MONEY Financial Planning

The Most Important Money Mistakes to Avoid

Smart people do silly things with money all the time, but some mistakes can be much worse than others.

We asked three of our experts what they consider to be the top money mistake to avoid, and here’s what they had to say.

Dan Caplinger
The most pernicious financial trap that millions of Americans fall into is getting into too much debt. Unfortunately, it’s easy to get exposed to debt at an early age, especially as the rise of student loans has made taking on debt a necessity for many students seeking a college education.

Yet it’s important to distinguish between different types of debt. Used responsibly, lower-interest debt like mortgages and subsidized student loans can actually be a good way to get financing, helping you build up a credit history and allowing you to achieve goals that would otherwise be out of reach. Yet even with this “good” debt, it’s important to match up your financing costs with your current or expected income, rather than simply assuming you’ll be able to pay it off when the time comes.

At the other end of the spectrum, high-cost financing like payday loans should be a method of last resort for borrowers, given their high fees. Even credit cards carry double-digit interest rates, making them a gold mine for issuing banks while making them difficult for cardholders to pay off once they start carrying a balance. The best solution is to be mindful of using debt and to save it for when you really need it.

Jason Hall
It may seem like no big deal, but cashing out your 401(k) early has major repercussions and leads you to have less money when you’ll need it most: in retirement.

According to a Fidelity Investments study, more than one-third of workers under 50 have cashed out a 401(k) at some point. Given an average balance of more than $14,000 for those in their 20s through 40s, we’re talking about a lot of retirement money that people are taking out far too early. Even $14,000 may seem like a relatively easy amount of money to “replace” in a retirement account, but the real cost is the lost opportunity to grow the money.

Think about it this way. If you cash out at 40 years old, you aren’t just taking out $14,000 — you’re taking away decades of potential compound growth:

Returns based on 7% annualized rate of return, which is below the 30-year stock market average.

As you can see, the early cash-out costs you dearly in future returns; the earlier you do it, the more ground you’ll have to make up to replace those lost returns. Don’t cash out when you change jobs. Instead, roll those funds over into your new employer’s 401(k) or an IRA to avoid any tax penalties, and let time do the hard work for you. You’ll need that $100,000 in retirement a lot more than you need $14,000 today.

Dan Dzombak
One of the biggest money mistakes you can make is going without health insurance.

While the monthly premiums can seem like a lot, you’re taking a massive risk with your health and finances by forgoing health insurance. Medical bills quickly add up, and if you have a serious injury, it may also mean you have to miss work, lowering your income when you most need it. These two factors, as well as the continuing rise in healthcare costs, are why a 2009 study from Harvard estimated that 62% of all personal bankruptcies stem from medical expenses.

Since then, we’ve seen the rollout of Obamacare, which signed up 10.3 million Americans through the health insurance marketplaces. Gallup estimated last year that Obamacare lowered the percentage of the adult population that’s uninsured to 13.4%. That’s the lowest level in years, yet it still represents a large number of people forgoing health insurance.

Lastly, as of 2014, not having health insurance is a big money mistake. For tax year 2014, if you didn’t have health insurance, there’s a fine of the higher of $95 or 1% of your income. For tax year 2015, the penalty jumps to the higher of $325 or 2% of your income. While there are some exemptions, if you are in a position to do so, get health insurance. Keep in mind that for low-income taxpayers, Obamacare includes subsidies to lower the monthly payments to help afford health insurance.

MONEY retirement planning

Money Makeover: Freelancers With a Toddler, No Plan, and No Cash to Spare

The Larsons
With 30-plus years to retirement, David and Ashlene Larson can afford to take more investing risk. Peter Bohler

Managing new businesses and a new baby left one young couple with little to save for retirement. Here's the advice they need to get their finances on track for the future.

David and Ashlene Larson know how important it is to save for retirement. The problem is they don’t have much cash to spare, as they are new parents—daughter Rosalie is 18 months—who are both starting new businesses. David, 33, took his sideline ­video-production company full-time in June, and Ashlene, 32, left her job at a PR firm in July to freelance.

