deciding which ones are right can prove challenging. Multi-asset funds are a good one-stop solution.
Charles Stanley’s Morgan says: ‘Multi-asset funds invest across different areas, mixing shares and bonds as well as alternative assets such as property. The result is a diverse portfolio in a single fund, which is helpful for those looking for a low-maintenance investment choice.’
He likes Investec Diversified Income fund as an ‘uncomplicated, conservatively-run’ choice.
Another strategy is to pick a multi-manager fund. These invest in other funds using their expertise to find the best mixture of fund managers to generate returns.
Seven’s Martin likes Jupiter Merlin Balanced which invests in funds such as Woodford Equity Income and Fundsmith Equity.
The S&P 500 didn't gain ground in 2015, so neither did retiree Bruce Stanton's spending money. That summer, the former teacher in Washougal, Wash., dialed back what he withdrew from his retirement account to reflect the lackluster market. Fluctuations in income aren't that rare. During his career as a chemistry teacher, Stanton would sometimes get a big raise and other times get none. "I'm used to going without them," says Stanton, 63.
A challenge for all retirees is creating an income stream that will last a lifetime even if a downturn takes a big bite out of their savings. Some, like Stanton, are tackling this by adjusting withdrawals based on the market's performance.
But market-linked approaches run counter to the long-standing 4% rule, which holds that your money will last for a 30-year retirement if you withdraw 4% of your nest egg the first year and adjust that dollar amount annually for inflation.
Some experts are now arguing for a lower initial rate—such as 3%—since stocks and bonds may deliver below-average returns over the next few decades. Yet for much of history, 4% has been conservative, according to financial adviser Michael Kitces.
So what's a retiree to do? As an alternative to withdrawing a fixed percentage, here's a look at four "dynamic" withdrawal strategies.
Skip rises in down years.
Under the 4% rule, retirees with $1 million would take out $40,000 in the first year. Then they'd typically boost that dollar amount in subsequent years based on the consumer price index (CPI), a common gauge of inflation. So if CPI rises 2%, they'd take out $40,800 in year two.
But to play it safer, you could choose to skip those raises in years following negative returns for your portfolio.
David Blanchett, Morningstar's head of retirement research, says if you skip the inflation bump in down years, the chances your money will last until age 90 will go up by nearly 11 percentage points, assuming an initial 4% withdrawal.
Ratchet higher in up years.
What if you care about flexibility, but instead of sacrificing after down years, you want to reap the rewards of a strong market?
Kitces says if your account ever grows 50% above its starting value after initiating withdrawals—says you retired with $1 million but your balance rises to $1.5 million—you can go ahead and boost your withdrawals by an additional 10% above any inflation adjustments in perpetuity. Assuming you were going to withdraw $45,000 this year, you'd actually be able to tap as much as $49,500. And you wouldn't have to slash withdrawals after subsequent downturns.
According to Kitces, this strategy won't deplete your account under any scenario. The higher spending, though, makes this less than ideal if you want to leave legacies to your heirs.
Set a floor and a ceiling.
This hybrid approach, pioneered by Vanguard, starts out by establishing an annual rate of withdrawals—say, 4%. Then you set a ceiling that's no more than 5% higher than the prior year's income level, and a floor that's no more than 2.5% lower.
Here's how that would work: Assume you start with $1 million, and say you plan to withdraw 4%, or $40,000, at year's end. But market forces boost the value of your nest egg by 20% to $1.2 million. How much would you be able to tap at the end of year two? Well, you'd start by applying that 4% rate again to your new balance, which comes to $48,000. Then you'd see if that amount falls within your ceiling and floor. In this case, a 5% ceiling on $40,000 would be $42,000, which is below the $48,000 mark—so you'd go with the lower figure.
This ceiling-and-floor approach had a 92% success rate, meaning in more than nine out of 10 possible scenarios, retirement funds aren't depleted even after 35 years, according to Vanguard. By contrast, the traditional 4% rule with annual inflation adjustments resulted in a 78% success rate.
This also mimics human behavior: People tend to splurge when the market is up, and dial back when it's down, says Francis Kinniry, a principal in Vanguard Investment Strategy Group.
Use RMDs as your guide.
Once you reach age 70½, you have to take required minimum distributions (RMDs) from your traditional IRAs. Its Uncle Sam's way of getting his hands on money that's been tax sheltered for years.
To calculate your RMD, you divide your IRA balance by an IRS-provided figure that represents an actuarial estimate of the remaining life span of someone your age. At 70, your denominator is 27.4; meaning that under certain circumstances someone your age may live until nearly 97½.
As it happens, you can "take advantage of the actuarial strategy behind RMDs to guide your spending," says Wade Pfau, professor of retirement income at the American College of Financial Services. No one under 70½ must take RMDs, but there are equivalent lifetime expectancy figures. For a 65 year old, it's 31.9.
If you retire at 65, you'd divide your nest egg by 31.9. With a $1 million account, that's $31,350, meaning rather than tapping 4% of your nest egg, you'd be taking 3.1%, a relatively conservative approach.
Investors who aren't looking to leave a lot in their accounts for heirs might alter the formula slightly to boost their income.
For instance, you might modify your RMD amount by a factor of 1.1. Here, you'd multiply that $31,350 figure by 1.1, and at 65 you could withdraw close to $34,500 on that $1 million account.
Poor spending habits can snuff out your savings, just like the moon snuffs out the sun in a solar eclipse. The sun comes back out, but will your savings?
Today many of us in the US got a celestial treat: the first total solar eclipse in nearly a century. At the place where I work there is a high concentration of technical people, so we were all geeking out outside and enjoying the show, complete with pinhole cameras, polarizing sheets, colanders, and eclipse glasses.
