MONEY retirement planning

3 Smart Moves for Retirement Investors from the Bogleheads

The Bogleheads Guide to Investing 2nd Edition
Wiley

A group of Vanguard enthusiasts offers sound financial advice to other ordinary investors. Here are three tips from one of their founders.

Wouldn’t be great to get advice on managing your money from a knowledgeable friend—one who isn’t trying to rake in a commission or push a bad investment?

That’s what the Bogleheads are all about. These ordinary investors, who follow the teachings of Vanguard founder Jack Bogle, offer guidance, encouragement and investing opinions at their website, Bogleheads.org. The group started back in 1998 as the Vanguard Diehards discussion board at Morningstar.com. As interest grew, the Bogleheads split off and launched an independent website. Today the Bogleheads have nearly 40,000 registered members, but millions more check into the site each month. (You don’t have to be member to read the posts but you must register to comment—it’s free.)

As you would expect given their name, the Bogleheads favor the investing principles advocated by Bogle and the Vanguard fund family: low costs, indexing (mostly), and buy-and-hold investing—though the members disagree on many details. The Bogleheads are led by a core group of active members, who have also published books, helped establish local chapters around the country, and put together an annual conference. Their ranks of regular commenters include respected financial pros such as Rick Ferri, Larry Swedroe, William Bernstein, Wade Pfau, and Michael Piper.

For investors who prefer their advice in a handy, non-virtual format, a new edition of “The Bogleheads’ Guide to Investing,” a best-seller originally published in 2006, is coming out this week. Below, Mel Lindauer, who co-wrote the book with fellow Bogleheads Taylor Larimore and Michael LeBoeuf, shares three of the most important moves that retirement investors need to make.

Choose the right risk level. Figuring out which asset allocation you can live with over the long term is essential—and that means knowing how much you can comfortably invest in stocks. Consider the 37% plunge in the stock market in 2008 during the financial crisis. Did you hold on your stock funds or sell? If you panicked, you should probably keep a smaller allocation to equities. Whatever your risk tolerance, it helps to tune out the market noise and stay focused on the long term. “That’s one of the main advantages of being a Boglehead—we remind people to stay the course,” says Lindauer.

Keep it simple with a target-date fund. These portfolios give you an asset mix that shifts to become more conservative as you near retirement. Some investing pros argue that a one-size-fits-all approaches has drawbacks, but Lindauer sees it differently, saying “These funds are an ideal way for investors to get a good asset mix in one fund.” He also likes the simplicity—having to track fewer funds makes it easier to monitor your portfolio and stay on track to your goals.

Another advantage of target-dates is that holding a diversified portfolio of stocks and bonds masks the ups and downs of the market. “If the stock market falls more than 10%, your fund may only fall 5%, which won’t make you panic and sell,” says Lindauer. But before you opt for a fund, check under hood and be sure the asset mix is geared to your risk level—not all target-date funds invest in the same way, with some holding more aggressive or more conservative asset mixes. If the fund with your retirement date doesn’t suit your taste for risk, choose one with a different retirement date.

Don’t overlook inflation protection. Given the low rates that investors have experienced for the past five years—the CPI is still hovering around 2%—inflation may seem remote right now. But rising prices remain one of the biggest threats to retirement investors, Lindauer points out. If you start out with a $1,000, and inflation averages 3% over the next 30 years, you would need $2,427 to buy the same basket of goods and services you could buy today.

That’s why Lindauer recommends that pre-retirees keep a stake in inflation-protected bonds, such as TIPs (Treasury Inflation-Protected Securities) and I Bonds, which provide a rate of return that tracks the CPI. Given that inflation is low, so are recent returns on these bonds. Still, I Bonds “are the best of a bad lot,” Lindauer says. Recently these bonds paid 1.94%, which beats the average 0.90% yield on one-year CDs. If rates rise, after one year you can redeem the I Bond; you’ll lose three months of interest, but you can then buy a higher-yielding bond, Lindauer notes. Consider them insurance against future spikes in inflation.

More investing advice from our Ultimate Retirement Guide:
What’s the Right Mix of Stocks and Bonds?
How Often Should I Check on My Retirement Investments?
How Much Money Will I Need to Save?

