I know a doctor who is thinking about retirement. He’s not overly concerned about his future. But his retirement is five years away.
The No. 1 factor, in my opinion, affecting anyone’s retirement savings is inflation. Inflation is relatively tame at the time of this writing, but it can still be harmful—even if you plan to retire in five years. So, here’s what I suggest:
1. Don’t quit on stocks. “To achieve returns to sustain a 30-year retirement, you need to still be investing for growth,” states Money magazine in its “Retirement Guide 2013” series published last October. If stocks make you nervous, then finding a way around that concern could be difficult. According to Bankrate.com, one-year CDs offer a 0.76% pre-tax yield. Money market accounts pay 0.49% per year. Yields on two-year U.S. Treasury bonds are even worse: 25%. (Figures through November 13, 2012.) You’d lose out to inflation if all you had in your portfolio were low-yielding investments. So, if you’re near retirement, based on your risk tolerance time horizon, I’d likely recommended a stock investment allocation of 30-40%.
2. Wait before taking Social Security. In general, most individuals should delay receiving their Social Security benefits. Money states that your payments can be 76% higher if you begin taking them at age 70 instead of at age 62. “Your payment will increase by about 6% a year for every year you delay filing before your full retirement age (between age 66 and 67 for most folks),” Money claims. “After that, holding off earns you another 8% a year until age 70.” Of course, your decision as to when to retire is a personal one. What’s best depends on a number of factors, such as your current cash needs, your health and family longevity, whether you plan to work in retirement, whether you have other retirement income sources, your anticipated future financial needs and obligations, and, of course, the amount of your future Social Security benefit. See Publication No. 05-10147, “When To Start Receiving Retirement Benefits,” at socialsecurity.gov to learn more.
3. Consider taking spousal benefit Social Security income early. Assuming your spouse is 62 and has been the lower income earner, and you are 62, you could file for benefits and postpone collecting them until you turn 70. Your spouse can begin collecting 50% of your benefit right now. See “Retirement Planner: Benefits For You As A Spouse” at at socialsecurity.gov.
4. Plan your retirement health care. If you retire before Medicare kicks in at 65, you could have a big expense ahead. “For a 62-year-old couple with one spouse in ill health,” states Money, “premiums run up to $2,300 a month on the individual market.” Ask your financial planner about bringing in a health insurance specialist, or look for an independent agent at nahu.org. Check with your company’s human resources department. You may be able to buy health care coverage when you retire. Remember that long-term care insurance will run about $4,000 a year for a couple in their early 60s, states Money. But if your assets total more than $1.5 million, I say pay for your long-term care as you go.
5. Line up some income. Want to consult? Now’s the time to gather clients and stay abreast of your field. You could also buy an annuity, which is a contract between you and an insurance company that pays out income and is designed for retirement purposes. Finally, practice living within your retirement income budget today. Doing so grounds your retirement planning in reality.
Jerome “Joe” P. Bonnett, Jr., CFP®, ChFC®, is an Independent Wealth Manager and President of Bonnett Wealth Management, Omaha. He is a 1987 graduate of the University of Nebraska with a bachelor’s degree in business administration, finance, and banking. He is a Registered Representative of Securities America, Inc. Member FINRA/SIPC. Bonnett resides in Omaha with his wife, Susan (Engdahl), and their two children, Jake and Claire. Bonnett Wealth Management and Securities America companies are unaffiliated.