Spending habits can be the difference between night and day
Just like the moon covers up the light of the sun, poor spending habits can cover up your savings, and then some.
Spending less than you earn is what responsible personal finance boils down to. Nothing else is sustainable in the long run.
Here are eight spending habits that are best to avoid if you want to save money and have good personal finance:
· Large student loans. A college degree is an income-booster, generally. There are also insanely expensive ways to go to college, just as there are cheap ways to go to college. Coming out of college with a load of student loans — which, by the way, are notoriously difficult to get discharged — can substantially cut into your ability to save for years. (Or, even worse, failing out of college with debt. Ouch!)
· Lavish, over-the-top weddings. Having gone through a wedding myself, I fully understand the desire to have a great day. It should be an once-in-a-lifetime event (kind of like a really good solar eclipse). At the end of it all, though, you'll be just as completely married after a $3,000 wedding as you will after a $50,000 wedding. The only difference is the bill. And if it comes with a five-figure credit card debt afterwards — well, the honeymoon will be over more quickly than you realize. Opt for a budget wedding and you'll be happy you did (and your guests probably won't think any less of you, either).
· Buying as much house as the bank will approve you for. When I was getting our loan approval for our current house, I was flabbergasted by how much they would lend me. If I remember, it was an amount that would result in a mortgage payment of nearly half of my take-home pay. That was way, way too much for me! But … the banks know that you'll move mountains to make that mortgage payment, so they don't really care too much if you are strained financially by it. Our mortgage payment is something more like 15% of our take-home pay. The less the better!
· An addiction to new vehicles. Buying new vehicles is a nice luxury if you can afford them and pay cash, but borrowing for them is like throwing thousands of dollars down the drain. New vehicles lose 15% or more the second they're driven off of the lot, and there's basically no way to get that back, ever. Buying used cars has the advantage that the first owner paid the depreciation for you. They'll still go down in value, but not nearly to the extent that they did the first year. (Buying used is a great saving tips in general, too!)
· Eating out all the time. Eating out once in a while for special occasions is a nice treat, but when it's one or two meals a day, every day of the week, it takes its toll on your bank account. Learn some simple meals that you can make yourself (here's my favorite soup for starters).
· Mountains of credit card debt. I get it: Sometimes credit card debt is unavoidable. Stuff happens beyond people's control: a serious accident, or a serious illness, or both. But a lot of it is completely and utterly avoidable with some good spending habits and some self-restraint. Simply don't buy stuff that you can't afford.
· Crazy-expensive vacations. Though it's unwise to cheap out too much on a vacation, it's equally unwise to vacation beyond your means. The vacation hangover is usually bad enough without a giant bill or humongous credit card balance to pay off.
· Expensive toys with lots of maintenance. Think boat (which is an acronym for Bring on another Thousand), or a swimming pool, or a vacation home, or a time share. These toys have a lot of fees and maintenance costs that are ongoing; buying the toy is just the down payment.
· Expensive toys with lots of maintenance. Think boat (which is an acronym for Bring on another Thousand), or a swimming pool, or a vacation home, or a time share. These toys have a lot of fees and maintenance costs that are ongoing; buying the toy is just the down payment.
When it comes to saving for retirement, maybe you've done everything right. You started early, maxed out your 401(k) plan, invested in a diversified portfolio and avoided costly mistakes, such as cashing out your retirement plan. Fantastic. But now comes the hard part: making sure you don't outlive your money.
That's a tall order for today's retirees. Taxes, unpredictable investment returns, rising health care costs and inflation down the road can significantly erode the value of your nest egg. And perhaps the biggest challenge is that you'll probably need the money for a long time. A 65-year-old man has a life expectancy of 19.3 years; it's 21.6 years for a 65-year-old woman. If you're married, there's a 45% chance that one of you will live to age 90 and a nearly 20% chance that you or your spouse will live to 95.
Fortunately, there are steps you can take to generate extra income and extend the life of your portfolio.
1. Put Your Money in Buckets
A bear market just as you enter retirement couldn't come at a worse time if you're forced to sell securities after prices have plunged. Certainly, many investors today worry about how long the bull market can keep running (see When Will the Bull Market End?). That's where the "bucket system" can help. Basically, you divide your money among different kinds of investments based on when you'll need it. Jason L. Smith, a financial adviser in West Lake, Ohio, and author of The Bucket Plan (Greenleaf Book Group Press), uses the system with clients, splitting their assets among three buckets: "Now," "Soon" and "Later."
The Now bucket holds what you'll need in the short term. Smith recommends setting aside enough so that, when added to Social Security or a pension, it will cover your basic expenses for up to a year. It should also have enough for major expenses that are likely to crop up over the next couple of years, such as paying for a new roof or that once-in-a-lifetime trip around the world, plus cash for unexpected emergencies.
Money in the Soon bucket will be your source of income for the next 10 years. Smith recommends investing in a fixed annuity (not an immediate annuity, which locks you into monthly payments) or high-quality short-term bonds or bond funds. As the Now bucket is depleted, you withdraw money from the annuity or sell some of the fixed-income investments in the Soon bucket to replenish it.
The assets in the Later bucket aren't meant to be tapped for more than a decade into your retirement, so they may be invested more aggressively in stock funds, which provide greater growth potential, and alternative investments such as REITs. This bucket can also include life insurance or a deferred-income annuity, which pays income later in life. Consider selling securities in the later bucket to replenish the Soon bucket starting about five years before it runs out of money. If the market is in a downward spiral, you can wait, knowing you still have a few years before the Soon bucket will be empty.
KIP TIP: Money you’ll need in the near term should be parked in a savings account. Yields on deposit accounts have been abysmal, and even though the Fed has been nudging rates higher, most banks haven’t passed on the increases to savers. Still, some are boosting rates. Yields on saving accounts requiring little or no minimum balance were recently 1.4% at Dollar Savings Direct, 1.35% at Live Oak Bank, and 1.3% at BankPurley and CIT Bank.