MONEY

Why You Probably Have More Mental Health Care Options Than You Think

Rorschach test with dollar signs
Sarina Finkelstein (photo illustration)—William Andrew/spxChrome/Getty Images

The suicide of comedian Robin Williams shows how tough it can be to overcome mental illness. The good news is that mental health care coverage is now more widely available, thanks to recent insurance rule changes.

The apparent suicide of comedian Robin Williams, who had reportedly suffered from depression, shows how tough it can be to overcome mental illness. His struggles are shared by millions of Americans—some one in four adults in a given year.

The good news is that mental health care coverage is now more widely available and at least somewhat more affordable, thanks to recent changes in federal law. And there’s reason to believe these rules can have an impact on suicide rates: Ken Duckworth, medical director of the National Alliance on Mental Illness, told USA Today that about 90% of people who commit suicide suffer from an untreated or under treated mental illness.

Here’s what you need to know:

1. If your health insurance covers mental illness, your benefits must be comparable to medical coverage.

If you’re covered under an employer health plan that offers mental health benefits—and some 85% of company plans do, according to the Society for Human Resource Management—you’re now entitled to coverage that is on par with coverage for physical illnesses. That’s the result of the Mental Health Parity and Addiction Equity Act of 2008—the final provisions of which just went into effect. (The parity act mainly addresses larger company plans.) Yet according to a study earlier this year by the American Psychological Association, more than 90% of Americans are unfamiliar with their rights under this law.

The mandate is even stronger for individuals buying coverage through the health insurance exchanges created under Obamacare. The Affordable Care Act included mental health care as one of 10 essential benefits that must be covered, expanding the parity rules to plans bought in the state exchanges.

“The parity act is a landmark law that creates a level playing field in insurance,” says Ron Honberg, national policy director for the National Alliance on Mental Illness.

2. Mental health care must have the same coverage limits as other medical care.

Before to the new rules kicked in, you would typically have had to get prior authorization for mental health or substance abuse treatment. And you would also have to cope with yearly limits and lifetime limits on treatments that were lower than for medical benefits.

“Now mental health care treatment rules have to be on par with medical care,” says Debbie Plotnick, senior director of state policy for Mental Health America.

That means you cannot be denied coverage for therapy visits or a stay in a treatment center, unless your plan also restricts coverage for comparable medical conditions. And you cannot be charged higher co-pays or co-insurance than you are for most medical and surgical services.

That doesn’t guarantee you’ll find treatment affordable. The sticking point for many people seeking counseling is that their provider may not be in their health plan’s network—far fewer mental health providers are part of an insurance network than other types of healthcare providers. If you’re in a plan that covers out-of-network treatment, you’ll still be reimbursed, albeit at lower rates than for in-network treatment. Note, though, that the entire bill may not be eligible since many providers charge more than insurers deem “reasonable and customary.”

3. Your insurance plan needs to disclose the medical criteria for denial of mental health care.

If you are denied reimbursement or coverage for mental health treatment, you will be entitled to the same appeal procedures as for medical care. The plan cannot simply refuse coverage without providing a detailed explanation that shows why the treatment is not deemed necessary, says Plotnick.

Over the past couple of years, many employer plans have already improved coverage of mental health. And there are early indications that more people are benefiting, particularly young adults who have remained on their parents’ health plans. (Adolescence and young adulthood is often when severe mental illness is diagnosed.) A recent study published in Health Affairs found that among people ages 19 to 25 receiving mental health treatment, uninsured visits declined by 12.4 percentage points, and visits paid by private insurance increased by 12.9 percentage points.

The new rules don’t cover everyone. Small plans may not be governed by these rules (depending on state laws). If you don’t have a large employer plan or one purchased on the exchanges, and if you don’t qualify for Medicaid, you may have to scramble. In many regions, and for many specialities, it may also be difficult to find a psychiatrist or therapist who takes your insurance. And if you go out of network, you will only be reimbursed for “reasonable and customary” costs that don’t cover your actual bills.

Still, for those suffering from mental illness, these new rules are major step forward. One more reason to, as late night talk show Jimmy Kimmel noted at the end of his Twitter tribute to Robin Williams: “If you’re sad, tell someone.”

MONEY Roth 401(k)

The Great Retirement Account You’re Not Using

diamond in dirty hands
RTimages—Getty Images

Roth 401(k)s are showing up in more workplaces, but only about 10% of eligible workers saved in one last year. That's a big mistake.

