Our parents had it easy. They retired with a pension and the luxury of letting other people worry about the financial world. We have more control over our retirement funds, but also more responsibility for our financial future. We have to pay attention to how inflation, interest rates and the stock and bond markets will affect our IRA or 401(k), and whether we will have enough money to cover the expenses of our final years. We even have to worry about Social Security.
1. Do figure out the best time to begin Social Security. Most experts advise us to wait before applying for Social Security benefits. You get a roughly 7 percent increase for every year you delay after age 62, up until age 70. And you’d be hard pressed to find any investment offering that high a risk-free rate of return. But most people ignore this advice. Why? Because they have higher priorities than the rate of return on their money. The best strategy is to start Social Security as soon as you need it. If your job is killing you, then it makes sense to retire early, at age 62 or 64, and go on Social Security. But if you enjoy your job, still have kids at home and have an average life expectancy, then you need that money later on more than you need it now, and it pays to keep on working.
2. Do keep most of your savings in the stock market. The market goes up and down, but over time it grows at a rate higher than inflation. Other investments such as gold or real estate may beat the stock market for limited periods, but the stock market almost always wins out in the long run. Numerous studies have shown that the best results come not from trying to beat the market, but from matching it in low-cost, no-load index mutual funds or ETFs, such as the Vanguard Total Stock Market Index Fund (VTSMX) or Vanguard S&P 500 ETF (VOO). Other fund families such as Fidelity and Schwab offer similar low-cost, broad-based funds.
3. Do own some bonds. Most financial experts believe that interest rates are currently very low, and the price of bonds, including corporate bonds, Treasury bonds and municipal bonds, are historically expensive. But experts can be wrong, and low interest rates may stick around for a while. In general, bonds offer more current income and are safer investments than stocks. So investing a portion of your retirement funds in bonds is the prudent thing for a retiree to do. Again, the most practical way for individuals to own bonds is through low-cost mutual funds or ETFs sponsored by major financial institutions.
4. Do keep a lump sum in cash. You can always stash a bundle of bills under your mattress. But you're less likely to lose it if you keep it in a money market mutual fund or certificate of deposit in a bank. Some people recoil at going to the bank for a CD because of the low interest rates currently offered to depositors, typically less than 1 percent. Nevertheless, with the economy as volatile as it's been, retirees need to limit risk by keeping up to a year's expenses in a federally insured bank deposit.
5. Do economize when you can. Nobody likes to face this fact, but retirees by definition live on a fixed income. We no longer get raises at work, unless you count the 1.5 percent Social Security increase slated for 2014, which will likely be eaten up by higher medical bills. So retirees should think long and hard before taking on new debt. And if you haven't already, now is the time to finally develop the skills to live within your budget.
6. Don't invest in Twitter or any other high-flying stock. Retirement is not a time to take on additional risk. So however much the commentators on CNBC gush about Twitter or Facebook or other Internet stocks – or, really, any stocks in general – just remember that financial reports on TV or in the popular press are produced more for entertainment than information. So go ahead and be entertained. But do not be tempted to gamble away your future.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.