2. Manage Your Spending
To avoid running out of money during retirement, the standard rule has been to withdraw 4% from your nest egg in the first year of retirement and use the inflation rate as a guide to adjust withdrawals in subsequent years. For example, if you have $1 million, you can withdraw $40,000 in year one. If the inflation rate clocks in at 2% in year two, your withdrawal grows by 2%, to $40,800.
The 4% rule is based on historical market returns for a portfolio evenly split between stocks and bonds. But as the saying goes, past performance is no guarantee of future returns. Plus, the rule assumes you will live 30 years in retirement, so you might want to adjust the withdrawal rate up or down based on your life expectancy, says Judith Ward, a senior financial planner at T. Rowe Price.
Still, you should do just fine if you use the rule as a starting point for withdrawals. In fact, T. Rowe Price tested the 4% rule for a worker who retired in 2000 with a $500,000 portfolio (60% stocks, 40% bonds) and experienced two bear markets—the 47% drop in Standard & Poor’s 500-stock index in 2000–02 and the 55% drop in 2007–09. Though the retiree’s balance shrunk to about $300,000 by 2009—a 40% decline—the subsequent bull market helped restore the balance to $414,000 by the end of 2016.
KIP TIP: Like any rule of thumb, the 4% rule won’t work for everyone or in every situation. You might need to reduce the withdrawal rate if you retire early or have a major expense, or if a market downdraft wipes out a chunk of your nest egg. Or you might increase it if your investments have appreciated more than expected, or you’ve spent less than you anticipated and have built up a sizable balance.
3. Protect Against Inflation
The inflation rate has averaged 2.2% since 2000, and the Kiplinger forecast is for 1.3% inflation for 2017 and 1.9% for 2018. That seems tame, but don’t underestimate the power of even modest inflation, which can significantly erode purchasing power over time.
One way to make sure your nest egg keeps up with the cost of living is to remain invested in stocks. That can make for a bumpy ride over the short term, but over the long haul stocks’ steady upward trend makes them a go-to hedge against inflation. As measured by the S&P 500, stocks have returned an average annual rate of 10% for nine decades. Over the next decade, investors are more likely to see an average annual rate of 8% or even less—but even if inflation reverts to its long-term historical norm of a little over 3%, that return still provides a healthy cushion.
If you are near or just beginning retirement, advisers generally recommend a portfolio of up to 60% in stocks. But Michael Kitces, director of wealth management for Pinnacle Advisory Group in Columbia, Md., suggests that when stocks are highly valued (as they are now), investors should reduce their stock allocation to 30% at retirement. (If you’re using the bucket system, your 30% allocation to stocks goes in the later bucket.) You can gradually increase your portfolio’s stock holdings to 60% or whatever amount meets your comfort level, he says.
Treasury inflation-protected securities, or TIPS, are another hedge against rising consumer prices. With these bonds, issued by Uncle Sam, your principal will be adjusted for inflation. In addition, you’re guaranteed a fixed rate of interest every six months, so as the principal rises, so does the amount of interest you’ll earn.
Ease the tax bite by holding securities in the right accounts. Income from bonds and bond funds are taxed as ordinary income tax rates and are best held in a tax-deferred account, such as an IRA. Stocks get favorable tax treatment in a taxable account; most dividends from stocks and stock funds, as well as long-term capital gains, are taxed at only a 15% or 20% tax rate. But make sure you keep some stocks in tax-deferred accounts to fight the effects of inflation over the long term.
KIP TIP: You can buy TIPS straight from the federal government if you set up a TreasuryDirect account. That way, you won’t pay a commission to buy them, and you’ll avoid a management fee that comes with a TIPS fund. Plus, if you invest in TIPS directly, you’ll never get less than your original investment when the bonds reach maturity.
4. Get Income from Your Investments
If you need to boost your retirement paycheck to supplement Social Security and other sources of guaranteed income—or to generate cash while you wait for delayed benefits to supercharge your Social Security—dividend-paying stocks in a taxable portfolio should be high on your list. They can make up one-fourth to nearly one-half of your stock portfolio.
A number of blue-chip stocks have yields of 2.5% to 4%, including such stalwarts as Boeing (symbol BA), Caterpillar (CAT) and 3M (MMM). Look for companies with a record of regularly increasing dividends over time, which can serve as a hedge against inflation. But beware of chasing the highest yields. Outliers that boast yields of 7% or 8% may not generate enough profits to sustain those dividends.
As alternatives to individual stocks, consider exchange-traded funds and mutual funds that focus on investing in companies that pay dividends. T. Rowe Price Dividend Growth (PRDGX) and Vanguard Equity Income (VEIPX) are members of the Kiplinger 25, the list of our favorite mutual funds; Kiplinger’s 20 favorite ETFs include Schwab U.S. Dividend Equity (SCHD) and Vanguard High Dividend Yield (VYM).
Bonds are another key source of income. “You can make a huge difference in your income and your total return by properly managing the bond portion of your portfolio,” says Mari Adam, a certified financial planner with Adam Financial Associates, in Boca Raton, Fla.
The bond allocation for conservative investors near or at retirement is roughly 40% or more. Adam recommends that up to half of that be invested in a core bond or bond index fund consisting of U.S. government and high-quality corporate securities. Or, if you’re in the 28% or higher tax bracket, make municipal bonds your core holding, she says. The yields on munis issued by state and local governments tend to be lower than those of some other bonds, but you won’t owe federal taxes on the income.