The Larsons have more stable income than many self-employed workers, with $9,000 coming in monthly from two regular clients and twice that in a good month. But after payments for a mortgage, day care, car lease, and $25,000 in student loans—and after plowing some profits back into David’s growing business—they can put only $200 a month in Ashlene’s Roth IRA and $100 in a 529 savings plan for Rosalie’s college. Total savings rate: 3%. “It’s nerve-racking,” David says.

Meanwhile, they don’t know what to do with the $27,500 they’ve saved for retirement. Nor do they have any idea how to deploy the pile of savings bonds—worth $42,000 and earning 1.49%—that David’s grandparents gave him as a kid. “Our investments are all over the place,” says Ashlene.

Matt Morehead of Greenspring Wealth Management in Towson, Md., says that the Larsons’ overall allocation for retirement—73% stocks, 27% fixed income—is a tad conservative for their ages. But worse, Ashlene inadvertently has $15,000 in an old 401(k) invested in a 2025 target-date fund that will move to 50% bonds in 10 years, hampering its growth potential. Another concern: They have no cash in the bank. “The Larsons are stuck in the ‘foundation phase’ because they have debt and not enough emer­gency funds,” says Morehead. “They need to take care of those issues before sinking money into retirement.”

The Advice

Build in a shock absorber: Since they’re both self-employed, the Larsons should keep a reserve fund of at least nine months of expenses to prevent them from having to tap retirement funds if business slows, says Morehead. With basic costs of $6,000 a month, that’s $54,000.

David’s savings bonds are a good headstart, since these can be redeemed anytime without penalty—though taxes will drop their value to about $39,000. To make up the difference, the Larsons should redirect their $300 monthly retirement and college savings to a savings account. Plus, 40% of any monthly earnings over their base pay of $9,000 should go to the cash stash (another 35% to student loans, 25% to taxes).

Consolidate with the right target-date fund: David should open a Roth IRA for himself at a low-cost brokerage; Ashlene should move her accounts there too. Morehead suggests they go all in on Vanguard’s Target Retirement 2045 Fund time-stock symbol=VTIVX]. This bumps their stock stake to about 89% and gives them broad market exposure. Plus, the fund automatically rebalances until reaching a 50%/50% mix in 30 years. “This is a great way to invest for a young couple who don’t have time to monitor their portfolio,” Morehead says.

Beef up retirement savings: When their reserves are established, that 40% of additional income can go to their IRAs. Once they max out these regularly (each can put in $5,500 in 2015) or exceed the income limits ($193,000 modified AGI for couples filing jointly), Ashlene can open a SEP-IRA and David can start a 401(k). Only when they’re saving 15% of pay should they return to funding Rosalie’s 529. “You can always borrow for college,” says Morehead. “But you can’t borrow for retirement.”

Read more Money Makeovers:
Married 20-somethings with $135,000 in debt
4 kids, two jobs, and no time to plan
30 years old and already falling behind

MONEY alternative assets

How to Boost Returns When Interest Rates Totally Stink

People climbing over wall to greener yard
Mark Smith

With bond rates looking bare, income investors are eager to grab greener options. Higher payouts are out there, but watch your step: Some are riskier than others.

This is the first in a series of five articles looking at the most popular bond alternatives and the safest ways to use them to improve your income prospects when rates are low. Adapted from “Reaching for Yield” in the January/February issue of MONEY magazine.

Falling oil prices have sent shudders through the financial markets lately, but if you’re investing for income, this development could actually spell opportunity. Over the past few years, as rates shriveled on traditional bonds, yield-starved investors poured billions into higher-yielding alternatives, including dividend stocks, real estate investment trusts, energy partnerships, and new “go-anywhere” bond funds. That paid off handsomely if you got in early enough but has been problematic lately: All that money flooding in caused prices to rise sharply on bond alternatives, which sent yields plummeting. As a result, many of these securities by late last fall were paying out half as much as they usually do—or less.

That is, until recently. Jitters over what sharply declining energy prices might mean for the economy have ­prompted a rush back into government bonds and other “safe” securities. As a result, yields on some alternative assets are rising—and you can once again find payouts ranging from 4% to more than 6%, compared with the measly 1.9% rate on 10-year Treasuries.

