Money magazine’s 101 Ways to Build Wealth package offers blueprints for the different stages of your life on how to achieve real financial security. In tips #78 through #101, we offer advice for 55- to 64-year-olds.
Housing is the single biggest outlay in retirement: 37% of the average retiree budget, says a new report from the Social Security Administration. Act now to cut costs. Bonus: You may even be able to free up money to save.
81. Seize this market moment. If a smaller home is in the cards, don’t dawdle. Nationwide, the inventory of homes for sale is down 20% over the past year, just as buyers are returning. Homes are selling quickly. This won’t last. New-home construction is up. And as the market gets even healthier, notes Trulia chief economist Jed Kolko, more sellers will be competing with you.
82. Swap towns. Once the kids are gone, you can trim your costs without sacrificing space. Prices for homes near high-scoring public schools are 2.4 times higher on average than what you’ll pay near a low-scoring school, a Brookings Institution study of the 100 biggest metro areas found. Property taxes and other costs can be more than $11,000 a year less.
83. Pay down your mortgage. Say you got a 15-year $300,000 fixed loan at 4.5% three years ago, at age 53. You’ll be 68 when it’s paid off. By adding $500 to your $2,295 monthly payment, you can shave 2½ years from the loan, save $17,500 in interest, and cut your effective rate to 3.8%. Do your own math with HSH’s PreFi calculator at hsh.com.
84. Test-drive a frugal lifestyle. You shouldn’t head into retirement without knowing whether you can truly support your lifestyle. Estimate your retirement income, then live on that for a year, suggests adviser Jeff Townsend, author of The Road to Retirement. You can get in one last burst of savings, and if the test is a failure, you have time to adjust by, say, working longer.
On the verge of retirement, bear markets and high living costs can cut into your nest egg. How to reduce those risks.
78. Be ready for a bear attack. As you near retirement, you have less time to recover from a severe bear market (and fewer future paychecks to replenish your portfolio). One way to limit the damage from a market plunge is to beef up your cash cushion during these years.
Look ahead to your spending in retirement, says financial planner Harold Evensky, and calculate what portion you’ll have to fund with investments rather than Social Security or a pension. Then build up a year’s worth of those self-funded expenses in cash. You can avoid selling stocks in a slumping market, and you’ll have money to deploy if a crash creates buying opportunities.
79. Retire from your company stock. Vanguard 401(k) savers with balances of at least $250,000 have an average of 13% of their money in company stock. What’s optimal: Don’t keep more than 5% of your money in a single stock. Sell to cut your nest egg’s risk.
80. Give yourself shelter. If you’re a couple making over $250,000 a year, you could be facing higher tax rates, a new Medicare surcharge, or both. So stash your least tax-efficient assets, such as taxable bonds, in 401(k)s or IRAs. Put your most efficient holdings, such as index funds and muni bonds, in taxable accounts. The payoff:
After-tax value of a $1 million portfolio after 10 years
Tax-inefficient: $1.4 million
Tax-efficient: $1.5 million
Notes: Assumes 33% federal bracket and 3.8% Medicare tax, 6.6% pretax average annual return.<br />
85. Look past your working years. Even if you hang up your hat within the decade, wealth building is a longer-term project. Yet only one in five pre-retirees uses a 20-plus-year time horizon when making big financial decisions, according to a Society of Actuaries survey. Bad idea.
Today’s 65-year-olds have a 50% chance of living to their mid-eighties. With above-average health, your life expectancy is even longer. So stay committed to stocks. Vanguard and T. Rowe Price 2015 target retirement funds have 50% to 60% in stocks.
86. Invest for income safely … Over the past 30 years, stocks that pay a dividend have returned five times as much as nonpayers. Focus on firms strong enough to keep up (and boost) payouts. Add a layer of defense by sticking with relatively cheap stocks, since dividend-payers are getting expensive.
Josh Peters, editor of Morningstar Dividend Investor, likes Chevron (3% current yield) and Philip Morris (3.6%). Both trade at P/E ratios below their industry’s norm and have boosted payouts by roughly 10% annually over the past three years.
87. … Or take a flier. Investing in the 10 highest yielders in the Dow Jones industrial average — the “Dogs of the Dow” strategy — isn’t for the faint of heart.
Some stocks are high yielders because they throw off so much cash (think AT&T , others because their prices have sunk (take Hewlett-Packard ). This aggressive approach, which captures both kinds of high yielders, has nearly doubled the market’s return since 2000. You can buy all 10 via the Elements Dogs of the Dow exchange-traded note or Hennessy Total Return Fund .
88. Bookmark this! Use T. Rowe Price’s Retirement Income Calculator to see how much income your assets will throw off: A new study from the Center for Retirement Research found that seeing how much retirement income their savings would produce led workers to set aside more.
89. Lock in tax-free income now. With a Roth IRA, your withdrawals are tax-free, so you don’t have to worry about triggering higher Social Security taxes and Medicare premiums in retirement. And if you don’t need the money, you’re not forced to make withdrawals at 70½, as you are with a regular IRA.
You can convert an IRA to a Roth no matter how much you earn, and starting this year you can convert a 401(k) to a Roth 401(k) if your company offers both. You will have to pay taxes on your gains, so do it only if you have the cash on hand, says T. Rowe Price financial planner Judith Ward. And wait if you’re still in a higher tax bracket than you expect to be in retirement.
90. Take your bonds on the road. With high-quality U.S. bonds paying anemic yields — and bonds funds looking risky — add foreign bonds for more income and geographic diversification. To dampen the price swings currency changes can bring, buy a fund that hedges that risk.
By June, you’ll have a new low-cost option. Vanguard Total International Bond Index Fund will track a fixed-income index covering more than four dozen countries in Europe, Asia, and Latin America, while charging a penny-pinching 0.23% expense ratio.
91. Squeeze the most you can from Social Security. As you plan for when you’ll claim your benefit, keep in mind that you can wring more wealth from the system if you delay as long as possible, as this example of a retiree who’s entitled to the full benefit shows. Use the new tool at troweprice.com/socialsecurity to compare benefits under a variety of scenarios.
NET PRESENT VALUE OF SOCIAL SECURITY BENEFITS
Claim at 62: $439,000
Claim at full retirement age: $483,000
Notes: Assumes full retirement age of 66, 3% inflation, 5% nominal returns; includes survivor benefit.
Working a few more years is a significant wealth booster (plus, you’ll have fewer years of retirement to finance): 70% of workers who wait until age 68 to leave can expect to have enough money for a comfortable retirement, vs. only 50% of those who retire at 66, according to the Center for Retirement Research.
92. Go solo. Stay employed by employing yourself. People ages 55 to 64 have launched more businesses than those in any other age group during the past decade, according to the Kauffman Foundation. And experience appears to pay off: The 55-plus entrepreneur is twice as likely to succeed as are those ages 20 to 34.
93. Work less. An AARP and Society of Human Resource Management survey found that 72% of employers are worried about a brain drain as boomers leave the workforce. Of that group, 30% have hired retirees as consultants; 24% have created part-time slots. Staying around longer is in both your interests, so propose a plan.
94. Lose weight. More than half of those who retire earlier than planned cite health problems, according to the Employee Benefit Research Institute. Look after yourself now. Just a 5% drop in body weight can significantly improve your blood pressure, cholesterol, and blood sugar, a National Institutes of Health study found.