Since they were launched in 2006, Roth 401(k)s have been typecast as the ideal plan for millennials. Paying taxes on your contributions in exchange for tax-free withdrawals, the reasoning goes, is best when your tax rate is lower than it’s likely to be in retirement. It turns out Roth 401(k)s may be the better option for Gen Xers and baby boomers too.

That’s the conclusion of a recent study by T. Rowe Price, which found that Roth 401(k)s leave just about all workers, regardless of age or tax bracket, with more money to spend in retirement than pretax plans do. “The Roth 401(k) should be considered the default investment,” says T. Rowe Price senior financial planner Stuart Ritter.

Yet few workers of any age invest in Roth 401(k)s, which let you set aside $17,500 in after-tax money this year ($23,000 if you’re 50 or older), no matter your income. Just as with a Roth IRA, withdrawals are tax-free, as long as the money has been invested for five years and you are at least 59½. Some 50% of employers now offer a Roth 401(k), up from just 11% in 2007, according to benefits consultant Aon Hewitt. But only 11% of workers with access to a Roth 401(k) saved in one last year. Big mistake. Here’s why:

Higher income. Every dollar you save in a Roth 401(k) is worth more than a dollar you put in a pretax account. That’s because you’ll eventually pay income taxes on those pretax dollars, while you get to keep every penny in a Roth. Granted, you get an upfront tax break by saving in a traditional 401(k), and you can invest that savings. Even so, a Roth almost always overcomes that headstart, the T. Rowe Price study found.

The fund company’s analysis looked at savers of different ages and tax brackets, both before and after retirement. As the graphic shows, a Roth 401(k) pays more even if you face a lower tax rate in retirement than you did during your career. The only group that would do significantly better with a pretax plan: investors 55 and older whose tax rate falls by 10 percentage points or more, which would mean up to 6% less income.

roth edge

Greater flexibility. With a tax-free account, you can avoid required minimum withdrawals after age 70½ (as long as you roll over your Roth 401(k) to a Roth IRA). You can also pull out a large sum in an emergency, such as sudden medical bills, without fear of rising into a higher tax bracket.

Tax diversification. Having tax-free income can keep you from hitting costly cutoffs. For every dollar of income above upper levels, 50¢ or 85¢ of your Social Security benefits may be taxable. “Many retirees in the 15% bracket actually have a marginal tax rate of 22% or 27% when Social Security taxes are added in,” says CPA Michael Piper of ObliviousInvestor.com. And if you retire before you’re eligible for Medicare and buy your own health insurance, a lower taxable income makes it more likely you’ll qualify for a government subsidy. In short, when it comes to retirement, tax-free money is a valuable tool.

More from the Ultimate Retirement Guide:
What Is a Roth 401(k)?
Which Is Better for Me, Roth or Regular?
Why Is Rolling Over My 401(k) Such a Big Deal?

 

MONEY Savings

Millennials Are Hoarding Cash Because They’re Smarter Than Their Parents

Cash under mattress
Zachary Scott—Getty Images

Sure, young adults could get higher returns by investing in stocks, but many have good reasons to stay safe in cash right now.

Another day another study about the short-comings of Millennials as investors. This time around, Bankrate.com weighs in—data from their latest Financial Security Index show that 39% of 18-29 year-olds choose cash as their preferred way to invest money they won’t touch for least 10 years. That’s three times the percentage that would choose stocks.

“These findings are troubling because Millennials need the returns of stocks to meet their retirement goals,” says Bankrate.com chief financial analyst Greg McBride. “They need to rethink the level of risk they need to take.”

Bankrate.com is not the only group trying to push Millennials out of cash and into stocks. Previous surveys have scolded young adults for “stashing cash under the mattress,” being as “financially conservative as the generation born during the Great Depression,” and more being “less trustful of others”—in particular financial institutions and Wall Street. (You can find these surveys here, here and here.)

These criticisms are way overblown. It’s simply not true that Millennials are uniquely averse to equities—many are investing in stocks, despite their responses to polls. As for cash holdings, keeping a portion of your portfolio liquid is simply common sense, though you can overdo it.