To get to greener payouts, though, you have to climb a wall of risk. Historically, when market conditions turn sour, alternative assets lose more money, sometimes a lot more, than traditional fixed-income investments. That’s why financial advisers such as Mitch Reiner, chief operating officer of Capital ­Investment Advisers in Atlanta, recommend limiting the amount you invest in them to 5% to 25% of your portfolio, depending on how much income you need and whether you could let losses ride during market setbacks.

Also recognize that while these alternative assets can help boost your yield, the strategy isn’t a cure-all. Shifting 20% of a portfolio split fifty-fifty between stocks and traditional bonds into a mix of higher-paying alternatives might raise your yield from about 2% to 2.6% with little additional risk, says Geoff Considine, who runs the portfolio modeling firm Quantex. If you’re retired, that means you’ll still probably have to rely on principal and capital gains to fund at least some of your living expenses.

What follows is the first in a series of five articles looking at the most popular bond alternatives—in this case dividend stocks—and the safest ways to use them to improve your income prospects.

Dividend stocks: Go global and preferred

High-quality stocks that return a hefty portion of profits to shareholders via dividends are a favorite of income investors when bond yields are low. That’s been especially true over the past few years, when many blue-chip and even some tech companies were yielding as much as or more than Treasury bonds. The same payouts with real growth potential—slam dunk, right?

Not so much anymore. Yield-hungry investors have been bidding up prices on dividend payers since the financial crisis, and despite the market’s recent slide, they still look expensive relative to their earnings. For instance, the average stock in the SPDR S&P Dividend ETF, which tracks an index of companies that have boosted payouts consistently over the past 20 years, was recently selling at more than 18.6 times projected earnings. The price/earnings ratio for the Standard & Poor’s 500, which historically has commanded a higher multiple than slower-growth dividend stocks: about 16.

The more stock prices race ahead of earnings, the more likely they are to fall, warns James Stack, president of InvesTech Research of Whitefish, Mont.  “We are in the sixth year of a bull market,” he warns, adding: “A retirement portfolio can be destroyed reaching for yield.” And while high-dividend shares typically drop less than the average stock during downturns, their losses are still substantially more on average than you could expect with bonds.

Your best strategy: Rather than seeking out the highest yields, zero in on companies that consistently raise dividends. And don’t overpay. To avoid that, look for dividend payers overseas, where stocks have been less inflated than in the U.S.  A good option: PowerShares International Dividend Achievers ETF POWERSHARES INTERNATIONAL DIVIDEND ACHIEVERS PORTFOLIO PID -0.0564% , a MONEY 50 pick that invests in foreign companies that have hiked dividends for at least five years straight. It paid out 3.9% over the last year yet has a modest average portfolio P/E of 14.

Preferred stocks offer even higher yields, recently averaging 6%. These shares can be traded like regular stocks but have more in common structurally with bonds: Their payments tend to be fixed over time, and their shareholders are ahead of common stock owners in the pecking order of whom companies must pay first. What you give up in exchange for that reliable income: a shot at much appreciation, because preferred shares, like bonds, have set redemption prices. And like bonds, preferreds are also sensitive to interest rates. If rates jumped, your shares could lose value, as they did in 2013.

Preferreds also lack diversification; almost 90% of them are issued by financial institutions. To reduce your exposure to banks, James Kinney, an adviser in central New Jersey, suggests splitting your preferred stake between iShares U.S. Preferred Stock ETF ISHARES TRUST U.S. PREFERRED STOCK ETF PFF 0.1758% and Market Vectors Preferred Securities ex-Financials MARKET VECTORS ETF PFD SECS EX FINLS ETF PFXF -0.0952% , which counts blue chips like United Technologies and Tyson Foods among its top holdings.

More in this series:
High-Yield Bonds: Where to Look for Quality Junk

MONEY Aging

Why Confidence May Be Your Biggest Financial Risk in Retirement

portrait of aging woman
F. Antolín Hernández—Getty Images

Seniors lose ability to sort out financial decisions but hold on to the confidence they can get it right.

