Time for one last push to get you where you want to be
By the time you hit 60, you’ve hopefully built up a significant savings balance. But even if the number is big, you have to be careful about protecting what you’ve built, while still taking advantage of opportunities where you can find them. Here are some ideas to help you get the retirement you want:
Have a career Plan B. The last years of your career will be crucial savings years, but they can be perilous. On average, unemployed Americans 55 to 64 have been jobless for 11 months. So to help ensure you can work until your planned retirement date, lay the groundwork for a backup plan—whether it’s a short-term project, freelancing, or a business idea.
Downsize the house. As seen in the chart below, housing accounts for the largest share of spending in retirement. Swapping a $250,000 house for a $150,000 one puts cash in your pocket—and frees up $3,250 a year in taxes and upkeep, according to the Center for Retirement Research.
Want to retire early? Factor in better health. Ending your career well before you turn 65 requires extra preparation, for a pretty obvious reason: You have more years to fund. Another challenge, though, is that you’ll probably be in excellent health and active for more of that time. That’s also why you’d like to do it, of course, but it means that you are likely to spend more. Younger retirement-age people spend 36% more than those 75 and over, according to Census data. Plan for the extra spending with a more ambitious savings goal. Deciding whether to retire early now? Add a generous allowance for the cost of your travel plans and hobbies to your regular budget—theretirement-expenses worksheet at Vanguard.com is a helpful tool—and make sure it all still fits with a safe spending plan.
Take some profits. You spend a lifetime building wealth, yet success and failure can come down to a handful of years—those just prior to and after you stop collecting a paycheck. The odds say that given how long retirement is, you should keep the bulk of your portfolio in equities. Yet you don’t get to play out thousands of scenarios. you get only one try. dial down equities to half or less as you near this danger zone. You can always take on more risk after, when the stakes are smaller.
Don’t eat the seed corn. Common advice for retirees is to withdraw 4% of savings in year one and then adjust for inflation. But due to low yields, says economist Wade Pfau, that’s too aggressive now. A 2.9% withdrawal gives you a 90% chance of a 50% stock/50% bond portfolio lasting 30 years. If that seems low, start higher, but protect your capital by spending less in bad market years.
Put your assets in the right place. Once you’ve maxed out your IRAs and 401(k)s, use taxable accounts for the most tax-efficient investments in your mix. They include index and buy-and-hold equity funds that trade infrequently and generate few capital gains distributions.
Rethink your target. If you’re close to retirement but don’t like the look of your balance, take heart. Most retirement advice and online calculators assume you are going to spend the same amount, adjusted for inflation, each year after you stop working. In reality, spending tends to decrease as you move through retirement, according to David Blanchett of Morningstar Investment Management. When working out your retirement budget, make a distinction between fixed, essential costs and those you may have more flexibility with.
Maximize Social Security. What if you could earn 8% a year on your money risk-free, and all you’d have to do is be patient? Well, there is such a thing: Social Security. A person who would get $24,000 a year tapping his benefit at 62 can expect that sum to swell to $42,000 by waiting until 70. That looks even better when you consider that the payment lasts even if you live a long, long time.
Avoid taxes in retirement. There may be years when you fall into the 15% bracket ($74,900 taxable income for couples). Take advantage by selling your long-standing holdings with big gains. why? The long-term capital gains rate for those in the 15% bracket or below is 0%. That’s right: nada.