Here’s what’s really going on:

  1. Millennials are not much more risk averse than older generations. In the wake of the financial crisis, investors of all ages have been keeping more of their portfolios in cash—some 40% of assets on average, according to State Street’s research. Baby Boomers held the highest cash levels (43%), followed by Millennials (40%) and Gen X-ers (38%). That’s not a wide spread.
  2. Many Millennials do keep significant stakes in equities. This is especially true of those who hold jobs and have access to 401(k) plans. That’s because they save some 10% of pay on average in their 401(k)s, which is typically funneled into a target-date retirement fund. For someone in their 20s, the average target-date fund invests the bulk of its assets in stocks. Thanks to their early head start in investing, these young adults are an “emerging generation of super savers,” according to Catherine Collinson, president of the Transamerica Center for Retirement Studies.
  3. Young adults who lack jobs or 401(k)s need to keep more in cash. Most young people don’t have much in the way of financial cushion. The latest Survey of Consumer Finances found that the average household headed by someone age 35 or younger held only $5,500 in financial assets. That’s less than two months pay for someone earning $40,000 annually, barely enough for a rainy day fund, let alone a long-term investing portfolio. Besides, that cash may be earmarked for other short-term needs, such as student loan repayments (a top priority for many), rent, or more education to qualify for a better-paying job.

There’s no question that young adults will eventually have to funnel more money into stocks to meet their long-term right goals, so in that sense the surveys are right. But many are doing better than their parents did at their age—the typical Millennial starts saving at age 22 vs 35 for boomers. And if many young adults hold more in cash right now because they’re unsure about their job security or ability to pay the bills, there are worse moves to make. After all, it was overconfidence in the markets that led older generations into the financial crisis in the first place.

MONEY 401(k)s

Millennials (With Jobs) Are Super Saving Their Way to Retirement

Laptop with cord in shape of piggy bank
Atomic Imagery—Getty Images

Young adults are outpacing Baby Boomers and Gen X when it comes to getting a head start on their 401(k)s.

You may have heard that Millennials are taking saving more seriously than Gen X-ers and Baby Boomers did at their age. But their financial prospects look much worse, given student loan debts, high unemployment, and shaky entitlement programs.

No question, Millennials face steep challenges. But it turns out, twenty-something savers who managed to land jobs (some 74% of this age group) are doing even better than you might have thought—and they’ve built a huge head start toward retirement security.

Those are the findings of a just-released study by Transamerica Center for Retirement Studies, which surveyed more than 1,000 Millennials in the work force. “Millennials have seen what happened to their parents, many of whom lost their jobs and savings in the financial crisis—and they are taking steps to avoid a similar outcome,” says Catherine Collinson, president of the Transamerica center. “We’re seeing an emerging generation of retirement super savers.”

Millennials have also benefitted from the widespread adoption of 401(k) auto enrollment, automatic contribution hikes, and target date funds, Collinson says. Some 71% of Millennials who are offered a 401(k) end up joining their plan. By being enrolled into 401(k)s as soon as they start their jobs (unless they opt out), many Millennials are being nudged onto the retirement savings path sooner than previous generations.

How much sooner? Some 70% of Millennials started saving for retirement at an unprecedented young age, just 22, the survey found. By contrast, the average Boomer began saving at age 35, while Gen Xers got started at 27.

Transamerica’s findings show that Millennials are contributing an average 8% of salary to their 401(k) plans; adding an employee match, they’re stashing a solid 10% of income into their accounts. Those findings echo earlier surveys of young adults, which have found that Millennials are saving more.

Those contribution rates are especially impressive, given that Gen X savers are putting in just 7% of pay before the match on average. Boomers are saving at a higher rate, 10% before the match, but they also have higher pay on average and are facing a looming retirement date. Some 27% of Millennials also said they raised the amount they contributed in the past 12 months vs. just 7% who decreased it.

Thanks to this early savings start, Millennials have amassed an average $32,000 in their 401(k) accounts, according to Transamerica. And unlike older generations they are relying heavily on professional advice to invest their money—some 62% use a managed account or target date fund, vs just 47% of Boomers and 56% of Gen X-ers.

Of course, most young adults have plenty of shorter-term financial worries. Some 27% say their top priority is covering basic living experiences, and 27% say they want to pay off debt. Only 16% listed saving for retirement as a top concern. Complicating matters, three in 10 expect to provide support for their aging parents or other family members.

Even so, Millennials are optimistic about their retirement prospects. A whopping 60% expect to retire at age 65 or sooner. That’s a stark contrast to the majority of Baby Boomers (65%) and Gen X (54%), who plan to work past retirement or never retire. But Millennials share the expectations of older generations in other ways—half plan to work the job in retirement, either full time or part time. When it comes to staying busy in retirement, there’s not much of a generation gap.

