Benjamin Franklin once said, “A penny saved is a penny earned.” Although that might seem like a frivolous remark to make these days, it has a lot of relevance to the savings predicament of many retirees today.
According to a 2017 Bankrate survey, the average retirement savings is $124,831 for families aged 50 to 55 and $163,577 for families aged 56 to 61―far less than the $1 million that experts recommend for retirement savings given that Americans are living longer. Social Security can supplement existing retirement savings, but the maximum monthly retirement benefit of $2,639 is probably not enough to fill the gap.
So, what should you do about it? Regardless of how much you have saved, you need to make the most of your money in retirement. Here are some suggestions:
Do a cash flow analysis
A comfortable retirement can largely be a function of how much money stands between you and your wants and needs.
For example, suppose you receive a total of $5,000 per month from your 401(k) plan and Social Security, but your expenditures amount to $6,000 a month. (This is a hypothetical example and is not representative of any specific investment. Your results may vary.)
You’ll need to either cut back on expenditures or come up with another $1,000 per month in order for that spending plan to work. If you tap investment assets for the difference, make sure you have enough to last you for many years at that level.
Remember to take into account the prevailing economic backdrop, as well as life changes that spring up. Plus, you’ll have to factor in inflation.
Know your investment types
Investment types come in more flavors than Baskin-Robbins ice cream. All investments come with some amount of risk, but these could potentially be lower-risk than others:
- Real estate investment trusts (REITs): REITs invest in mortgages or direct equity positions in various properties. They pay dividends to their investors that typically yield higher than what you can get from stock dividends.
- Dividend-paying stocks: Some companies pay dividends on their stocks that are higher than what you can get on safer investments like CDs and U.S. Treasury securities.
- Municipal bonds: Munis are debt securities issued by state, county, and municipal governments. The advantage is that the interest you earn is tax-free for federal income tax purposes and sometimes from state and local taxes, depending on where the bonds are issued.
- U.S. Treasury notes and bonds: Yields on U.S. Treasury notes and bonds are higher than what you can get on certificates of deposit and money market funds. This is because both notes and bonds are longer term securities that pay higher interest rates.
- Treasury inflation-protected securities (TIPS): TIPS are another form of U.S. Treasury protection that pay the interest and additional principal in order to compensate for inflation.
Rebalance your portfolio
Experts recommend that your investment accounts be reviewed periodically for increased return potential. If necessary, your portfolio should be rebalanced to take into account things like inflation and interest rates.
Rebalancing can help you match your investments with your original goals or accommodate your changing needs. If you’re comfortable with more risk, this could be a good time to increase the long-term return potential of your portfolio by investing in a higher percentage of equities (stocks). The downside, of course, is that increased return potential comes with the risk of more volatility, so you need to have an understanding of how much risk you are willing to take.
Put off collecting social security
If you’re making a good salary and can keep working longer, it will likely be to your advantage to hold off on collecting benefits, because higher lifetime earnings may result in higher benefits when you retire. The longer you wait to collect, the larger the payout.
You can start receiving Social Security benefits as young as age 62, or you can wait until full retirement age, which depending on your year of birth, ranges from age 65 to 67. If you give in to immediate gratification and start collecting at age 62, your benefits will be reduced by 20 to 30 percent than if you wait until full retirement age. If you wait until age 70, your check could be nearly twice what it would be at age 62. But because you won’t get a bigger check after age 70, it doesn’t pay to delay beyond then.
Downsize in retirement
Downsizing in retirement is no longer for folks on the fringes. It’s becoming the new chic.
Fifty-five percent of baby boomers who intend to move for retirement plan on renting, according to a 2018 Harris Interactive study.
If parting with the family home brings too much sorrow, there are other ways to downsize in retirement, including taking cheaper vacations, investing in a fuel-efficient car, or cutting energy expenses. Again, downsizing effectively requires having a good grasp of your spending needs.
Strive for good health
Out-of-pocket medical expenses can chip away at your assets significantly as you get older. Retired couples will need about $250,000 in savings to pay for basic medical care over the rest of their lifetimes, according to the National Coalition on Health Care.
That doesn’t include Medicare costs, which can add up quickly:
- Part A premium is $422.
- Part A has a $1,340 deductible per benefit period.
- Part B premium amount is $134.
- Part B deductible is $183 per year.
By eating healthy and exercising, you can cut down out-of-pocket medical expenses substantially.
Seek expert advice
Making the most of your money in retirement requires active assessment of your future goals, lifestyle, and current financial situation, as well as the flexibility to adapt to future change. A professional wealth advisor can help you assess your current financial situation and work with you to create to roadmap that will ensure you live out your golden years comfortably.
To schedule a complimentary financial assessment, with a TDECU wealth advisor fill out this request form or contact us at: 877-635-7028.