We spend much of our career saving and investing for retirement. And the challenges don't end on the day we retire. We must then manage our nest eggs to make sure our retirement savings lasts for the rest of our lives. Here are some ways to improve your retirement end game.
Plan how you will draw down your savings. Develop a plan to draw down your retirement savings at an annual rate, such as 4 percent of the initial balance each year, with adjustments for inflation. "You can withdraw between 4 and 6 percent of your portfolio each year and still protect the principal," says Stephen Overstreet, a certified financial planner in Winter Springs, Fla. The Congressional Research Service estimates that a 4 percent annual withdrawal rate for an investment portfolio with 35 percent in U.S. stocks and 65 percent in corporate bonds would be 89 percent likely to last 35 years or more. You can further prevent yourself from outliving you savings by withdrawing less in years when your investments perform poorly. "When there is a recession, clients should start spending less," says Overstreet.
Retain an emergency fund. Keep an emergency fund of immediately available cash so that an unexpected expense doesn't disrupt your retirement draw down strategy. "You always need to have an emergency fund in another account that is not part of the investment portfolio, but in a bank or mutual fund," says Overstreet. "If you are heavily dependent on a portfolio, you're going to need two or three years worth of income sitting in some very safe place."
Minimize taxes. If the bulk of your retirement savings is in tax deferred retirement accounts including 401(k)s and IRAs, your timing of withdrawals could impact how much you pay in taxes. "If you take too much in one year your tax bracket could go up because you have a big chuck of money boosting your income," says Overstreet. "I believe in trying to stretch things out so you don't have too much income in any one particular year." Withdrawals from traditional retirement accounts generally become required after age 70½. Those who fail to withdraw the correct amount must pay a 50 percent tax penalty on the amount that should have been withdrawn.
Maximize Social Security. The monthly payment you are eligible for from the Social Security Administration increases for each month you delay claiming between ages 62 and 70. "If you retire later you will have more money coming in from Social Security," says Gerald Cannizzaro, a certified financial planner for Retirement Planning Services in Oakton, Va. "If you don't take your Social Security at 62, you make about 8 percent more per year for every year you don't take it." There is no additional benefit for delaying claiming beyond age 70.
[See 8 New Retirement Rules.]
Pay off your mortgage. You will be able to get by on a much smaller income in retirement if you can eliminate your mortgage. "When you retire and have no mortgage to pay it greatly improves your retirement income," says Cannizzaro. Consider a mortgage payment of $2,000 per month. "Without that payment going out that's $24,000 a year less you need to spend," says Cannizzaro.
Sign up for Medicare on time. You can sign up for Medicare beginning three months before the month you turn 65. Sign up right away to avoid a premium hike for late starters. If you don't sign up for Medicare Part B during the seven-month window around your 65th birthday, your premiums may increase by 10 percent for each 12-month period that you delay enrollment. Those who are still working and covered by a group health plan at work must sign up within eight months of leaving the insurance plan to avoid the premium increase.
Minimize fees. Pay attention to the costs and fees you are paying to invest and take steps to minimize them whenever possible. "It's very common for retail investors who are managing their own money to have multiple layers of underlying expenses that they don't even know about," says Bryan Hancock, a certified financial planner for Timberchase Financial in Birmingham, Ala. "The average expense ratio is about 1.5 percent, but there are very low-cost options that can do the same thing for a tenth of that cost, such as low-cost ETFs." Hancock recommends shopping around for expense ratios of less than 1 percent on your investments.
Combat inflation. Most people have only one source of inflation-protected retirement income: Social Security. Social Security payments increase each year to keep up with inflation as measured by the Consumer Price Index. Consider adding some additional inflation-fighting investments to your portfolio, such as Treasury Inflation-Protected Securities (TIPS), or some exposure to commodities, real estate, or the stock market.
Consider part-time or seasonal employment. A part-time job, even if you only make a few thousand dollars per year, allows you to spend your savings more slowly. You can also use part-time income to pay for gifts and trips and other non-necessities that you don't want to use your nest egg to finance. Spending less in the early years of your retirement allows you to preserve assets for the latter part of your retirement when continued employment may no longer be an option.