Editor’s Note: Jonathan Pond is a longtime financial planning expert and author (“Safe Money in Tough Times,” “Your Money Matters”) who has worked with public television for many years, both as guest and host. He’s as sound a financial advisor as I’ve met in my decades as a reporter. His financial planning software, SmartPlanner.com, is commercially available.
—Economics correspondent Paul Solman
Everything you do in your financial life throughout your working years is geared toward one goal: Being able to retire comfortably. Most of your retirement “to-do” matters should be reasonably straightforward, like saving regularly and investing those savings wisely and obtaining the right insurance at the right price. Other matters are less obvious but are still important. Here are 7 ideas that could help you achieve lifelong financial security:
1. You can retire comfortably on less than you’ve been led to believe.
The published estimates of how much you’ll need to retire are scary. Most suggest that you need at least 80 percent, and some even suggest as high as 110 percent, of the income you earn before retirement. Forget those rules of thumb. Everyone’s situation is different, and the average person who is now retired took a 30 percent income haircut upon retirement and never looked back. You may think it’s too early to prepare a retirement expense budget, but the further you are away from retirement, the more time you have to do the necessaries to achieve your retirement aspirations — in other words, match your income up with your expenses.
You’ re likely to find that you’ll be able to retire well on less than you had been led to believe. A lot of expenses decline or are eliminated when you retire, including retirement plan contributions, work expenses, income taxes, and, hopefully, mortgage payments (see below). True, some expenses may rise when you retire, including medical and travel. But, all in all, you don’t need tons of money to be able to make ends meet. In fact, you’ll probably find that you can retire quite nicely on about 60 percent of your pre-retirement income. That has been the experience of my clients over the years.
2. Strive to pay off the mortgage by the time you retire.
One of the best things you can do for your retirement wellbeing is to pay off your mortgage before or soon after you retire. Owning a mortgage-free home will so improve your retirement budget that it will be hard to say you can’ t afford to retire. Even if you have a large mortgage balance now, you can still shorten the time it takes to pay off the loan. For example, consider someone who has a $200,000 mortgage with 25 years to go. Adding an extra $200 a month on top of the regular mortgage payment will shorten the mortgage payoff by a decade. In other words, it will be paid off in 15 years rather than 25. Even though your tax deductions are reduced if you accelerate the mortgage payments, you’ re still ahead financially because for every dollar of mortgage interest you pay out you save only a fraction of that dollar in taxes. And once you retire and earn less, the mortgage interest deduction is worth less.
Two caveats: You should first pay off all higher interest loans, including credit card loans. And always contribute generously to available retirement savings plans, including your retirement plan at work and an IRA. (I recommend this even if there is no company match; the beneficial effect of a current tax deduction and tax deferral trumps the match. But decisions get more complicated for those who expect to be in a higher tax bracket.) Each year you forego contributing to a retirement plan is a year you can’ t make up in the future.
3. Your age should not have a big impact on the way you invest.
This idea is a controversial one, some might say “contrarian.” A familiar rule of thumb is that the portion of conservative investments in your portfolio — typically, bonds — should equal your age. For example, at age 50, your portfolio would be half in bonds, half in riskier stock; at 75, three-quarters in bonds and only one quarter in stocks. By my advice, there’s usually not much reason to change in the way you invest as you age and any necessary changes should be made very gradually. Retirees often think they need to invest more conservatively. After all, they’re no longer adding to their investments to make up for losses. Also, retirees think, quite appropriately, that they’re going to need income from their investments to help meet living expenses. But investing during retirement requires balancing the dual goals of income to pay living expenses and investment growth to offset the loss of purchasing power due to inflation. After all a typical retiree will need income to last for 30 years or more. (I assume a life expectancy of 95.)
So the most important consideration is not that you’ re retiring; rather, it’ s how long you’re going to need your money to last. That’s called your “investment horizon.” If your nest egg is already well diversified before retirement, major shifts in your investments should not be necessary.
