By now you should have the basics of your retirement strategy in effect. You’ve salted away a decent chunk of change and invested in a diversified group of funds. Hopefully, you’ve even gotten the hang of dealing with some market ups and downs, and settled on a mix of stocks and bonds you feel comfortable with. But as you close in on your retirement date, there are some new complications to consider. And some opportunities, too. Let’s start with the good stuff:
1. Look for savings boosters
As you’ve no doubt learned over the years, neither saving nor spending runs along a smooth path. Expenses spike when you need that new minivan or you’re paying tuition bills, and may then tail off once the offspring strike out on their own. Whenever money frees up, you can plow that money into extra savings.
You’d be surprised how you can make up for lost ground. For example, say you’re 50 with $350,000 socked away, make $70,000 a year, save at a 10% annual clip, and earn 5% annual investment returns. Let’s say for a brief window of time, when junior is at college racking up tuition bills, you have to drop that savings rate down to 5%.
It’s not the end of the world, as long as you commit to boosting your savings when cash frees up. For instance, if you were to drop your savings rate to 5% during those college years, but then boost it to 15% starting at 55 (when junior has graduated), and then to 25% starting at age 60 (perhaps when the mortgage is paid off), you’d wind up with $980,000 by age 65. That’s actually slightly more than the $916,500 you would have amassed by simply sticking to that 10% annual savings rate all along.
Remember too that starting at age 50, both you and your spouse can make extra catch-up 401(k)s contributions of up to $5,500, on top of the normal $17,500.
2. Prep your portfolio for the spend-down phase
As you get nearer to your retirement date, you have to start thinking about your investments differently. Earlier in your career, market losses hurt, but they were buffered by the fact that you still had many years of earnings ahead. You were replenishing your portfolio even as it fell.
Once you enter retirement, the rules are different. You’ll have to spend out of your nest egg whether your portfolio is up or down. That means that even if stocks do well on average during the time you are retired, a bad run early on can deplete your portfolio quickly. In that case, a later market rebound may not help much. Consider this (partly) hypothetical example. The “bad years early” example is what actually would have happened to someone with the bad luck to retire in 1971. The portfolio taps out in less than 25 years.
The happier result, “bad years late,” is the same set of returns, just reversed so that more bull years come first. The moral of the story: Your retirement outcome will depend a lot on whether you have good luck or bad luck in the years just before and just after your retirement.
You can’t control what the markets will look like when you retire. But before you get there, you can prepare your portfolio by making sure a decent chunk of your nest egg is in safer assets such as bonds or cash.
3. Make sure your investments and your career are in sync
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When you set your retirement plan in motion, you may have had certain expectations about when you’d retire. According to polls by Gallup, Americans expect to retire around age 66, reflecting a general trend toward later retirement. Here’s the thing: The actual age of retirement is only about 62. (That’s up from 59 in 2004.) Things happen: You may run into health issues, or find yourself forced into early retirement as your company downsizes. In your late 50s or early 60s, you probably will start to get a good sense of whether you’ll have to reset your planned retirement date. Don’t forget to reevaluate your plan accordingly. An earlier retirement means you’ll want to shift into safer assets more quickly.
Many 401(k) savers these days use target-date funds, premixed portfolios of stocks and bonds which lower their equity exposure as you approach a retirement date. If you’ve reset your retirement expectations, you should switch target date funds too. It can make a difference:
The popular T. Rowe Price Retirment fund meant for people aiming at a 2020 quit date has almost 10% more of its assets in stocks than the one for those retiring just five years sooner. Other target retirement funds in 401(k) plans have similar features. Even if you prefer to keep your investments on autopilot, sometimes you have to step in to correct course.