You think it’s tough managing your 401(k) now, just wait until you are 80 and not quite as sharp as you once were—or still believe yourself to be.

Cognitive decline in humans is a fact. It starts before you are 30 but picks up speed around age 60. A slow decline in the ability to think clearly wasn’t an issue years ago, before the longevity revolution extended life expectancy beyond 90 years. But now we’re making key financial decisions way past our brain’s peak.

Managing a nest egg in old age is the most pressing area of financial concern, owing to the broad shift away from guaranteed-income traditional pensions and toward do-it-yourself 401(k) plans. Older people must consider complicated issues surrounding asset allocation and draw-down rates. They also must navigate an array of mundane decisions on things like budgets, tax management, and just choosing the right cable package. Some will have to vet fraudulent sales pitches.

About 15% of adults 65 and older have what’s called mild cognitive impairment—a condition characterized by memory problems well beyond those associated with normal aging. They are at clear risk of making poor money decisions, and this is usually clear to family who can intervene. Less clear is when normal decline becomes an issue. But it happens to almost everyone.

Normal age-related cognitive decline has a noticeable effect on financial decision making, the Center for Retirement Research at Boston College, finds in a new paper. Researchers have followed the same set of retirees since 1997 and documented their declining ability to think through issues. Despite measurable cognitive decline, however, these retirees (age 82 on average) demonstrated little loss of confidence in their knowledge of finance and almost no loss of confidence in their ability to manage their financial affairs.

Critically, the survey found, more than half who experience significant cognitive decline remain confident in their money know-how and continue to manage their finances rather than seek help from family or a professional adviser. “Older individuals… fail to recognize the detrimental effect of declining cognition and financial literacy on their decision-making ability,” the study concludes. “Given the increasing dependence of retirees on 401(k)/IRA savings, cognitive decline will likely have an increasingly significant adverse effect on the well-being of the elderly.”

Not everyone believes this is a disaster in the making. Practice and experience that come with age may offset much of the adverse impact from slipping brainpower, say researchers at the Columbia Business School. They acknowledge inevitable cognitive decline. But they conclude that much of its effect can be countered in later life if problems and decisions remain familiar. It’s mainly new territory—say mobile banking or peer-to-peer lending—that prove dangerously confusing.

In this view, elders may be just fine making their own financial decisions so long as terms and features don’t change much. They will be well served by experience and muscle memory—and helped further by smart, simplified options like target-date mutual funds and index funds as their main retirement account choices. The problem is that nothing ever really stays the same. Seniors who recognize the unfamiliar and seek trusted advice have a better shot at keeping their finances safe throughout retirement.

Read next: Why Your Employer May Be Your Best Financial Adviser

MONEY 401(k)s

Why Your Employer May Be Your Best Financial Adviser

150121_RET_ADVISOREMPLOYER
Thomas Barwick—Getty Images

Employers are offering more than 401(k) advice. They are adding financial wellness programs that help workers budget, save for a home, and more.

Large employers are taking on the roles of retirement adviser and financial educator in increasing numbers, new research shows. This is welcome news, because the federal government and our schools have not done a great job on this front, and individuals generally have not been able to manage well on their own.

Employers have been tiptoeing into retirement planning for workers for years as part of their 401(k) plan benefits. Typically, the advice has been offered in the form of printed materials and online informational websites. More recently, personalized advice has become available through call-in services and, in some cases, face-to-face meetings with planners arranged through work.

But what started as help with, say, settling on a contribution rate and choosing appropriate investment options has evolved into a more rounded service that may offer lessons in how to budget and save for college or a home. A breathtaking 93% of employers intend to beef up their efforts at helping workers achieve overall financial wellness in a way that goes beyond retirement issues, according to an Aon Hewitt survey.

This effort promises to fill a deep void. Just five states require a stand-alone personal finance course in high school, and just 13 require money management instruction as part of some other class. Meanwhile, the Social Security and pension safety net continues to grow threadbare. Someone has to take charge of our crisis in financial know-how.

Employers don’t relish this role. It comes with lots of questions about fiduciary duty and liabilities related to the advice that is proffered. Yet legal obstacles are slowly being cleared away to encourage more employer involvement, which is coming in part out of self interest. Financially fit workers are more productive and more engaged, research shows.

