8/20/2012 2:15 PM ET|
Money in your 60s: 12 steps to take
This is your last chance to get retirement-ready. Here's the game plan to make sure your numbers add up before you call it quits at work.
Traditionally, this decade in your life would be all about retirement.
And traditionally, you'd do it sooner rather than later. In recent years, half of all retirees left the work force by age 62.
Ongoing turmoil in the stock markets and serious declines in home equity have changed the equation. Only 13% of workers now feel very confident they'll have enough money for a comfortable retirement, according to a recent survey by the Employee Benefit Research Institute. Those already in retirement are worried, too: Just 24% believe they'll have enough money, down from 41% in 2007.
Today's 60-somethings face other challenges. Compared with their parents, they are much less likely to have guaranteed retirement checks through defined-benefit plans, which means their own savings are critical to funding retirement. Yet the median amount saved in 401k's, IRAs and other retirement accounts in this age group was just $100,000 in 2007, according to the Federal Reserve's most recent Survey of Consumer Finances -- and that was before the massive damage the stock market drop of 2008 did to retiree nest eggs.
Today's 60-somethings also are more likely to be carrying debt. Three-quarters of people in their 60s owed money, with a median debt of $50,000, the survey found. Forty-five percent carried balances on credit cards, and the median amount owed was $4,000, more than any other age group.
Clearly, today's near retirees have the wind in their faces. Here's your game plan for getting your finances back on track.
1. Zero in on a retirement date
To know if you can comfortably retire, you'll need to have a target retirement date, because how much money you'll need and how much you'll get (from Social Security and other options) depends on this. But you need to stay flexible, in case the day you'd like to quit working -- or phase into part-time work -- turns out to be too early.
Working even a year or two extra can boost your nest egg and increase your retirement income enormously. But there's also no point in hanging around longer than you have to.
2. Figure out where you're going to live
Will you stay put in a paid-off home, or will you still have a mortgage? Will you move to a cheaper area or downsize to a smaller place? Or will your move be lateral, to an equally expensive (if lower-maintenance) condo or retiree village?
Where you spend your retirement will have a huge effect on how much income you'll need. If your retirement plan doesn't pencil out one way, you may need to consider other alternatives. Although more than 80% of retirees "age in place" -- living in the same house in which they retired -- moving to a cheaper area or downsizing to a smaller house can free up home equity for investments or income.
Thinking about tapping your equity through a reverse mortgage? These mortgages, which give you a lump sum, a line of credit or a stream of monthly checks, don't have to be paid back until you die, sell the house or move out permanently. But the amount you get is inversely proportionate to your age: The younger you are, the less you get. That's why the typical age for getting a reverse mortgage is about 75 and why real-estate expert Tom Kelly doesn't usually recommend them when you're in your 60s unless you have no other choice.
"I believe people in their 60s . . . simply don't qualify for enough cash under the present (reverse mortgage) programs," said Kelly, the author of "The New Reverse Mortgage Formula."
Then again, a reverse mortgage may be the best of bad options if you still have equity, can no longer work and your retirement income isn't enough to pay the bills.
"There's a needs-based group. Some folks have no other option to pay for meals and meds (or) a new roof," Kelly said. "This group doesn't really care how much it costs to get the (reverse mortgage); they simply need it now."
3. Consider long-term-care insurance
There is no expert consensus on when you should buy this coverage, if you buy it at all. Consumer Reports doesn't recommend the coverage before age 65, but adviser Robert Pagliarini, a certified financial planner and author of the book "The Six-Day Financial Makeover," prefers his clients buy a policy before they turn 60.
"Unfortunately, the longer you postpone the decision, the greater your chances of suffering an illness or developing a condition that will disqualify you from coverage or cause the premiums to be too expensive," Pagliarini said. In the 60-to-65 age range, "rates will not necessarily be attractive, but they should still be reasonable." In the 65-to-70 age range, "premiums start going up dramatically." Do some serious research before you buy: Look for companies with sound financial ratings from TheStreet.com, Fitch, A.M. Best or Standard & Poor's and review the insurers' complaint records with your state insurance regulator.
The National Association of Insurance Commissioners, a group that represents state insurance regulators, offers information on this coverage, including a free brochure, "A Shopper's Guide to Long-Term Care Insurance," that you can order.
4. Don't forget to include medical costs
Paying for health insurance before age 65, when you qualify for Medicare coverage, can be extremely costly.
But even once you qualify for Medicare, your expenses aren't over. Those age 65 and older spent an average of $4,888 per capita for deductibles, co-payments, premiums and other health care expenses not covered by insurance, according to the 2004 National Health Expenditure Survey. That's more than twice as much as the typical nonelderly adult, the survey found.
It's not unusual for a couple, even in relatively good health, to spend $1,000 or more a month on these costs.
The average expenditure climbs with age: $3,851 for those 65 to 74, $5,066 for those 75 to 84 and $8,304 for those 85 and older.
