Retirement is coming, are you ready?
Many people nearing retirement do not confront the financial issues until it’s too late in the game. The bad news is… financial planning is a process that is better when prepared with more time and planning. The good news is… it can start at any time in a person’s life – but the later you start, the more compromises and adjustments you might have to make. You need to attack your financial planning aggressively and intelligently. Following are some things to consider doing:
Get rid of debt – especially from credit cards. Next, try to pay down mortgages that have interest rates higher than what you can earn on your investments.
Get a Budget
Reduce spending. Current life styles need to be adjusted to accomplish longer term goals which should include being secure financially. Look at every area of spending including housing, insurance, clothing, medical costs, gifts to children and vacations. An alternative is to work longer.
Tax Efficient Investing
Invest in a more tax-efficient manner. Buy bonds and bank CDs in your tax deferred accounts and stocks in your own name. The interest will then be free from current taxation and the dividends and eventual capital gains will be taxed at reduced rates.3. Invest in a more tax-efficient manner. Buy bonds and bank CDs in your tax deferred accounts and stocks in your own name. The interest will then be free from current taxation and the dividends and eventual capital gains will be taxed at reduced rates.Invest in a more tax-efficient manner. Buy bonds and bank CDs in your tax deferred accounts and stocks in your own name. The interest will then be free from current taxation and the dividends and eventual capital gains will be taxed at reduced rates.
Lower investing costs by using discount brokers; and buying index and exchange traded funds rather than individual stocks and actively managed mutual funds. The costs do count and hold down your overall yields and growth.
Buy longer-term bonds instead of CDs to increase your yields. Consider setting up a ten or twenty-year bond ladder. A ladder has equal portions of your bond investments coming due annually allowing reinvestments at the then current rates, permitting you to change your investments, or have the funds available for other purposes.
Understand what you are really investing in. For example, a bond mutual fund is not a “safe” investment. Once made, you can only get back an amount that the market deems appropriate based on the current interest yields. As market yields increase the value of the bond fund will decrease. Of course, the opposite is true if rates drop, the fund’s value will increase, assuming there isn’t excessive leverage within the fund or a major management misjudgment.
Long-term investment plans should not ignore stocks. A married couple, both at age 70, would have at least one of them living twenty-five or more years – that is long term. The planning should not be to outlive your money. Someone at age 92 can possibly ignore future effects of inflation and plan on spending down principal; but not someone age 70.
Regular Financial Review
Review your asset allocation a minimum of once a year, and don’t automatically rebalance. Traditional rebalancing refers to asset values and not portfolio yields which is where the cash flow comes from. Also, many of the traditional rules do not apply anymore.
Consider putting a portion of your assets in immediate annuities to increase your cash flow to guarantee some cash flow for the rest of your life. The downside is that the funds are no longer available to be used for anything else and disappear upon your death. You need to balance wanting a secure cash flow with leaving a “legacy” to your heirs.
Know your safety nets. If you continue to spend down your assets to maintain “yesterday’s” life style you can always get a reverse mortgage if you own a house.