Among mutual funds that focus on munis, Fidelity Intermediate Municipal Income (FLTMX) is in the Kip 25. The rest of the bond money can be spread among TIPS, high-yield bonds (also called junk bonds), international bonds, strategic bond funds, floating-rate bond funds and preferred stocks. (Preferreds behave like bonds, paying out regular fixed payments.)
KIP TIP: Real estate investment trusts, which own and manage properties such as offices, apartments and shopping malls, must distribute at least 90% of their taxable income to shareholders. Plus, REITs are a hedge against inflation. You can invest in REITs through ETFs and mutual funds. Among our favorites is Schwab U.S. REIT (SCHH).
5. Delay Social Security Benefits
You might not think of Social Security as an inflation fighter, but for many people it will be their only stream of income with an automatic cost-of-living adjustment. The COLA was only 0.3% for 2017, but it’s projected to be 2.2% in 2018. (When inflation was soaring in 1981, the COLA hit a record high of 14.3%.)
More than 45% of people take Social Security retirement benefits as early as they can, at age 62. For those who have taken early retirement, perhaps because of poor health, this often makes sense. But grabbing benefits early comes at a steep cost. If you claim Social Security at 62, your benefit will be reduced by as much as 30% compared with delaying until full retirement age (currently 66 but gradually rising to age 67). And if you’re patient and have other sources of income, you get a generous bonus for waiting until age 70 to claim benefits: For every year you wait to take Social Security beyond full retirement age until age 70, your benefit increases by 8%. Even better, future COLAs will be based on that bigger benefit.
KIP TIP: Spouses should coordinate their claiming strategies to maximize the survivor benefit. A married couple is likely to maximize lifetime income from Social Security if the higher earner delays taking Social Security until age 70, so no matter who dies first, the survivor gets the largest possible benefit (see How Misinformation from Social Security Can Cost You Tens of Thousands of Dollars).
6. Earn Extra Income
When Steve Cornelius retired in 2011 from his job as an executive for an industrial supply company in Atlanta, he moved to Minneapolis—no doubt passing other retirees who were headed in the opposite direction. “I can’t stand hot weather,” he says. Cornelius loves spending time outdoors and playing golf, but after a couple of years he realized he needed something else to do during Minnesota’s long, cold winters. His solution: a part-time job with tax-preparation giant H&R Block.
Cornelius, 67, started working for Block in 2013 and has a growing roster of return clients. His hours are flexible, but he usually works 32 hours a week from January through April. During the rest of the year, he works about 10 hours a week providing clients with general tax-planning advice.
Cornelius says the income from his job will allow him to postpone claiming Social Security benefits until he’s 70. He’ll get a bump up of 8% for every year he delays taking benefits after his full retirement age of 66. “That’s going to give me security against inflation, which will rear its ugly head at some point,” Cornelius says.
The income has also enabled Cornelius to take trips he might not otherwise be able to afford. This fall, he and his partner, Robin, are taking a cruise through Southeast Asia, with stops in Hanoi, Ho Chi Minh City, Bangkok and Singapore. “I’ve got a great retirement plan, but unless you’re Warren Buffett, you’re on a budget,” he says.
In addition to allowing you to delay taking Social Security, income from a part-time job can help cover your expenses during a market downturn, which means you won’t have to sell investments at a loss to pay the bills. Part-time and seasonal job opportunities run the gamut, from working as a park ranger to teaching English as a foreign language in another country. Freelancing is another way to earn extra cash (see www.freelancersunion.org for advice on everything from contracts to taxes). Freelance gigs range from online tutoring to consulting in your former profession. If you have a garage apartment or second home, you can earn income through home-sharing services, such as Airbnb.
KIP TIP: If you’re receiving Social Security benefits and haven’t reached full retirement age—66 for most retirees—be mindful of the earnings test. In 2017, if you make more than $16,920, you’ll lose $1 in benefits for every $2 you earn over that amount. In the year you reach full retirement age, you’ll give up $1 for every $3 you earn over $44,880 before your birthday. Starting in the month you reach full retirement age, you can earn as much as you want without worrying about the earnings test. But the benefits aren’t lost forever. Once you reach full retirement age, your benefits will be adjusted to recover what was withheld. Still, if you’re planning on working after you retire, it makes sense either to keep your earnings below the limit or delay claiming benefits until you reach full retirement age.
7. Buy an Annuity
Unless you’re a retired public service employee or you worked for one of the handful of companies that still offer a traditional pension (see below), you’re not going to receive a monthly paycheck from your employer for the rest of your life. But that doesn’t mean that a guaranteed source of lifetime income is an impossible dream. You can create your own pension by buying an immediate fixed annuity.
When you buy an immediate annuity, you give an insurance company a lump sum in exchange for a monthly check, usually for life. You can buy an annuity that has survivor benefits so that it will continue to pay your spouse after you die. But you pay for that protection by accepting smaller monthly payouts. Another option is a deferred-income annuity; you purchase the annuity when you’re in your fifties or sixties, but the payments don’t start for at least 10 years. The longer you wait, the bigger the payouts. Of course, if you die before payments start, you get nothing—unless you opt for return of premium or survivor benefits. (These products are often referred to as longevity insurance, because they protect you from the risk of outliving your savings.)
A relatively new type of deferred-income annuity, a qualified longevity annuity contract (QLAC), offers a tax benefit for retirees who have a lot of money in tax-deferred retirement accounts. You can invest up to 25% of your traditional IRA or 401(k) plan (or $125,000, whichever is less) in a QLAC without taking required minimum distributions on that money when you turn 70½. To qualify for this special tax treatment, your payments must begin no later than age 85.