A company that offers a financial wellness benefit could save $3 for every $1 they spend on their programs, according to a Consumer Financial Protection Bureau report. These programs also reduce absenteeism and worker disability costs. That’s because money problems may cause stress that leads to ill health. So helping employees improve not just their retirement plan but their entire financial picture makes sense.

Among the upgrades most popular with employers, Aon found:

  • 69% offer online investment guidance, up from 56% last year, and 18% of the rest are very likely to add this feature in 2015.
  • 53% offer phone access to financial advisers, up from 35% last year.
  • 49% offer third-party investment advice, up from 44% last year.

Aon also found that 34% of employers have cut their 401(k) plan’s administrative and other costs, compared with just 27% a year ago. This echoes a BrightScope study, which found that employers generally are beefing up investment options while reducing fees in their 401(k) plans. In all, it seems employers are embracing their role as financial big brother—for their own good as well as the good of their workers.

MONEY Ask the Expert

How to Secure Your Finances When Reality Doesn’t Bite

Investing illustration
Robert A. Di Ieso, Jr.

Q: I am a 22-year-old college grad with a six-figure income and minimal student debt. I have no car and live with my parents. Is there something I should do now to lead a secure and fiscally responsible life? My father gave me the name of his planner but he was of little help — Timothy

A: Given your age, healthy salary, low expenses, and minimal debt, you’re financial situation is pretty straight forward. “There is a time and a place to work with a financial planner, and now may not be one of them,” says Maggie Kirchhoff, a certified financial planner with Wisdom Wealth Strategies in Denver.

If you still want some guidance, you may have better luck getting referrals from friends or colleagues. “A planner who’s a good fit for your parents may not be a good match for you,” she adds.

In the meantime, there are plenty of things you can be doing to improve your financial security. The biggest one: “Save systematically,” says Kirchhoff. If you start saving $5,500 a year, even with a conservative 5% annual return, you’ll have nearly $600,000 when you turn 60. “That assumes you never increase contributions,” she says.

It sounds like you’re in a position to save several times that amount now that your expenses are still low. Make use of your current economic sweet spot by taking full advantage of tax-friendly retirement vehicles, such as an employer-sponsored 401(k) plan. You can sock away up to $18,000 a year in such a plan, and any contributions are exempt from federal and state taxes. If your employer offers matching benefits, contribute at least enough to get the most you can from that benefit.

Your 401(k) plan likely offers an allocation tool to help you figure out the best mix of stocks and bonds for your time horizon and risk tolerance. Based on that recommendation, you’ll want to choose a handful of low-cost mutual funds or index funds that invest in companies of different sizes, in the United States and abroad. “You can make it as complicated or simple as you like,” says Kirchhoff.

If you want to keep things simple, look at whether your plan offers any target-date funds, which allocate assets based on the year you expect to retire (a bit of a guess at this point) and automatically make changes to that mix as that date nears. Caveat: Don’t overpay to put your retirement plan on autopilot; ideally the expense ratio should be less than 1%.

Now, just as important as investing for retirement is making sure you protect that nest egg from its biggest threat: you. Build an emergency fund so you won’t be tempted to dip into your long-term savings — and owe taxes and penalties — if you lose your job or face unexpected expenses.

“A general rule is three to six months of expenses, but since his expense are already so low, he should aim to eventually save three to six months of his take-home pay,” says Kirchhoff, who recommends keeping your rainy-day fund in a money market account that isn’t tied directly to your checking account.

With the extreme ends of your financial situation covered, you’ll then want to think about what you have planned for the next five or 10 years.

Is graduate school in your future? What about buying or renting a place of your own? Once you get up to speed on your retirement savings and emergency fund, you can turn your attention to saving up for any near-term goals.

You might also consider eventually opening a Roth IRA. You’ll make after-tax contributions, but the money will grow sans tax, and you won’t owe taxes when you withdraw for retirement down the road. (Note: You can save up to $5,500 a year in a Roth, but contributions phase out once your modified gross adjusted income reaches $116,000 to $131,000.)