5. Deal with your debt
Ideally, you'll enter retirement with no debt, but you definitely want to blitz any credit card balances or other consumer loans before you get there.
If you're having trouble paying off this toxic debt, contact a legitimate credit counselor (one affiliated with the National Foundation for Credit Counseling) or a bankruptcy attorney to discuss your options.
6. Draw up a retirement budget
Now that you're almost at the finish line, you can replace the usual retirement rules of thumb ("plan on spending 70% to 80% of your pre-retirement income") with concrete figures.
Not sure if your budget will work? You might take it on a trial run for a few months by living with it as if you really were retired (just keep showing up for work).
7. Review your Social Security and pension options
You can draw on Social Security as early as age 62, but the longer you wait to start taking payments, the bigger your benefit checks will be.
Signing up at 62 basically means locking in a lower benefit for the rest of your life. If you don't expect to live very long or you can't work and need the money, then by all means, sign up. Otherwise, think twice.
If you'll continue working, definitely hold off on Social Security payments unless you won't be making much. If you sign up before full retirement age and earn more than a certain amount -- $14,640 for 2012 -- you'll have to give up $1 in Social Security benefits for every $2 you earn.
You also should check with current and former employers to see if you qualify for any traditional pension benefits and, if so, how much you can expect. You may have a choice on how to take the money: as a lump sum, as a lifelong string of monthly checks or as a string of monthly checks that lasts for your lifetime plus that of your spouse.
If you're thinking of taking the lump-sum option, talk to your human-resources department about how it would calculate the amount. You also might want to schedule an appointment with a fee-only financial planner who's experienced in handling pension payouts for some advice on your situation.
8. Check your withdrawal rate
The consensus among financial planners has been that you shouldn't withdraw more than 3% to 4% of your retirement savings the first year, though that has its critics.
The earlier you retire and the longer you expect to live, the more conservative you'll want to be about tapping your savings.
9. Consider an immediate annuity
For clients who don't have traditional pensions and who can swing the cost, financial planner Sheryl Garrett, the author of "Just Give Me the Answers," recommends taking a portion of their nest eggs and buying an immediate annuity. This is an insurance product that promises you a lifetime stream of income in exchange for a lump-sum investment.
When combined with Social Security checks, an immediate annuity can help guarantee that you're able to pay your basic expenses regardless of how your other investments perform.
Let's say you have a $300,000 nest egg and expect your essential expenses in retirement -- shelter, utilities, transportation, food, health insurance, etc. -- to be about $2,300 a month. Your Social Security check might provide $1,600 of that amount. If you're a 66-year-old man, you could buy an immediate annuity from Vanguard for $100,000 that would pay you about $727 a month for life. If you wanted inflation protection -- in other words, a payment that would rise along with the cost of living -- your guaranteed initial check would drop to $554. (You can play with the numbers yourself at Vanguard's annuity website.)
You could use what's left in your retirement accounts to provide the "extras," such as travel or a new car. The annuity would ensure that you could pay your basic living costs even if your investments turned against you or you lived longer than you had expected.
If you opt for the annuity route, you'll want to make sure the insurer you pick has rock-solid finances and low expenses.
10. Stress-test your plan
You now should have enough facts and figures to see if your plan will work. Garrett recommends using a post-retirement return rate of no more than 6% or 7%. That's the historical norm for a relatively conservative portfolio of stocks, bonds and cash.
"You want any surprises to be on the upside," Garrett said.
Then consider checking out T. Rowe Price's retirement income calculator, which can estimate your plan's probability of succeeding.
What if you're falling short? See what would happen if you worked a little longer, or adjust your budget to see whether you could live on a little less. If you're determined to retire and the numbers don't work, consider more-drastic options, such as moving to a cheaper area or a smaller home.
11. Meet with a fee-only financial planner
The decisions you're about to make are too important to your future not to get a second opinion. Look for an objective planner who's experienced with retirement-income calculations.
You can get referrals from Garrett's organization, the Garrett Planning Network, or from the National Association of Personal Financial Advisors.
12. Review your estate plans
Your chances of being incapacitated -- too ill or injured to make your own decisions -- rise as you age. Make sure you have updated durable powers of attorney for finances and for health care (the latter document is known as a health care directive in some states), so that someone you trust can take over for you.
Also consider a living will, which outlines what kind of end-of-life care you'd want if you weren't able to speak for yourself. Though they're not as foolproof as they're often portrayed, they can give your loved ones a road map for what you might have wanted.
Dealing with these issues can be difficult and emotional, Garrett said, so don't try doing it while you're sitting in your attorney's office. She recommends getting a copy of the workbook brochure "5 Wishes," available for $5 from Aging With Dignity, and taking time to review your options. (Another nonprofit group, HELP, has free resources at its website.)
You also should review any wills or trusts and update beneficiaries on retirement, bank and investment accounts and on life insurance, preferably with the guidance of your attorney and financial planner.
"If you haven't updated your will since the kids were born," Garrett said, "now's the time."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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