4. Upsize your income by downsizing your domicile.
Downsizing or renting makes a lot of financial sense and could become a sensible lifestyle decision besides. Downsizing — selling your current hacienda and buying a less expensive home either before or after you retire, particularly if it’s a newer home — could reduce the time and inconvenience of maintaining your current home. Relocating to a place that has a less frenetic pace can be attractive to some. Conversely, moving from the suburbs to the big city is appealing to others. And consider the advantage of an elevator, as you age, over stairs. There are many financial benefits of downsizing, including tax breaks if the current home is sold at a profit, and reduced housing expenses, which translate into higher retirement income. Moreover, if you live in a high-cost area, relocating to a lower-cost locale may be very rewarding financially.
5. Delaying Social Security can be beneficial.
Almost three quarters of those eligible for Social Security benefits start collecting before reaching full retirement age. This is often a mistake. With longer life expectancies and people relying more heavily on Social Security, it often pays for healthy individuals and couples to delay collecting benefits. Benefits grow at a rate of 6 percent annually for those who delay collecting from age 62 until reaching full retirement age, currently 66, and 8 percent annually thereafter until age 70, adjusted each year for inflation. Those no-risk increases are hard to beat. Each month of deferred benefits results in a higher lifetime check. Delaying benefits may be particularly efficacious if one spouse will be receiving a considerably higher Social Security check than the other. Should the higher earning spouse predecease, the surviving spouse will be entitled to the higher Social Security check. And while you wait, one spouse can take a “spousal benefit,” equal to fully half the other spouse’ s retirement benefit at age 66. (You can read more about ways to maximize Social Security in Making Sen$e’s weekly column by Laurence Kotlikoff, as well as in “Get What’s Yours: The Secrets to Maxing Out Your Social Security” a new book by Kotlikoff, Paul Solman and Philip Moeller.)
6. Retiring gradually can work wonders on your retirement prospects.
Gradual retirement (also called “phased retirement”) has a lot of appeal for lifestyle reasons. When the customary retirement age of 65 was initiated over a century ago, it was a reward for those few workers who managed to live that long. Now, a lot of workers simply can’ t imagine retiring cold turkey with so many years left to live. Moreover, gradual retirement can make a bigger difference in your retirement income than you probably believe.
Delaying retirement for just a few years can transform a merely okay retirement into a really nice one. For example, someone who works enough to cover living expenses for three extra years and doesn’ t tap into retirement savings or begin collecting Social Security will increase her annual Social Security income by 19 percent to 26 percent (depending on age) and her annual income from retirement plan withdrawals by about 25 percent — for the rest of her life. What a difference!
There are two reasons why gradual retirement results in more retirement income. First, your nest egg has more time to grow before you begin tapping into it. Second, each year you continue working is one less year your money will be needed to fund your retirement.
7. Help family members financially but don’t enable them.
One of the best ways to teach children, grandchildren, nieces, and nephews about the importance of saving for retirement is to help them fund their retirement plans. Anyone who has job income, even from summer or part-time jobs, can contribute to an IRA, even if they are minors. Once a younger generation family member gets a “real job,” you might be able to afford to help him or her contribute to a retirement savings plan at work. I know this is a good investment for the youngster. But it may also be a good investment for you because the sooner you teach younger generation family members about financial responsibility, the better your chance of not having to help them out in a big way later on.
Despite your good efforts, you may need to provide financial help for an adult child in need. Whether you are already helping or may want to in the future, keep these two matters in mind. First, can you easily afford the outlay? You don’ t want to impair your own financial future. As callous as it may sound, you may simply have to say that you can’ t afford to help. Second, if you are providing financial assistance, don’t let temporary assistance turn into an annuity for the family member. You have to draw the line somewhere, or otherwise you will end up enabling the child who may come to view the periodic assistance as an entitlement. If that’ s what you want to do and can easily afford to send money indefinitely, so be it, but be wary of how this might adversely affect a child’s initiative and self-esteem.