A Roth may not only save you more in taxes down the road, it also offers a little more flexibility that most retirement accounts. For example, you can withdraw up to $10,000 for a first-time home purchase, without tax or penalty, if you’ve had the account at least five years. Likewise, you can withdraw contributions at any point, for any purpose.

What about the student debt? Depending on the interest rate and whether you qualify for a tax deduction (in your case probably not), you could hang onto it and focus on other financial priorities.

That said, if you can make large contributions to your 401(k) plan, build your emergency fund and pay off your student debt at a quicker pace, says Kirchhoff, so much the better.

TIME

This Is The Dumbest Reason You’re Losing Money

TIME.com stock photos Money Dollar Bills
Elizabeth Renstrom for TIME

Your inaction could cost you big

Interest rates might be low, but they’re not going to stay that way forever. And when they do rise, the chance to save a bundle will vanish. In spite of that, most Americans won’t take advantage of this window of opportunity.

A new survey from HSH.com, a site for comparing and calculating mortgage rates, finds that only 9% of Americans plan to refinance a mortgage this year, while only 30% say they’re going to pay off credit card debt.

This means we’re leaving money on the table in a big way. “Given that most credit cards are variable-rate, a rising interest rate environment would tend to be more costly over time, so there is even a greater benefit to retiring balances as quickly as possible,” says HSH.com vice president Keith Gumbinger. When the prime rate goes up, so will your monthly rate, even if you haven’t added to your overall balance.

“As far as mortgage refinancing goes, it’s a matter of opportunism,” Gumbinger says. “At the moment, fixed mortgage rates are at about 20-month lows, and very close to as much as 60-year lows.” While there are more variables to consider when refinancing, such as if your credit is good enough to qualify for the lowest rate, how much equity you have in your home and whether or not you plan to stay in that home for a while longer, Gumbinger says the opportunity for greater savings — and month-to-month cash flow — can make refinancing worth it under the right circumstances.

Even though Americans might be aware of their collective inertia when it comes to taking these steps, Gumbinger says the actual number of people who make a proactive improvement to their finances is likely to be low. “Even the best intentions are rarely realized, and over the course of the year there are likely to be many distractions,” he points out. For comparison, last year only 24% of us paid off credit card debt, although 15% did take advantage of low rates to refinance a mortgage.

Unfortunately, it’s not even like we’re socking away the money we do have for the future. The survey finds that only a third of Americans say they’re going to save for retirement this year. That’s an improvement from the 27% who say they did last year, but it’s still low.

“The calendar continues to work against you in the battle to amass assets,” Gumbinger warns. “Incomes are growing again, so if IRA [or] 401k contributions have been on the minimal side over the last few years, here’s a bit of a chance to play catch-up.”

MONEY long term care insurance

The Best Moves to Make So a Nursing Home Doesn’t Bankrupt You

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 62 and my wife is 58. We are considering buying long-term care insurance. However, we are also wondering if we have enough assets to self-insure. We have more than $2 million and no debt. We plan to retire to North Carolina, where long-term care costs are considerably less than in New Jersey. Would you be able to help us make this decision? – Bob Hyde, Flemington, N.J.

A: The decision is understandably difficult. A nursing home, assisted living facility, or home health care can cost tens of thousands of dollars a year, and no matter where you live, a lengthy illness could quickly deplete your savings. But long-term care insurance policies are expensive and restrictive, and insurers are hiking premiums as people live longer and require more care than insurers anticipated.

The high cost is one reason fewer than 8% of Americans have long-term care insurance. Many people mistakenly believe that Medicare will cover long-term care needs. The reality is that most people use their own resources to pay, and when those assets are exhausted, they turn to Medicaid.

There’s no easy answer to the best way to plan for long-term care needs, even as people grow increasingly worried about having enough money to cover the cost of a protracted illness.

A recent study has some good news and some bad news on this front. While previous research seemed to overstate the duration of care for people who need it, the risk of requiring care at all may be higher than previously thought.

According to the study, by senior economist Anthony Webb of the Center for Retirement Research, U.S. nursing home stays are relatively short: 11 months for the typical single man and 17 months for a single woman. But the risk that an older person may one day need some kind of nursing home care is considerable: 44% for men and 58% for women.