An analysis by New York Life illustrates how this strategy could lower your tax bill. A 70-year-old retiree in the 28% tax bracket with $500,000 in an IRA would pay about $117,000 in taxes on RMDs between age 70 and 85, assuming 5% annual net returns. If the retiree opted instead to put 25% of the IRA balance into a QLAC at age 70, he would pay roughly $87,000 in taxes over the same period—a $30,000 reduction. Taxes would increase, however, once the annuity payments began at 85.
KIP TIP: Don’t stash all of your nest egg in an annuity. Most experts recommend investing no more than 25% to 40% of your savings in an annuity. Alternatively, calculate your basic expenses, such as your mortgage, property taxes and utilities, and buy an annuity that, when added to Social Security benefits, will cover those costs.
8. Minimize Taxes
To get the most out of your retirement savings, you need to shield as much as possible from Uncle Sam. Fortunately, there are plenty of legal ways to lower your tax bill, but they require careful planning and a thorough understanding of how your different retirement accounts are taxed.
Let’s start with your taxable brokerage accounts—money you haven’t invested in an IRA or other tax-deferred account. Because you’ve already paid taxes on that money, you’ll be taxed only on interest and dividends as they’re earned and capital gains when you sell an asset. The top long-term capital gains rate—which applies to assets held for more than a year—is 23.8%, but most taxpayers pay 15%. The rate is 0% for taxpayers in the 10% or 15% bracket. For 2017, a married couple with income of $75,900 or less can qualify for this sweet deal.
Next up: your tax-deferred accounts, such as your IRAs and 401(k) plans. Withdrawals from these accounts are taxed at ordinary income rates, which range from 10% to 39.6%. The accounts grow tax-deferred until you take withdrawals, but you can’t wait forever. Once you turn 70½, you’ll have to take required minimum distributions (RMDs) every year, based on the year-end balance of all of your tax-deferred accounts, divided by a life-expectancy factor provided by the IRS that’s based on your age. The only exception to this rule applies if you are still working at 70½ and have a 401(k) plan with your current employer; in that case, you don’t have to take RMDs from that account. You’ll still have to take withdrawals from your other 401(k) plans and traditional IRAs, unless your employer allows you to roll them into your 401(k).
Finally, there are Roth IRAs, and the rules for them are refreshingly straightforward: All withdrawals are tax-free, as long as you’ve owned the account for at least five years (you can withdraw contributions tax-free at any time). There are no required distributions, so if you don’t need the money, you can leave it in the account to grow for your heirs. This flexibility makes the Roth an invaluable apparatus in your retirement toolkit. If you need money for a major expense, you can take a large withdrawal without triggering a tax bill. And if you don’t need the money, the account will continue to grow, unencumbered by taxes.
Conventional wisdom holds that you should tap your taxable accounts first, particularly if your income is low enough to qualify for tax-free capital gains. Next, take withdrawals from your tax-deferred accounts, followed by your tax-free Roth accounts so you can take advantage of tax-deferred and tax-free growth.
There are some exceptions to this hierarchy. If you have a large amount of money in traditional IRAs and 401(k) plans, your RMDs could push you into a higher tax bracket. To avoid that scenario, consider taking withdrawals from your tax-deferred accounts before you turn 70½. Work with a financial planner or tax professional to ensure that the amount you withdraw won’t propel you into a higher tax bracket or trigger other taxes tied to your adjusted gross income, such as taxes on your Social Security benefits. The withdrawals will shrink the size of your tax-deferred accounts, thus reducing the amount you’ll be required to take out when you turn 70½.
Another strategy to reduce taxes on your IRAs and 401(k) plans is to convert some of that money to a Roth. One downside: The conversion will be taxed as ordinary income and could bump you into a higher tax bracket. To avoid bracket creep, roll a portion of your IRA into a Roth every year, with an eye toward how the transaction will affect your taxable income.
KIP TIP: If the stock market takes a dive, you may be able to reduce the cost of converting to a Roth. Your tax bill is based on the fair market value of the assets at the time of the conversion, so a depressed portfolio will leave you with a lower tax bill. If your investments rebound after the conversion, those gains, now protected inside a Roth, will be tax-free. Should the value of your assets continue to plummet after you convert, there’s a safety valve: You have until the following year’s tax- filing extension (typically October 15) to undo the conversion and eliminate the tax bill. If prospects for major tax reform and rate cuts come to fruition, it could open a golden era for Roth conversions. Keep an eye on Congress.
9. Manage Your Pension
At a time when defined-benefit plans are becoming as rare as typewriters, consider yourself fortunate if you have a traditional pension to manage. Even so, the decisions you make about how you take your pension payout could have a significant impact on the amount of income you receive.
One of the first decisions you’ll probably have to make is whether to take your pension as a lump sum or as a lifetime payout. A lump sum could make sense if you have other assets, such as life insurance or a sizable investment portfolio, and if you’re comfortable managing your money (or paying someone else to do it for you). You’ll also have more flexibility to take withdrawals, and your investments could grow faster than the rate of inflation. What you don’t spend will go to your heirs.
A lifetime payout, however, offers protection against market downturns, and you won’t have to worry about outliving your money. You’ll probably also get a higher payout from your former employer than you could get by taking a lump sum and buying an annuity from an insurer.
Consider longevity when deciding how to structure your lifetime payout. Married couples have a couple of basic options for their payments: single life or joint and survivor. Taking the single-life payment will deliver bigger monthly payments, but your pension will end when you die. By law, if you’re married, you must obtain your spouse’s consent before taking this option. With the joint-and-survivor alternative, payments will be smaller, but they’ll continue as long as you or your spouse is alive.
The survivor benefit is based on the pension participant’s benefit. Plans must offer a 50% option, which pays the survivor 50% of the joint benefit. Other survivor-benefit options range from 66% to 100% of the joint benefit. In most cases, the benefit drops no matter who dies first, unless you choose the 100% option.
