Top5 Last Minute Retirement Tips
By Stacey L. Bradford,
Associate Editor, SmartMoney.com
EVEN WHEN ONE'S investments are flourishing, facing retirement is stressful. Add in a shaky economy and a bearish stock market, and it's downright unsettling.
The good news is that, with the proper planning, folks can still retire without putting their nest egg at risk. Here are five last-minute steps pre-retirees should take before collecting their gold watches and hitting the golf course.
1. Adjust Your Asset Allocation
Whether retirement is six months away or three years down the road, prospective retirees need to take a good hard look at their portfolio in order to determine if it consists of the right investment mix. Keep in mind that a retirement stash may have to last 30 years. So it's important that the portfolio's asset allocation isn't too conservative.
In fact, the biggest mistake retirees make, especially during a bear market, is to sell all of their stocks in favor of more conservative bonds. According to a recent study by investment management firm T. Rowe Price, those who do so are virtually guaranteed to run out of money during their lifetime since the portfolio won't be able to keep up with inflation.
In fact, according to T. Rowe, a typical retiree should shoot for a mix of 55% stocks and 45% bonds. Of course, everyone's risk tolerance is different and other factors, such as pension distributions and the equity stake they have in their home, also need to be taken into consideration.
Read our story for more advice on how to retire in a bear market. And use our asset allocation calculator to help you determine the best investment mix for your situation.
2. Plot Your Distributions
Before you stop working, plot out how much money you'll take each year from both your retirement account and Social Security. However tempting it may be to tap into these funds as soon as retirement hits, there are huge financial advantages to holding off for as long as you can, says Daniel Thomas, a CPA from Newport Beach, Calif.
T. Rowe's study shows that a recent retiree who withdraws 4% from a 401(k) or IRA during the first five years of retirement (and increases his withdrawal amount by 3% each year to keep up with inflation) while his portfolio has an average return of less than 5%, has just a 43% chance of his money lasting for the next 25 years. In a nutshell, if one takes the recommended distributions during a bear market, the chances of his money lasting during retirement are greatly reduced. Should he put off tapping into his investments until the market recovers, or reduce his withdrawals significantly, he can expect to more than double his chances of affording retirement.
As for Social Security, Uncle Sam allows you to start receiving benefits at age 62. But if a retiree can afford to wait until full retirement age (for those born between 1939 and 1942, it falls during your 65th year; for those born between 1943 and 1954, age 66), the government will reward them with a "delayed retirement credit" that adds 8% to his or her benefits each year until age 70. Use the Social Security Administration's retirement planner here to help you figure out when to start receiving your benefits.
For more advice on how to dole out your retirement savings, read our story here.
3. Scale Down Your Lifestyle
One of the best ways to make money last during retirement is to scale back on expenses and stick to a budget. In the past, one of the easiest ways to achieve significant cost savings was to trade in a large home for a smaller one. Given the housing slump, that may not seem possible these days since homeowners can't count on fetching the rich prices they had hoped for just a year or two ago. Not to worry, says Bill Losey, author of "Retire in a Weekend." Most retirees have been in their homes long enough that they can afford to sell their properties for a bit less and still realize healthy profits. And if they buy a place in a more affordable part of the country, they'll certainly come out ahead. "By downsizing, my clients save between $750 to $1,000 a month," Losey says.
If moving isn't an option, then retirees will need to cut back on spending elsewhere. Losey recommends trading in large expensive cars for more economical ones. (Read our story for a list of some of the least expensive cars to own.) Another cost-saver: Postpone a pricey vacation until the stock market recovers.
4. Sign Up for Medicare
Health care is one of the biggest expenses retirees face. The first thing a prospective retiree should do is check if his employer offers retiree health benefits or if supplemental insurance will be necessary. The next thing: Get a handle on the registration rules for Medicare. While the government's health insurance for seniors has many attractive features - including its relatively inexpensive premiums - it also has very strict rules and will penalize people by adding an additional 10% to premiums for every year they don't sign up on time.
Here's what you need to know: The Medicare open enrollment period starts three months before a senior turns 65 and end three months after his 65th birthday. Miss the six-month window and retirees will go without coverage until the following general enrollment period, which is Jan 1 through March 31 of the next year. The only exception is for folks who are working full time and are on their employer's health plan. Their open enrollment period starts as soon as they officially leave the work force. Also, be aware that Medicare doesn't cover dental expenses. That's why Sal Cocivera, a financial advisor with Lincoln Financial Advisors recommends that clients get a thorough checkup and take care of any costly procedures, including root canal and crowns, while their employer's insurance still covers them.
Read our story for a primer on how Medicare works.
5. Buy Long-Term-Care Insurance
Finally, the biggest threat to one's nest egg isn't a bear market but an extended stay in a long-term-care facility. The average nursing home costs more than $74,000 a year, according to life insurance provider Metlife. To make sure an accident or just deteriorating health doesn't wipe out your savings, consider buying long-term-care insurance.
Be warned, however, that purchasing a long-term-care policy in one's 60s will be expensive. Those high premiums will be worth it, though. Should you fall ill, for example, your spouse will still have assets to live on, says Lincoln Financial Advisors' Cocivera. While prices vary quite a bit, this is one area where one shouldn't skimp. Some of the least expensive policies may leave out important benefits, including inflation protection and the freedom to hire any home health-care aide you want.
Read our story for more on long-term-care insurance.
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