Understanding New Retirement
According to U.S. Census Bureau data, 4 million Americans will turn 65 in 2024, the most in history. Unfortunately, more than two-fifths of baby boomers have no retirement savings. Transitioning from your old career to retirement is a significant life change that requires careful consideration. Let’s explore issues that retirees face and strategies for adjusting to new retirement challenges seamlessly, even in times of great uncertainty.
Extended Life Expectancy
While none of us know how long we will live, Americans who make it to age 65 have an average life expectancy of 82 for men and 85 for women, according to the Social Security Administration’s Actuarial Life Table. Many, of course, will live longer than this. Planning for longevity when it comes to retirement is essential so you do not run out of money prematurely.
As you get closer to retirement, take time to review your current expenses and get a more specific idea of what your actual spending needs will be. It can be helpful to group your expenses into non-discretionary (must-pay) and discretionary (fun expenses, but optional) categories. Also, remember to account for oversized ticket items (like once-in-a-lifetime trips) and taxes (income and property). Staying within your budget and not overspending are the most crucial aspects of a successful retirement plan and are one area you may have more control over.
Consider delaying taking Social Security benefits. Every year you defer beyond your retirement age to 70, you lock in an 8% increased benefit for life. If you are in a career you like and have the option to keep working, consider doing so, even if just on a part-time basis. Working longer can also help reduce the risks of outliving your money.
Another added expense that can come with living longer is increased medical costs. In addition to obtaining Medicare coverage at age 65, strongly consider buying a supplemental policy covering what Medicare does not. Medicare only covers 80% of most outpatient care and services; the rest must be covered out of pocket or by a supplemental policy.
Unpredictable Stock Market
Retirees from older generations were more likely to have company pensions to help supplement retirement income. The new retirement reality is that most retirees need to rely on their investment portfolio to fund a large part of their retirement spending needs. Investors must structure their portfolios appropriately and avoid taking excessive risks.
Since bonds tend to be less volatile than stocks, plan to shift away from stocks and more towards bonds as you retire. While the expected returns may not be as high as stocks, owning more bonds is a better way to preserve your capital over the long term and avoid the higher volatility (and sleepless nights) that too much stock exposure can bring to your portfolio.
It is also important to structure your portfolio as efficiently as possible from a tax standpoint. Since bonds tend to generate more annual income than stocks, avoid paying tax on that income by owning bonds in your tax-deferred retirement accounts to the extent you can. Also, try to hold the stock portion of your portfolio in a taxable brokerage account.
Stock mutual funds and ETFs can be more tax-efficient than bond funds. Also, stocks can be expected to appreciate more than bonds, so owning them in a taxable brokerage account is more tax efficient, as you will pay the more favorable capital gains rate when you sell them, as opposed to the ordinary income tax rate that you pay when you distribute money from a traditional retirement account.
Although retirees no longer have to worry about job opportunities in tough economic times like they did in their working years, fluctuating interest rates and higher inflation can significantly impact retirees. When the economy is in a recession, the Federal Reserve often lowers interest rates to spur economic growth. While this is great for people needing to borrow money, it can be bad for retirees wanting to earn a decent interest rate on their cash savings. Even in a low-interest rate environment, though, retirees should maintain enough cash savings to cover 1-2 years of living expenses.
When economic growth resumes and interest rates rise again, that is an excellent time to look for opportunities to lock in high rates in CDs or US Treasury Bonds (most currently yielding over 4%). In this higher interest rate environment, be sure you are getting a decent return on your cash. Some banks only pay in the 1% range for savings accounts. Better rates may be found in money market mutual funds offered by companies like Vanguard, Charles Schwab, or Fidelity.
Adjusting to retirement is a journey that requires careful planning and ongoing optimization. With the knowledge and strategies outlined in this article, you can confidently embark on your retirement. Consult with a financial advisor to tailor these approaches to your unique circumstances, ensuring a secure and prosperous retirement. The future is yours to shape – make it financially sound and fulfilling. If you’re interested in learning more about how to invest in your future, contact our team here at ML&R Wealth Management.