KIP TIP: In general, women who want lifetime income should take the pension’s monthly payout. Pension plans use gender-neutral calculations, which can further complicate the choice of monthly payments versus a lump sum. Because women tend to live longer than men, it’s highly likely that the pension plan will offer a higher payout than they could get on the open market. For example, a 65-year-old man who wants to buy an annuity that will provide $60,000 a year for life would need about $914,000. A 65-year-old woman would need about $955,000—roughly $40,000 more—to get the same amount of annual income. If you take the pension, however, your payment is based on your years of service and salary; your gender doesn’t play a role.
When it comes to converting the pension payment to a lump sum, however, gender neutrality can work against women. If their longer life expectancy could be taken into account, the lump sum would have to be larger to equate to the higher lifetime costs of the monthly payments.
10. Tap Permanent Life Insurance
Most of us buy life insurance to provide financial security for our loved ones after we’re gone, but a permanent life insurance policy could provide a valuable source of income while you’re still around to enjoy it.
A permanent life insurance policy has two components: the death benefit, which is the amount that will be paid to your beneficiaries when you die, and the cash value, a tax-advantaged savings account that’s funded by a portion of your premiums. With whole life and universal life, the insurance company usually promises that a minimal level of interest, after insurance costs and expenses are deducted, will be credited to your account every year. With variable life insurance policies, you choose the investments and may not get a guarantee.
You can withdraw your basis—the amount in the cash-value account you’ve paid in premiums—tax-free. That could provide a cash cushion in case, say, the stock market takes a 2008-style downturn and you want to give your portfolio a chance to recover. (Withdrawals that exceed what’s in the cash-value account will be taxed in your top tax bracket.) The death benefit will be reduced by the total amount you withdraw. You can also borrow against your policy, and you won’t have to undergo a credit check. Interest rates range from 5% to 8%, depending on market rates and whether the loan is fixed or variable. If you don’t repay the loan, or pay back only part of it, the balance will be deducted from your death benefit when you die.
When you borrow against your policy, you’re not taking withdrawals from your account that you’ll pay back later, as is the case with a 401(k) loan. Rather, the insurer is lending you money and using your policy as collateral. Unless you pay the interest out of pocket, it will be added to the loan balance. If the balance exceeds the policy’s cash value, the policy could lapse, and you’ll owe taxes on the amount of the cash value, including loans, that exceed the premiums you paid.
What if you need a regular source of income? One option is to convert your life insurance into an income annuity through what’s known as a 1035 exchange. The downside to this strategy is that you’ll give up the death benefit, but you’ll lock in income for the rest of your life, or for a specific number of years. The conversion is tax-free, but you’ll pay taxes on a portion of each payout, based on the proportion of your basis to your gains. Your insurance company may offer an income annuity, but you should look at payouts offered by other providers, too.
KIP TIP: If your insurance policy pays dividends, you can generate income without giving up the death benefit. Instead of reinvesting the dividends in the policy, which will increase its death benefit and cash value, you can take the dividends in cash. Dividends typically range from 5% to 6.7%, and any dividends you receive up to the policy’s cost basis are tax-free. Dividends that exceed that amount are taxable.
11. Plan for Health Care Costs
Fidelity Investments estimates that the average 65-year-old couple retiring now will need about $260,000 to pay out-of-pocket health care costs, including deductibles and Medicare premiums, over the rest of their lives. That doesn’t include long-term care, which can be a major budget buster.
There are a variety of options to help pay these future medical bills. One tax-friendly way is a health savings account. As long as you have an eligible high-deductible health insurance policy, you can contribute to an HSA either through your employer or on your own (but you can no longer contribute after you’ve signed up for Medicare).
An HSA offers a triple tax advantage. You contribute money on a pretax basis to the account. Money in the account grows tax-deferred. And withdrawals are tax-free if used to pay medical expenses, either today or when you’re retired. (You’ll owe income taxes and a 20% penalty on withdrawals used for other purposes, although the penalty disappears once you turn 65.)
To make the most of the HSA, contribute as much as you can to the account and pay current medical bills out of pocket. That way, the money in the account has time to grow. Years from now, you can use HSA funds to reimburse yourself for medical bills you’re paying today.
The maximum contribution for 2017 is $3,400 for single coverage and $6,750 for families, plus an extra $1,000 if you’re 55 or older. Your health insurance policy must have a deductible of at least $1,300 for singles and $2,600 for families.
Employers are increasingly offering workers this option to contain costs because premiums for high-deductible plans tend to be lower than for traditional insurance. Among Fidelity-run plans, nine out of 10 employers kick in money to workers’ accounts to encourage participation, says Eric Dowley, senior vice president of Fidelity’s HSA product management. The average employer contribution is $541 for singles and $991 for families.
If you’re looking for an HSA on your own, review fees and investment options. Morningstar recently looked at plans offered by the 10 most prominent providers and found that only one—offered by The HSA Authority—did a good job for both current spending and future investing.
You can use HSA funds to pay for long-term-care premiums—but that’s a small compensation given the steep price tag for a long-term-care policy. If you can’t afford a long-term-care policy that would cover at least three years of long-term care with inflation protection, another option is to buy enough coverage to pay the difference between the cost of care for three years and what you can afford to pay from savings and income.
Another solution: a hybrid policy that combines life insurance and long-term-care benefits. It’s basically a permanent life insurance policy that allows you to spend down the death benefit to pay for long-term care should you need it. You can also get a rider that will cover long-term care above and beyond the death benefit. If you don’t need long-term care or don’t entirely use up the death benefit, your heirs will collect what remains of it.
