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Even if you were smart (or lucky)
enough to have a comfortable retirement nest egg, you may still worry that it
may not last you through what may be 30 years of retirement. As many retirees
and pre-retirees saw in 2008, one unexpected financial disaster can devastate your
life savings.
And many others have discovered that
even the best-laid plans for retirement can be ripped apart by an unanticipated
medical crisis.
Not to worry. We talked to financial
planning firms, big and small, across the United States, and asked for their
best tips to help retirees protect, preserve and grow their retirement savings.
There are the easy ones, like once
you turn 50 you can take advantage of the catch-up contributions to your 401(k)
($5,500) and IRA ($1,000). You can delay taking Social Security until you're 70
because each year you wait, your benefit will increase by 8%. Or you can
increase your savings rate.
"I see people putting away 1% or
3% of their salary," says John Sweeney, executive vice president of
retirement and investing strategies at Fidelity Investments. "People have
to realize that is probably not enough to maintain their lifestyle in
retirement. We're talking about 10% to 15% of your current income."
Besides increasing your savings, here
are a few other tips:
1.
Have an emergency or "rainy day" fund outside of your retirement
account. Some retirement planners say retirees should have six months to a year
of living expenses outside of your retirement accounts.
"Rainy funds are absolutely
important," says Srinivas Reddy, senior vice president and head of
full-service investments at Prudential Retirement. "You need to have a
rainy-day fund that covers 90 to 180 days of living expenses, not only so you
have a safety net, but so you don't draw from longer-term investment savings
for retirement."
Jeremy Kisner, president of Surevest
Wealth Management in Phoenix, says his company recommends four to five years of
living expenses insulated from the stock market — and they put the money in a
laddered bond portfolio. That account is where your annual living expenses are
drawn from.
"As you spend your money for
this year, you have to replenish it (from the growth accounts)," he says.
"In a typical year you are harvesting gains and dividends from growth
side, and replenishing your safe money in the income segment."
That offers his clients five years of
"reliable" income. They did not have to worry about withdrawing funds
after the crash in 2008. And by the time they had to transfer money from those
retirement accounts, the market had recovered, he says.
But that rainy day money should not
be in cash, says Nicholas Yrizarry, president and CEO of Nicholas Yrizarry
Wealth Management Group in Laguna Beach, Calif. "Money in cash is a
negative investment. There is no return after taxes and inflation. Be careful
not to put too much money in cash."
2.
Plan for health care, even if you are relatively healthy. "You have to
plan for catastrophic illness," says Curt Knotick, CEO of Accurate
Solutions Group in Butler, Pa. "You have to plan for some kind of critical
illness, whether it's long-term care or mid-term disability." There's a
good chance that two out of five retirees will need some level of long-term
care, and that can destroy your nest egg, Knotick says.
Sweeney says health issues are
difficult to predict. "You never know what problems may develop later, how
severe it might be or how long it might last," he says. "We include
it in the budgeting. Couples will probably need $225,000 for medical expenses
over the span of their lifetimes. "And they usually don't anticipate
changes in expenses because they are expenses they don't have today,"
Sweeney says.
If a health savings account is
offered, people should take it. "It's triple tax-free," he says. It
goes in before tax, grows tax-free, and it's tax-free upon withdrawal. The key
condition is you have to have enough income while working to not draw that down."
3.
Consider downsizing. Not only will a home sale add to your savings, but you may
also reduce your living expenses.
"A lot of people need to start
thinking about using the equity in their homes," Kisner says. Think about
downsizing and think about it well in advance. There are people who live in
Southern California. They can't afford to retire in Southern California.
Relocating and downsizing is an important topic."
4.
Consider taxes in everything you do. Curt Whipple, chief managing partner at C.
Curtis Financial Group in Plymouth, Mich., and author of Retiree Lifeline! How
to Get Government Out of Your Pocket, says most couples want to live on the
interest from their investments, but that's not always the most tax-efficient
way to draw income.
"I had a couple come in,"
he says. "They were making $45,000 a year. Of that, $25,000 represented
Social Security and $20,000 was interest income off their investments.
"The problem with interest
income is it's all taxable," he says. "As a result, they ended up
being taxed on 85% of their Social Security. I called the company they had
their investments with and rearranged how the money was invested. Their taxes
went to zero. Now they are getting the whole $45,000 with no taxes.They stopped
paying taxes on Social Security. That's a major key to make sure your money
lasts longer in the most tax-efficient manner possible."
5.
Don't wait until 70½ to begin withdrawals from your retirement account. Whipple
says many people wait, even though they are eligible to make withdrawals
starting at 59½, but avoid doing so to avoid the taxes. But that only makes the
problems worse.
His recommendation: At 60 years old,
start withdrawals, pay the taxes and put it in a Roth IRA account. The result:
The money growth is in the tax-free Roth. And when the retiree reaches 70,
there is far less in required minimum distributions.
6.
Consider life insurance. Knotick says life insurance may help protect a nest
egg in some situations.
"For some individuals it may not
be an appropriate tool, because they may not have the funds necessary," he
says. "But what we've found is if someone has marginal assets or needs to
use a lot of assets in retirement, one way to free up in their mind is to
incorporate life insurance into their lives, so when the first spouse passes,
the surviving spouse receives a tax-free benefit."
His example: "If a couple has
$600,000 and intends to draw $2,000 a month, they may instead draw down $2,500
or $2,600 and pay insurance premiums. The surviving spouse is left with a
$100,000 to $150,000 lump sum that could be reinvested tax efficiently to
provide that surviving spouse with any lost income."
"Life insurance is unique to
each individual situation," he says. "There may be insurability
issues. But when appropriate and when possible, it is a great planning tool to
provide for the surviving spouses and frees up the assets."
7.
Consider an annuity. An immediate annuity will turn part of your savings into a
lifetime stream of income for you and your spouse. For some people, having a
regular monthly payment means peace of mind. And annuities have another
benefit: "You've sheltered yourself from longevity risk," Yrizarry
says. "People are living longer. I suggest people insure that risk."
You have to protect against longevity,"
says Sweeney. "For couples, there is a 25% chance that one of the two will
live into their 90s. People underestimate how long they will live in
retirement. You must have an income stream that anticipates that."
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