The average American who reaches age 65 will live for another 19.4 years, according to the Centers for Disease Control and Prevention. Those two decades are supposed to be relaxing and full of pleasure, but retirees have one overarching question to answer on the eve of retirement: How am I going to support myself?
Data from the Social Security Administration shows that monthly Social Security payments cover about 34 percent of income for the elderly. Personal savings and investments are supposed to cover the rest. The Federal Reserve has held interest rates to almost nothing since December 2008 because of the Great Recession. As a result, some retirement vehicles like savings accounts and savings bond investments have had historically low yields at typically less than two percent.
Instead, retirees need to get creative to pay for retirement. Consider the following investing advice, which can help retirees navigate the potentially treacherous waters of retirement.
1. Make a Plan and Revise as Needed
Financial goal-setting is particularly important when you don’t have the latitude future years of wages provides. You can catch up financially when you’re younger, but not after you’ve retired. The first thing to do is calculate your fixed non-discretionary expenses. Like any business, you must match these costs, or cash outflows, with savings or income.
Once you’ve figured out your fixed costs, you can plan for how you’re going to pay for them. Without a doubt, investing should be part of your financial plan. Many advisors recommend revisiting your financial plan annually. We suggest that you check in quarterly. It’s just that important during the retirement years. Your strategy must be fluid. If you expect to tweak it when necessary, then doing so won’t be such a psychological obstacle.
2. Reduce Fixed Expenses
Reducing your footprint is a great way to lower your non-discretionary expenses — mandatory payments like rent or a mortgage. You’ll get the biggest bang for your buck by downsizing your home. Of course, you’ll pay taxes on your home sale, so make sure to build those costs into your long-term plan. If you’re a single homeowner, you can avoid tax on $250,000 of profit on the sale. The savings are double if you’re married.
Consider investing some of your windfall in municipal bonds on which the interest received is federal tax-free.Triple tax-free bonds are even better because they’re tax exempt at the municipal, state and federal levels. In addition to several broad tax-exempt bond portfolios, Vanguard offers six municipal bond funds for investors in California, Massachusetts, New Jersey, New York, Massachusetts and Ohio.
3. Prepare for the Unexpected
Due to increased financial pressure and longer life spans, Americans are deferring retirement. According to Fidelity, the average retired couple age 65 should expect to pay $260,000 in out-of-pocket healthcare expenses over the balance of their lives. Long-term care can add another $130,000. Working as long as possible gives you more cash inflow to pay for these expenses.
The longer you work the longer you avoid cash drain, or depleting your assets without some offsetting inflow. You can invest any surplus cash, but it’s important to be conservative and invest in lower-risk stocks that pay dividends at least as high as the market’s. Alternatively, you could add bonds with maturities no longer than your date of retirement.
How to Prepare: Retirement Survival Strategies for Rising Healthcare Costs
4. Pay It Forward
Make sure your children, and particularly your grandchildren, know about compounding interest and the time value of money. These concepts are linked and they demand that you invest early and often to reap the greatest rewards.
Consider this: If your 20-year-old squirrels away just $58 per month and invests it in U.S. stocks (assuming a 10 percent return over time), she will be a millionaire by age 70. That kid won’t have to worry about Social Security. Compounding can work for you, too — it might be the most important investment concept — but it’ll have the greatest impact for the longest-term investor.
5. Delay Taking Social Security
Retirees can tap into Social Security as early as 62, but they’ll see a reduction in their monthly payments. On the other hand, if you can delay benefits, you’ll reap major rewards. Assuming your retirement age was 66, if you delay until age 70 your monthly payment will be 32 percent larger.
The average Social Security check paid in December 2016 was $1,360. If you had $68,000 in investments paying income that averages two percent, you could get by without government support in the near term.
6. Give Gifts to Lower Your Taxes
Consider gifting appreciated securities to your loved ones. Hopefully, you’re sitting on steep capital gains in your portfolio. We’ve been in a bull market for U.S. stocks since March 2009. If you transfer these assets now, you’ll shift your capital gains to their lower income tax brackets and avoid some complications settling your estate.
Read More: 7 Best Tax Tips for Investors
7. Consolidate Accounts and Confirm Beneficiaries
To make life easier, consolidate financial accounts whenever possible. Even your heirs will benefit from this streamlining. You should also confirm that proceeds from your life insurance, IRA or other financial contracts go to the right beneficiaries, so they can invest the money wisely. It’s too easy to drop the ball on this, although it sounds like a no-brainer.
8. Ask for Help
When it comes to retirement planning, especially in the early stages, it pays to get advice from an expert — a financial planner, a tax accountant or both. Fee-only financial planners shouldn’t be swayed by the commissions they receive selling products, whereas transaction-driven advisors might recommend products that pay them the most, but aren’t the best for your financial situation.
Paul Meeks is a financial journalist and equity analyst. His investment advice does not reflect the views of GOBankingRates.