Lincoln National, for example, offers a hybrid policy called MoneyGuard that you purchase with an up-front lump sum or in installments over 10 years. A 60-year-old man paying $10,000 a year over a decade could get monthly long-term-care benefits at age 80 of $7,983 for up to six years, growing at 3% annually. The death benefit at that point would total $106,400, or he could cash in the policy and get 80% of his premiums returned. Under a similar scenario, a woman would get $7,076 per month for long-term care or a $113,600 death benefit.
The trade-off is that hybrid policies are doing double duty, so you’ll get a lower long-term-care benefit for your money than if you purchased a stand-alone long-term-care policy, says Bill Dyess, president of Dyess Insurance Services, in Boca Raton, Fla.
KIP TIP: If paying for long-term care is your chief goal and you don’t need more life insurance, buy a stand-alone policy rather than a hybrid policy. Today’s long-term-care policies are more accurately priced than those issued years ago, so it’s less likely that you’ll see steep premium jumps in the future, says Pinnacle’s Kitces. Plus, you may be able to deduct part of your premiums on your tax return, something you generally can’t do with a hybrid policy.
12. Move to a Cheaper Locale
Downsizing to a smaller place, particularly after the kids are launched, is a common way to lower housing costs and stay close to family. If you live in a highly appreciated home, selling can free up large sums that can be used to wipe out debt, add to a nest egg or pay future long-term-care costs. (Married couples can protect up to $500,000 in profit from the sale of a house from capital gains tax; singles can shelter half that amount.)
But for a move to become a financial game changer and significantly lower living costs, consider putting down roots in a state where housing and living expenses are cheaper.
“This can take a retirement situation that is nearly hopeless and turn it into one that is comfortable,” says Tim Maurer, director of personal finance for BAMAlliance in Charleston, S.C. For example, housing costs in San Diego are 173% higher than in Galveston, Texas, according to Bestplaces.net. Galveston made Kiplinger’s most recent list of great places to retire. Kiplinger also compiles a list of the most tax-friendly states for retirees. Moving to a state that gives retirees a big tax break can free up money for a higher standard of living in retirement. (If you want to stay in your home and tap the equity for income, see Use Your Home to Get More Income.)
Kevin McGrain, 62, was able to retire last year as an executive of a catalog company after he moved from the Northeast to the Sun Belt. Two years ago, McGrain and his wife, Linda, traded in a $700,000 four-bedroom house on a small lot in Newburyport, Mass., for a $400,000 four-bedroom home in Inman, S.C., that sits on an acre of lakefront property with a view of the Blue Ridge Mountains. He says he doesn’t think he could have retired when he did if he hadn’t moved to South Carolina.
In Massachusetts, the McGrains’ property taxes were $15,000 a year, and monthly utility bills some winters reached $600. In South Carolina, the couple’s property taxes run $1,700 a year, and at age 65 they’ll be eligible for a special exemption that will reduce that bill even further. Their utility bills now average $150 a month.
Better yet, McGrain, who is an avid golfer, says his country-club fees are half of what they used to be, and he can play 11 months out of the year instead of seven.
KIP TIP: Before moving to a new zip code, do some field research. Take an extended vacation to experience day-to-day living in the new neighborhood you’re considering (you may be able to rent a place via Airbnb or VRBO). Visit in the off-season to see if the weather agrees with you. And meet up with a local real estate agent for a lowdown on the area.
As an old financial goat, I often get questions about aging from clients, seminar attendees and readers — even by email. I've no wondrous wisdom, but here are my 11 most offered tips that I sense few undertake:
1. Take seriously the need to finance a long life: You’ll likely live lots longer than you expect. Lifespans keep increasing and will continue to. In 1952 expectancy averaged 68.6 years. By 2006 it was 77.8. If you and your spouse are 65, odds favor one of you hitting 90. Maybe older! Invest as if you'll reach that milestone. Doing otherwise invites aged poverty. Little is more brutal.
2. Be clear early about family-support limits: Before it arises, decide with your spouse the limits on what you will and won’t do to support family members. Too much or too little causes bad outcomes. If the topic of support comes up, and you didn’t plan in advance, you will be too emotional and likely over or under give. Planning early saves relationships later.
3. Consider downsizing: Saves money, makes life more manageable, eases future burdens on offspring, but causes more upfront hassle and reduces guest potential (which may be good).
4. Consider upsizing: Big gatherings, room for lots of grandkids (nothing beats grandkids — get your kids to have more, which is the best tip of all). Negatives are higher cost and extra upkeep.
5. Consider moving closer to grandkids: Fun. And maybe you can coerce your no-good kids to do more for you. And if your kids are good — you will want them helping you as you age. All good.
6. If you can, involve offspring in your financial decisions: This requires that they are up to it. But the more you can do this, the less hostility will arise over time. And, as per above, you likely want and need their help eventually. Plus, you’ll learn a whole new side of them.
7. Drive the safest car you can: When I was young I hot-rodded. Now I know I can’t drive as well as I could (or thought I could). Time is against you. It only takes one idiot to ruin your life. That idiot could be you. My wife and kids were saved by her Volvo in the ‘80s in a head-on with a drunk. I came to love Volvo real fast. Cars are even safer now. Opt against the road idiot.
8. Build a cushion into your financial plan: Not everyone is highly disciplined about spending and planning. If you suffer a big gap between plans and realities, it causes anxiety — which makes for worse investors and hence worse results. Create an extra cushion year by year so at the end you aren’t trying to catch the ball with extremely shaky hands.
9. Know your net worth but don’t obsess over it: J. Paul Getty, when America’s richest man, famously said that really rich people hadn’t a close clue what they were worth because they owned illiquid assets that were impossible to price. If you aren’t rich, obsessing over exactly what you’re worth makes even less sense. Your sense of net worth is just a planning tool for the future.
