Yahoo Finance How to Invest in Retirement
For people with many years left to work, the retirement goal line looks way off in the gloom. Carry the ball across and you win, entering a deep end zone where there's no boss to answer to and you can enjoy decades of prosperity, comfort and fulfillment if all goes well.
But retirement is not a steady state. In real life, retirees are likely to go through several stages, each requiring its own preparation. Financial advisors have labeled them the "go-go," "slow-go" and "no-go" years.
"Unfortunately, most financial planning programs look at retirement as one constant season, where spending remains the same year after year," says Scott Hanson, co-founder of Hanson McClain Advisors, in Sacramento, California. "In reality, the first five years of retirement look vastly different than the last five years."
Early retirees can hope to be active and healthy, spending more than they will later on activities and travel. A study from Bank of America Merrill Lynch says that retired baby boomers, on average, spend more on travel per year than any other age group.
At some point, though, most retirees slow down, not getting around quite as much while still fairly healthy. Finally comes the homestretch no one likes to think about -- frailty and big expenses for health care and help with ordinary things like cooking and cleaning and even dressing.
[See: 11 Health Care ETFs for a Heart-Healthy Portfolio.]
It can be very misleading to assume that retirement will cost about the same as the years leading up to it, says Charlotte A. Dougherty, president of Dougherty & Associates in Cincinnati.
"In our experience, people do not correctly assess current cash flow," she says. "Thus the estimates for retirement expenses tend to be lower than is realistic. ... In general, we are including higher estimates for health care costs in all of our planning/modeling, at all ages. We can look ahead to the expenses for assisted living residences and model these in projections we make."
Also, life throws curve balls, like divorce and death of a spouse, which can upend even well-formed plans.
The most obvious implication: budgeting to spend a specific amount per year for 20 or 30 years may not work, as each stage will have different spending needs.
So how should one still in the working years prepare for all this?
Dougherty notes that the best computer and online financial planning tools allow for different spending projections during different stages of retirement, and even for one-time events like a child's wedding.
"One client even modeled gifting to an as-yet unborn grandchild over sequential time frames," she says. "Some clients have modeled new cars every few years. "
A good tool from a financial advisor or found online, will estimate how much each stage of retirement will cost, and how much must be saved at a given return to get there. But since nothing is certain, the key is to devise a plan that leaves enough in reserve for the expensive later years, and to avoid draining that sum in the active early years.
It's important, then, to abide by a budget rather than to simply spend all the cash that flows in from your investment accounts.
"The last few years of one's life can be quite expensive," Hanson says. "Medicare will cover the majority of medical costs, but it won't cover things such as assisted living or nursing homes. Ideally, one should have some cash earmarked for this chapter of life. Long-term care insurance is an option, but it's very expensive."
Some things to consider:
College vs. retirement. Pre-retirees should be wary of tapping retirement accounts to pay for children's college costs, many experts say. The brutal truth is that young people have many years to pay off college loans, while their parents have less time to rebuild if they raid retirement accounts.
"If you have no other choice, consider taking the money out of the plan as a loan rather than a hardship withdrawal," advises Tracy Burke, a planner at Conrad Siegel Investment Advisors in Harrisburg, Pennsylvania.
Continuing to save. While needs vary, people in their 40s should generally save about 15 percent of gross income for a nest egg large enough to produce a retirement income 75 percent of pre-retirement earnings, Burke says. Fifty-somethings should fine-tune their plans and, since these are peak earning years, boost savings if they're short of their target by making "catch-up" contributions to 401(k)s and IRAs, he says.
"Consider trimming discretionary expenses: Pack lunch. Make your own coffee. Hold off on buying a new car," Burke says.
Stay in stocks. Retirees can try to live on less in the early years, leaving the unused sum to continue growing. Because people are living so long these days, most advisors say the nest egg should include a healthy dose of stocks even after retirement starts, to get bigger returns to keep ahead of inflation.
"Your portfolio should continue to trend upward until around age 80," Burke says. "If it peaks before then, you could run out of money later in life."
[See: The 9 Best Investors of All Time.]
Have a final fall-back. An easy way to reduce your expenses while in retirement is to have paid off your mortgage," says David Hryck, a tax lawyer and personal finance expert with the Reed Smith firm in New York. "Strive to enter retirement with no mortgage."
A home with little or no mortgage balance can be sold to pay for an assisted-living facility or to move to a cheaper place, leaving leftover proceeds for expenses.
Also, a homeowner 62 and older can borrow against the equity in the home with a reverse mortgage, which requires no monthly payments. Instead, the loan and accumulated interest are paid after the home is sold or the last owner dies. The federal government guarantees these loans so that the borrower's debt can never exceed the home's sales price. Because older borrowers have less time to build up interest obligations, they can borrow more under a reverse mortgage, making this option ideal as a final reserve.
Though a reverse mortgage can be taken as a lump sum or monthly income, a third option, a line of credit, can be especially useful as a reserve. The credit line will automatically increase on the assumption home values rise, while there is no debt until you draw against the approved amount. It can be especially valuable to establish a credit line now because you can lock in today's low loan rates.
[See: 12 Tips for Investors in Their 50s and 60s.]
Consider insurance. Another option for an old-age reserve is a deferred income annuity, or DIA. For an upfront payment of $100,000, a 60-something might lock in a guaranteed lifetime income exceeding $50,000 a year, starting at age 85 or later. Insurance companies can be generous because they know many policyholders will not live long enough to collect much, if anything. Note that money spent on a DIA is like money spent on car insurance: it is gone, and it cannot be withdrawn or passed to heirs.
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