MONEY Longevity

3 Ways to Make Your Money Last As Long As You Do

"Fountain Of Youth" Billboard
Micheal McLaughlin—Gallery Stock

With lifespans on the rise, you may be sticking around for more years than you imagined. Time to revise your retirement plans. These moves can help.

When it comes to retirement planning, you have to make a lot of educated guesses—how much income you’ll need, what your portfolio will earn. But the most crucial unknown is how long you’ll live, and how many years you have to stretch out your savings.

Lifespans have been steadily increasing, thanks primarily to better health care and nutrition. The Society of Actuaries, which creates mortality tables for pension funds and financial services firms, recently announced plans to revise its numbers—­extending the average lifespan for a 65-year-old to 88, vs. 86 in 2002.

Some demographic groups have benefited more than others. Those with college degrees, for example, typically live two to three years longer than average, says Jay Olshansky, professor of public health at the University of Illinois. “Educated Americans tend to have more wealth and better access to health care,” he says.

Your own lifespan will depend on more than a college degree. Your family history, how often you exercise, and whether you smoke all come into play. For an estimate, try the calculator at ­livingto100.com. Even if you aren’t ­headed for the century mark, you need to make your money last as long as you do. These moves can help:

Aim far, within reason. If you’re healthy and have long-lived parents, figure on living longer than average. That may seem daunting once you click on a retirement calculator—getting to 95 with a 90% likelihood of maintaining your income requires serious saving. Don’t let that discourage you. Achieving a 90% success rate often means passing unspent wealth to heirs, says Michael Kitces, director of planning research at Pinnacle Advisory Group. In the event you fall short, cutting back modestly may not be a hardship since seniors tend to spend less as they age. “Be conservative about your longevity, but don’t overdo it,” says Kitces.

Cover the basics. Putting some of your portfolio in an immediate annuity will give you a regular stream of payments throughout your lifetime. Many advisers suggest using them, along with Social Security, to cover your essential expenses. Recently a 65-year-old man could purchase a $100,000 annuity paying 6.6%, according to ImmediateAnnuities .com. Those rates, while low historically, outshine bond yields. “It makes sense to buy now if you need an annuity,” says Joe Tomlinson, a financial adviser in Greenville, Maine. “If you hang on to your cash and wait for a rate hike, you’ll be earning zero percent, so you probably won’t come out ahead.”

Take a walk. When you stay healthy and active, studies show, you’re far more likely to avoid expensive medical problems, not to mention long-term-care costs. As a recent article in JAMA found, people in their seventies and eighties who exercised regularly, including walking and weight training, were 18% less likely to suffer physical infirmities and nearly 30% less likely to become permanently disabled. A fit old age not only saves money. It’s more fun too.

MONEY 401(k)s

This Nobel Economist Nails What’s Really Wrong with Your 401(k)

Robert Merton, a Nobel laureate and finance professor at the Massachusetts Institute of Technology
MIT professor Robert Merton John Hanna—AP

Retirement plans are doing it all wrong, says Robert Merton. He ought to know. His hedge fund nearly brought the down the global economy.

In the 30-plus years since 401(k) plans were first introduced, they’ve faced criticism for everything from the risks employees face to the fees they pay to poor investing options. Now Robert Merton, a Nobel Prize-winning economist, says 401(k)s are headed for a crisis.

If anyone should know about a potential crisis, it’s Merton. Along with his fellow Nobel laureate Myron Scholes, Merton co-founded and sat on the board of Long-Term Capital Management, a hedge fund that was managed based on complex computer models. Under the leadership of co-founder John Meriwether, LTCM’s massive failure nearly brought down the global economy in 1998.

Now Merton is saying that 401(k)s are headed for trouble, but for very different reasons. In particular, he argued at a recent Pensions & Investments conference, 401(k)s take exactly the wrong approach to retirement investing by emphasizing account balances and investment returns, thereby encouraging savers to amass the largest portfolio possible, which pushes them to take too much risk. That’s an approach he calls “la-la land.”

Instead of focusing on wealth creation, 401(k)s should emphasize the level of income employees can expect to receive in retirement, Merton says. By knowing whether they are on track to that goal, workers will make better saving and investment choices.

One of the best ways to be assured of steady future income is to invest in an inflation-adjusted annuity, Merton says. But current 401(k) regulations do not allow deferred annuities as an investment option. Merton argued in a recent Harvard Business Review article that this barrier should be changed.