In your case, you have substantial savings for retirement and no debt, so that should make it possible to self-insure without jeopardizing your retirement lifestyle, says Tom Hebrank, a long-term care insurance specialist and financial planner in Atlanta.

But it doesn’t have to be an all-or-nothing decision, Hebrank says. You could, for example, buy more limited coverage and plan to pay the rest from savings. That would bring the cost of insurance way down.

A couple your age would pay about $7,700 a year for a policy that would cover three years’ worth of nursing care and provide a 5% compound annual increase in benefits to keep up with inflation. If you reduce the amount of inflation protection to 4%, your annual premium drops to $6,000; at 3% it falls to $3,500.

Another way to reduce the cost of a policy is to cut the daily benefit from, say, $150 to $100. Or you could limit the number of years benefits are paid. A policy that covers three years will be about one-third cheaper than one that provides unlimited benefits, according to the American Association of Long Term Care Insurance. How much you can afford depends on your retirement income. The National Association of Insurance Commissioners (NAIC) suggests that you spend no more than 7% of your income on premiums.

You can get free quotes from the American Association of Long Term Care Insurance to price out different options.

When deciding whether or not to buy long-term care insurance, you should also consider how liquid your assets are and whether you want to preserve money for your spouse or heirs. If the bulk of your wealth is tied up in your home, it won’t be easy to tap if you need quick access to the money for medical bills. Long-term care insurance is another way to preserve your assets and protect a surviving spouse who may also need care down the road, Hebrank says.

For some people, having long-term care insurance buys peace of mind, so it seems worth the price. “They don’t want to be a burden to their spouse or kids,” he says, “so even if it’s expensive, they feel better knowing they have coverage.”

Get more answers to your questions about long-term care insurance:
What should I look for in a long-term care policy?
How much will a long-term care policy cost?
What’s the best age to buy long-term care insurance?

Read next: 5 Ways to Tell If You’re Really Ready to Retire

Listen to the most important stories of the day.

TIME Innovation

Five Best Ideas of the Day: January 13

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. The U.S. could improve its counterinsurgency strategy by gathering better public opinion data from people in conflict zones.

By Andrew Shaver and Yang-Yang Zhou in the Washington Post

2. The drought-stricken western U.S. can learn from Israel’s water management software which pores over tons of data to detect or prevent leaks.

By Amanda Little in Bloomberg Businessweek

3. Beyond “Teach for Mexico:” To upgrade Latin America’s outdated public education systems, leaders must fight institutional inequality.

By Whitney Eulich and Ruxandra Guidi in the Christian Science Monitor

4. Investment recommendations for retirees are often based on savings levels achieved by only a small fraction of families. Here’s better advice.

By Luke Delorme in the Daily Economy

5. Lessons from the Swiss: We should start making people pay for the trash they throw away.

By Sabine Oishi in the Baltimore Sun

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY retirement planning

5 Secrets to a Happy Retirement

Hammock underneath palm trees
Keep a smile on your face once your working years are over. Jason Hindley—Prop Styling by Keiko Tanaka

Sure, a fat nest egg and good health help. But there are less obvious ways to make sure your post-work life is a happy one.

Retirement ought to be a happy time. You can set your own schedule, take long vacations, and start spending all the money you’ve been saving.

And for many retirees that holds true. According to the Gallup-Healthways Well-Being Index, people tend to start life happy, only to see their sense of well-being decline in adulthood. No surprise there: Working long hours, raising a family, and saving for the future are high-stress pursuits.

Once you reach age 65, though, happiness picks up again, not peaking until age 85. In a recent survey of MONEY readers, 48% retirees reported being happier in retirement than expected; only 7% were disappointed.

How can you make sure you follow this blissful pattern? Financial security helps. And good health is crucial: In a recent survey 81% of retirees cited it as the most important ingredient for a happy retirement. Some of the other triggers are less obvious. Here’s what you can do to make your retirement a happy one.