10. Have a financial back-up person — or two: Whether you, a loved one or a professional, be clear who should oversee your finances if you’re numero uno choice can’t. If you ever need it, that decision made in haste and emotion could be as expensive as any.
11. Remember that anger slays: I got huge peace of mind when a psychologist buddy taught me to live my actions as if I’d live forever and my emotions as if I knew I’d be dead in 30 days. Every time I anger, I ask myself if I’d waste time over “this” if I knew I had only 30 days to live. I never do. It’s calming. Anger slays investors and you.
Managing your finances can be really stressful. There’s so much information to know, mastering all of it seems like an impossible task. Moreover, if you’ve developed some bad financial habits over the years, correcting them may seem extremely daunting.
Luckily, it is possible to improve your financial prowess. With a little effort, you will set yourself up for a better financial future, which can be a real benefit when it comes to starting a business. As you overcome your bad financial habits and instill new, good habits, you’ll learn how to manage not only your personal finances but business finances, too.
If you want to become more successful and get closer to starting your own business, you need to give up the five habits below. Some of them you’ll be able to give up today, while others will take a little bit longer to overcome. There might be some hard work involved to rewrite these five behaviors, but once you do, you’ll find that the work was well worth the outcome.
1) Living paycheck to paycheck
Very often, people have no idea what they’re actually spending all of their money on. Before they know it, their bank account is approaching zero, and they’re simply waiting for their next paycheck to come. The bottom line is this: without paying attention, it’s easy to spend the money you should be saving.
If you’d like to break out of this vicious cycle, the first step is to start tracking your expenses. If you don’t know where all of your money is going, you can’t give it a purpose. So, track every dollar, understand how much is going in and how much is going out. With this information in mind, you can overcome the bad habit of living paycheck to paycheck.
2) Avoiding a budget
Figuring out exactly how much money is coming in and going out is the first step to financial freedom, but it’s not the only step. Once you have a grasp of your monthly income and expenses, you’ll need to create a budget.
Whether you’re managing your personal finances or your new company’s money, you should always have a budget in place. Creating a working plan that outlines how you’ll cover your expenses and save for the future is key to financial well-being.
3) Neglecting your credit score
Knowing your current credit score and how you can improve it is paramount to success. Unfortunately, 30 percent of Americans have a bad habit of not checking and knowing their credit scores. Whether you worry about having bad credit or not, you should check your credit score at least once a year. Even if you are doing everything right, errors on your credit report might cause you to have an inaccurate score that threatens your financial health.
Although neglecting your credit score is number three on this list, its importance shouldn’t be understated. When you start a new business, your credit will likely serve as your company’s credit history. To secure the best funding and financing available for your future company, you need to start managing and improving your personal score today.
4) Failing to review statements and bills
Every month — sometimes several times a month — statements and bills roll in. Many of these documents don’t seem to require immediate attention, so people only view them at the end of the month. However, not opening these documents as soon as they arrive can wreak havoc on your finances.
If you don’t view your statements when they arrive, you might miss out on important information that should inform your budget. Like your credit, it’s also not uncommon for incorrect items to make themselves onto your statements.
Additionally, although you might dread looking at bills, you should catalog and categorize them as soon as they arise. Accidentally neglecting to pay a bill you’ve forgotten about is all too easy, so don’t give yourself the chance. This is a bad habit that doesn’t help your personal finances, and it certainly isn’t something you’ll want to do when you’re running your own company.
5) Thinking you can manage everything
Many people — especially aspiring business owners — have a bad habit of thinking that they can do everything by themselves. There’s only so much you can learn about building, managing and preserving your finances.
Fortunately, you can work with a mentor or a financial advisor that can help you overcome your bad financial habits to achieve financial freedom.
Over the years, mutual funds have come across as a popular and fairly profitable instrument of investment. They have proved to be more hassle free and risk averse as compared to direct stock investments.
Here is an insight on how you can plan your mutual fund investment:
As the name suggests, these investments are made for short periods of time, typically for 12-month duration or even less.
These investments are a boon in emergency situations. Be it a medical emergency or the sudden need of money for down payment of your car, short term mutual funds can bail you out.
What to keep in mind?
Since the investment is for a brief period, it needs to be ensured that your investment is insulated from market volatility. It is important as you would not want to see your investment numbers cut a sorry figure at the time of emergency. So, it is advised to invest in low-risk options -- liquid funds like Commercial Papers (CPs) and T-Bills or debt funds like government bonds, company debentures, fixed income assets etc.
These kind of mutual fund investments are made for a period of 1-3 years
If you are planning to launch a start-up or a business, mid- term investments are your best bet. Experts say that these investments can be helpful in case you are planning to buy property or real estate.
What to keep in mind?
In mid-term investments, your aim should be to have the best of both worlds. That is, you should eye to maximize your capital gains but at the same time you cannot afford to take too much risk as the period of investment in this case, is still not very long. So you can choose to stick with debt funds or maybe opt for Systematic Investment Plan (SIP) or monthly investments. SIP in mutual fund is recommended as a great way for a salaried person to invest in equity markets for long-term basis without understanding the working of equity markets.
Any mutual fund investment for a period of more than three years is termed as a long-term investment.
As it is quite evident from the nature of the investment, long-term investments hold good if you are planning for the future. If you want to sort out your retirement plans, save for old- age health issues or nurture your child's education, you should definitely go for long-term investments.
What to keep in mind?
Since the investment is a long-drawn one, you can take down your guards off to some extent, against market volatility. You won't mind taking a few risks to rake in the maximum possible profits. So you can choose to invest in equity funds i.e. in shares of companies.
Devin Consultants, a financial management company with hundreds of satisfied clients who trust the counsel and services we provide through our financial experts. Utilizing the latest technology, we can help you enjoy full online access to our financial management services.