Meanwhile, workers are encouraged to invest in Treasury bills for safety, which they appear to deliver — if you look at year-by-year returns. But if you consider the income that T-bills would provide in retirement, as measured by the amount of deferred annuity income they would purchase, they are nearly as risky as the stock market. “The seeds of the coming pension crisis lie in the fact that investment decisions are being made with a misguided view of risk,” Merton writes.

Even so, he isn’t recommending that investors hold only deferred annuities to achieve their income goals. Instead, he suggests investing in a mix of stocks as well as bonds and deferred annuities. Over time, that asset allocation should shift based on the likelihood of achieving the investor’s income goal. At retirement, the worker would have enough money to buy an annuity that would provide the target salary replacement amount. But the choice would be left up to the employee. Still, Merton clearly has an opinion about what option is best, as a recent MarketWatch article noted. “When we take a risk, it’s generally for a good reason. You wouldn’t normally put yourself in harm’s way for no reason,” Merton writes.

Problem is, figuring out the right portfolio strategy, and when to make those shifts, is a tough challenge for the average investor. And not so coincidentally, Merton has a solution, which is to rely on professsional investment managers to handle this for you. An MIT professor, Merton is also the “resident scientist” at Dimensional Fund Advisors, which offers a 401(k) plan that focuses on producing a reliable income stream. (For more on DFA’s approach, see “The End of Investing.”)

The DFA connection aside, Merton’s insights are well worth considering. Along with Scholes, he won the Nobel in 1997 for a landmark options-pricing theory, called the Black-Scholes model, that is still widely used. (Economist Fisher Black passed away before the Nobel was awarded.) And in his call for 401(k) reforms, Merton has plenty of company. A growing number of academics and 401(k) providers advocate an income approach. So does the U.S. Labor Department, which intends to require plan providers to present investors with statements showing their projected income in retirement. Some investment groups already do.

Even if your 401(k) plan doesn’t offer income projections, you can get find calculators online that will give you estimates. Just remember, they are only projections, and if you don’t keep checking your assumptions, models can steer you astray. Just ask Robert Merton.

Update 7/1: The U.S. Treasury today approved the option of deferred annuities in retirement plans.

Related story: The New 401(k) Income Option That Kicks In When You’re Old

 

MONEY long term care

The Retirement Crisis Nobody Talks About: Long-term Care

If you become disabled, you may face huge bills for daily help. And, no, Medicare doesn't cover it.

When you try to gauge the biggest risks to your financial security in retirement, health care costs usually top the list. But there’s even bigger danger that doesn’t get as much attention: long-term care costs.

By whatever measure you use, many Americans aren’t saving enough for retirement. In its latest annual retirement readiness study, the Employee Benefit Research Institute found that some 57% to 59% of Baby Boomer and Gen X households are on track to retire comfortably. But if you factor in long-term care costs, the percentage of households running short of money in retirement soars by 100% or more after 20 years for those in middle-class or upper-income quartiles, according to new study by EBRI. The analysis assumes that Baby Boomer and Gen X households will retire at 65 and spend average amounts for food, housing and other living expenses, in addition to long-term care costs.

The risk of falling short financially is highest for those in the lower-income quartile—by the 10th year of retirement, some 70% in this group would have run short of money, according to EBRI, though the majority were already headed for trouble because of lack of savings. But even households in the highest-income quartile saw the percentage falling short reach 8% by the 20th year of retirement vs. just 1% without accounting for long-term care.

If you become disabled, the costs of assistance with daily living tasks (what’s commonly referred to as long-term care) aren’t generally covered by Medicare. That’s something many people don’t realize. A nursing home in the Midwest might run you $60,000 a year, while the median salary for a home health aide may be $45,000 annually. Some 70% of Americans age 65 and older are expected to need long-term care at some point in their lives. And studies have found that many families end up paying huge amounts out of pocket, as much as $100,000 in the last five years of life.

Planning ahead can help, but unfortunately there are few solutions to the long-term care dilemma. One alternative is to purchase long-term care insurance, but it’s pricey, so few can afford it. “Long-term care insurance is something that nobody wants to buy and the insurance industry doesn’t want to sell,” says Howard Gleckman, senior fellow at the Urban Institute and author of “Caring for Our Parents.” In recent years, many insurance companies have raised premiums on long-term care policies. And other insurers have gotten out of the business—that’s mainly because fewer buyers than expected are dropping policies, and low interest rates have reduced profits.