1. Create a predictable paycheck. No doubt about it: More money makes you happier. Once you amass a comfortable nest egg, though, the effect weakens, says financial planner Wes Moss. For his recent book, You Can Retire Sooner Than You Think: The 5 Money Secrets of the Happiest Retirees, Moss surveyed 1,400 retirees in 46 states. The happiest ones had the highest net worths, but Moss found that money’s power to boost your mood diminished after $550,000.

“Once you reach a certain level, more money doesn’t buy a lot more happiness,” says Moss. Similar research based on the University of Michigan Health and Retirement Study found a dropoff in happiness with extreme wealth; after you’ve amassed some $3.5 million in riches, more money doesn’t increase your happiness as much.

Where your income comes from is just as important as how much savings you have, says Moss. Retirees with a predictable income—a pension, say, or rental properties—get more enjoyment from spending those dollars than they do using money from a 401(k) or an IRA.

Similarly, a Towers Watson happiness survey found that retirees who rely mostly on investments had the highest financial anxiety. Almost a third of retirees who get less than 25% of their income from a pension or annuity were worried about their financial future; of those who receive 50% or more of their income from such a predictable source, just under a quarter expressed the same anxiety.

You can engineer a steady income by buying an immediate fixed annuity. According to ImmediateAnnuities.com, a 65-year-old man who puts $100,000 into an immediate annuity today would collect about $500 a month throughout retirement.

2. Stick with what you know. People who work past 65 are happier than their fully retired peers—with a big asterisk. If you have no choice but to work, the results are the opposite. On a scale of 1 to 10, seniors who voluntarily pick up part-time work rate their happiness a 6.5 on average; that drops to 4.4 for those who are forced to take a part-time job.

The benefit of working isn’t just financial. It’s also a boon to your health—a key driver of retirement happiness. The physical activity and social connections a job provides are a good antidote to an unhealthy sedentary and lonely lifestyle, says medical doctor turned financial planner (and Money.com contributor) Carolyn McClanahan.

A 2009 study published in the Journal of Occupational Health Psychology found that retirees with part-time or temporary jobs have fewer major diseases, including high blood pressure and heart disease, than those who stop working altogether, even after factoring in their pre-retirement health.

Switching careers in retirement, though, isn’t as beneficial. Retirees who take jobs in their field reported the best mental health, says lead researcher Yujie Zhan of Canada’s Laurier University, perhaps because adapting to a new work environment and duties is stressful.

3. Find four hobbies. Busy retirees tend to be happier. But just how active do you have to be? Moss has put a number on it. He found that the happiest retirees engage in three to four activities regularly; the least happy, only one or two. “The happy retiree group had extraordinarily busy schedules,” he says. “I call it hobbies on steroids.”

For the biggest boost to your happiness, pick a hobby that’s social. The top pursuits of the happiest retirees include volunteering, travel, and golf; for the unhappiest, they’re reading, hunting, fishing, and writing. “The happiest people don’t do things in isolation,” says Moss.

That’s no surprise when you consider that people 65 and older get far more enjoyment out of socializing than younger people do.

4. Rent late in life. In retirement, as in your working years, owning a home brings you more joy than renting does. But as time goes on, that changes. Michael Finke, a professor of retirement and personal financial planning at Texas Tech University, analyzed the satisfaction of homeowners vs. that of renters from age 20 to 90-plus and found a drop late in life, particularly after homeowners hit their eighties.

The hassles of homeownership build as you age, Finke notes, and a house can be isolating. Most people want to stay put in retirement. Yet, says Finke, “you need to plan for a transition to living in an environment with more social interaction and less home responsibility.”

5. Keep your kids at arm’s length. Once you suddenly have a lot more time on your hands, your closest relationships can have a big impact on your mood. According to an analysis by Finke and Texas Tech researcher Nhat Hoang Ho, married retirees, particularly those who retire around the same time, report higher satisfaction than nonmarrieds—but only if the couple get along well. A poor relationship more than erases the positive effects of being married.

Children don’t make much of a difference, with one twist. Living within 10 miles of their kids leaves retirees less happy. “People overestimate the amount of satisfaction they get from their kids,” says Finke. The reason is unclear—could being a too accessible babysitter be the problem?

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