6 Ways to Make Your Savings Last a Lifetime
Maybe you've lived below your means and saved up a substantial nest egg. Or you got in on a 401(k) plan that padded your account with generous matches from the company. However you did it, you now have an estimable portfolio of retirement assets and, with help from Social Security and possibly a pension, you can enjoy a comfortable income.
So what could possibly go wrong? Remember the financial crash of 2008 and 2009. It's happened before, and will likely happen again. A stock market decline might not happen next week, or even next year, but you'll likely be retired for 20 years or more, so the chances of some rogue event occurring during your retirement are pretty high.
The solution is not to worry about it, but to do something about it. Here are six ways to defend your retirement nest egg:
1. Bulk up your savings. If you're not yet retired, one bulwark against disaster is to step up your savings rate and build a larger portfolio, because bigger is better. Once you're 50 years old, you can add extra money to your 401(k) and IRA. Also, there's no law saying you can't save more money outside of a retirement account, which is another brick in the wall to shore up financial security.
2. Keep some cash. Experts recommend keeping six months or even a year's worth of expenses in cash, outside of your retirement account, in a bank or money market mutual fund. It's a safety net, in case you face an unexpected medical bill, home repair or other expense. Another approach: Figure out your retirement budget, which is how much you take out of your savings accounts to cover your ongoing living expenses. Keep enough in cash to cover five years of your expenses. Then if the market crashes, you won't be forced to sell your funds at the bottom. You can wait up to five years, which should be enough time for markets to recover.
3. Plan for a major medical expense. You may have a top-notch insurance plan, but a serious medical problem could hit you with serious out-of-pocket expenses. I have a friend who needed a pacemaker. His insurance paid out $63,000, but that still left him with a $7,000 bill he had to pay himself. If you're eligible, open a health savings account, which is available to people with high-deductible insurance plans. If you're not eligible, dedicate a portion of your savings for an unexpected medical expense. Hopefully, you'll never need it, but it's there if you do.
4. Consider your long-term care. Even if you don't have a major medical issue, you might become disabled later in life. Who's going to take care of you if you need help bathing, dressing or preparing meals in old age? Maybe you have a friend or family member who's prepared to help out. But if you don't, you might consider a long-term care insurance policy. These policies are typically expensive and could cost you several thousand dollars per year, but the premium could be tax deductible, and it might save you from going broke in the end.
5. An annuity is an option. An annuity is a contract with an insurance company. You give them money, and they provide you with a steady income for a period of time, usually for life. Today is not a great time to buy an annuity, because the amount of the benefit depends in part on interest rates, and interest rates are low. But if you believe you're going to live longer than the average person, an annuity might pay off. If you have a sizeable portfolio, you might use an annuity to diversify your assets. The payments are not that generous. But they do continue for the rest of your life, so you'll never run out of money.
6. Time for downsizing. It seems daunting. How do you bulk up your savings at the same time you're paying extra medical bills and taking out more insurance? You have to realize that you are in a new stage of life now. Years ago you bought a three- or four-bedroom house with a lawn and a two-car garage because you had a family. But you no longer need a big house, just like you didn't need to keep your apartment in the city after you moved to the suburbs. Sure, a few rich people can afford to keep a pad in the city, or the old family home. But most of us move on. So maybe it's time to move on from paying for your family life to taking care of your retired life.
Tom Sightings blogs at Sightings at 60.