Another option is Medicaid, which many seniors end up relying on to pay for long-term care. But in order to qualify you will have to spend down most of your assets—not anyone’s idea of a dream retirement. And as more aging Boomers and Gen X retirees require care, Medicaid programs will come under increasing financial pressure, Gleckman says, so it’s not clear what the programs will provide in 20 years.

Until more options develop—perhaps some kind of private-public partnership for long-term care—your best strategy is to stay healthy, save as much as you can, and build a community network. People with strong social ties, research shows, live longer, happier lives.

This article was updated to clarify the percentage of households facing shortfalls in retirement due to long-term care costs.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

201209_GAM_BERNSTEIN
Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY Portfolios

Give Your Portfolio a Midyear Checkup

Zachary Zavislak; Prop Styling by Sarah Guido

A semi-annual examination of your holdings will make sure your investments are still on track. Before you kick back for the summer, review and adjust your portfolio for maximum performance.

Even if you’re feeling fine, you still visit the doctor now and then to make sure everything’s all right. Well, your portfolio deserves the same level of care. For instance, you may be pleased that the broad market is up again this year—continuing a bull run that has tripled your equity stake since 2009.

Yet investment success often brings with it a growing exposure to risk—perhaps too great to tolerate. See the chart below:

Portfolio moves
Here are three ways to review and adjust your investments to make sure they’re in tiptop shape:

Book losses now to capture an important tax break.

You don’t want to be a short-term investor, but you also don’t want to look a tax gift horse in the mouth.

Chances are, you’re sitting on hefty gains after the recent bull run. Want to take some profits off the table by selling winning shares of stocks, funds, or ETFs, but are reluctant to do so for fear of triggering a big capital gains bill? Book some losses now and Uncle Sam will let you offset those gains.

Normally, investors “harvest losses” at the end of the year. However, “you need to plan ahead” in case some of those losses evaporate, says Ann Arbor planner Rob Oliver.

Where to start? Emerging-market equity portfolios have fallen over the past three years, while Chinese region funds have lost more than 8% of their value so far in 2014. Other fertile ground: stock funds that specialize in gold and other precious metal–related investments (down 24% annually over the past three years), and shares of fast-growing small companies (down 7% year to date).

Tip: Don’t upset your portfolio just to take advantage of this break. While the IRS’s wash-sales rule bars you from buying the same or a “substantially identical” investment within 30 days of a sale, there’s nothing stopping you from selling an individual stock or an actively managed portfolio and replacing it with an index fund that covers the same asset. “If you sell a housing stock at a loss, you could buy a housing industry ETF,” says Pittsburgh adviser Jim Holtzman.

The market has changed your portfolio, so change it back.

“This is the first time in years that rebalancing has become really necessary,” says John Rekenthaler, director of research at Morningstar.

That’s because of the wide gap in performance between stocks and bonds lately. While equities posted double-digit annualized gains since 2009, fixed-income investments have returned just 4.8% a year.

Even if you rebalanced as recently as two years ago, you’ll want to at least revisit your mix. Why? Say you started off with a portfolio that was 70% in equities and 30% in bonds in May 2012. Because stocks have soared 45% since then while fixed income has been mostly flat, your portfolio is now 77% stocks and just 23% bonds.

Tip: Review your portfolio semiannually, but make adjustments only if your mix is substantially off—five percentage points or more above or below target. Rebalancing reduces portfolio risk, but there are times when it can also cut into returns. Use this strategy only when your exposure to certain assets grows uncomfortably high.

Make sure your life hasn’t changed either.

Unless you hold the bulk of your assets in a target-date retirement fund—which automatically shifts your mix for you, growing gradually more conservative over time—you’ll have to tweak your approach every now and then simply to reflect changes in your life.

For instance, as a 40-year-old you might have been comfortable holding 80% in equities, but at 50 you’re playing with greater sums and less time, so you might want to cap it at 60% to 65%.

Tip: To show how your asset mix should shift as your circumstances change, check out the free asset allocation calculator at Bankrate.com’s retirement section. Also, when you execute these changes, start in your 401(k)s and IRAs, where you won’t trigger capital gains taxes by selling. Why generate a tax bill when you don’t have to?

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