Retirement is changing — people are living longer, jobs with pensions are increasingly rare and retirees are relying on their 401k savings more than ever. Some old retirement strategies don’t work as well as they used to and some are just plain wrong. Here are some unorthodox retirement strategies that really work so you can bring your retirement plan to the 21st century.
Click through to find retirement savings strategies you can use to grow your nest egg.
1. Plan For a Retirement That Could Last 30 Years — or More
A few generations ago, people started working in their early 20s, worked for the same company for 40 years until they finally retired with a pension and a gold watch at 65, and lived for 10 more years in retirement. Today, people might still retire at 65, but they could live for 30 more years or even longer, and it’s unlikely they’ll have just one employer or work at a job that offers a pension.
Your retirement strategy must assume you need enough money to last at least 30 years. The key to a robust nest egg is to save consistently and as early as possible.
See how compound interest can work its magic when you start saving early.
2. Use a SEP-IRA to Save If You’re Self-Employed
“A common misconception is that it is harder to save for retirement if you are self-employed,” said Nancy F. Doyle, CFA, of the Doyle Group. “If you are self-employed, one easy way to save for retirement is a Simplified Employee Pension, which is also known as a SEP-IRA. According to the IRS, you can contribute the lesser of 25 percent of your compensation or $55,000 for the 2018 tax year. This contribution reduces your taxable income and builds your retirement nest egg. It is a win-win if you work for yourself.”
3. Postponing Paying Taxes Isn’t the Best Strategy for Everyone
“The concept of not paying taxes on retirement savings is a myth,” said Bobbi Rebell, CFP and host of the Financial Grownup podcast. “The truth is that you pay tax — it is just a question of when, and on how much income.”
Depending on the investment vehicle you choose, you’ll either pay taxes on the money when you earn it or when you withdraw it in retirement.
“For example, with a 401k, you avoid paying taxes until you take the money,” she said. “This has always been the default, but it might not be the best choice for everyone. We now have both Roth 401ks and Roth IRAs, so everyone should take the time to really think about what is best for them. You can to pay the tax on retirement funds now, and let the money grow post-tax, in a Roth. Or, you can avoid paying the tax in the near term, get the deduction, and let the full amount grow pre-tax, knowing that you have to face the taxes later on.”
Think about your financial situation and decide if it’s more cost-effective to pay taxes now or in retirement, depending on your tax bracket. A combination of pre- and post-tax accounts might work for you.
4. Bonds Might Not Always Be the Stable Choice
“Traditionally, people expect their bond mutual fund to be stable and safe,” said Dean Hedeker, principal of Hedeker Wealth in Lincolnshire, Ill. “With increasing interest rates, however, the opposite is true. As interest rates rise, bond prices drop, and this puts lots of pressure on bond mutual funds to maintain their asset values.”
5. Mind the Gap Period
“Usually when people retire, their incomes drop,” said Hedeker. “Their income stays low until they reach age 70 1/2 and are forced to withdraw money from their IRAs. We call this the gap period. Usually, people like to leave the money in the IRA and let it accumulate, but all this does is compound the tax problem that hits them at 70 to 90 years of age. So, we need to accelerate their IRA withdrawals in the gap period to avoid the tax hit later. Usually, this is done via Roth IRA conversions, when we take assets from their traditional IRA, pay the taxes, and put the money into a Roth IRA. Then they can usually take it out tax free at their own pace.”
6. Adjust Your Asset Allocation to Account for a Longer Life Expectancy
“The old rules of asset allocation don’t work any longer,” said Hedeker. “We used to say that your bond portfolio should match your age, so at age 60, you should have 60 percent of your portfolio in bonds. This isn’t going to work if you live to age 90, which is the new reality.” Your portfolio can now hold a greater percentage of stocks as you get older.
One option for passive investors is to invest in target-date retirement funds, offered by investment companies like Vanguard, which adjust to become more conservative as you near retirement.
7. Buy and Hold Still Works, Even After You’ve Stopped Working
Just because you’ve retired doesn’t mean you should stop buying stocks or mutual funds, and it doesn’t mean you shouldn’t buy with an eye to the long term. If you see a position you think is undervalued, you can still buy it and hold it for 10, 20 or even 30 years to benefit yourself later in life or your beneficiaries.
8. Sell Your Losing Stocks
Some people hold onto their losing stocks like they’re a life preserver in a stormy sea. They might do this because they don’t want to take the loss or they think the stock will rebound, but it can be a bad move, especially if you have gains in other positions. Selling losing stocks is actually a good strategy since you can use the loss to offset the income you earned on your investments that had a positive return. Sometimes referred to as tax-loss harvesting, this strategy can reduce your taxable income from your investments.
9. Plan for Two Stages of Retirement
Because people are generally healthier and living longer, many people have 10, 15 or 20 years after they stop working when they are able to travel, pick up a new sport or hobby and do other things that cost money. Once they get well into their 80s, they will start to slow down. Assume you’ll need more money in those early years of retirement so you can do the things you want to do, as well as money for healthcare and living expenses in your later years.
10. Don’t Touch Your Social Security Until You’re 70
A lot of people are concerned that Social Security is going to run out of money, so they want to get it while they can. You can take a reduced benefit at age 62, but you’ll get that reduced amount for the rest of your life. Alternatively, you can take your full benefit at your full retirement age, which is from 66 to 67, depending on the year you were born. If you delay taking your benefit until you are 70, your full benefit will grow at 8 percent per year until age 70, and you’ll get that amount for the rest of your life. There are few investments with a guaranteed 8 percent rate of return. That said, the number of years you’ll live is not guaranteed, so think wisely and consult a financial professional before making any decisions.
11. Healthcare Costs Can Undo All Your Hard Work
Many people think all their healthcare costs in retirement will be covered by Medicare. This is rarely true. Medicare covers some things, but you’ll still have to pay for deductibles and copayments. Generally, Medicare does not pay for long-term care in a nursing home or assisted living facility or home health care. Planning for these expenses, either with long-term care insurance or earmarking savings, is an important part of retirement planning. If you plan ahead, your children will certainly thank you for doing so.
These retirement planning tips will help you understand and plan for the new retirement reality, so you can enjoy your later years.
The author has no relation to the source who shares her last name.