This is the second of two pieces on how to avoid outliving your money, featuring the wisdom of AdviceIQ advisor Jeff Rose, the founder of Alliance Wealth Management in Carbondale, Ill.
Our first article looked at various ways to attack one of life’s biggest worries: running out of money in retirement. Here are some additional tactics:
Consider an annuity. Annuities can be very confusing; quite a few shady advisors also sell them just to make a commission. Annuities work well, though, in the right situation and can guarantee attractive income benefits.
Immediate annuities, indexed annuities tied to an equity-based index and certain variable annuities, which rise and fall depending on the market, offer income benefits you can set up to pay for an individual or a couple. Your payout depends on the insurance company, type of annuity, amount you invest and when you start taking the payout.
Fixed-indexed annuities (sometimes referred to as equity-indexed annuities) were hot sellers for the past couple of years, offering protection of principal and guaranteed income. Like any other investment (and annuity), they come with pros and cons.
Buy less house than you can afford. Conventional wisdom says you buy the most expensive house you can afford and your financial situation grows into it. Wrong: When planning for retirement, your biggest step in cutting expenses is to buy real estate that’s beneath your budget.
The house that you buy affects your spending for the rest of your life. A larger, more expensive home hikes nearly all your other expenses: property taxes, utilities, insurance, repairs and maintenance and even the type of car you can afford to buy. In addition, a house payment is a fixed expense difficult to lower after you buy.
Instead of buying your dream home, plan on preparing to afford your dream retirement.
Retire where living is cheap. This tactic becomes especially important if your retirement investments don’t return quite as much as you hope. The nation’s top cities for an affordable retirement include Omaha, Neb.; Sarasota, Fla.; Austin, Texas; Charleston, S.C.; and Nashville, Tenn.
Set your kids up for success. We often think of preparing for retirement and sending kids to college as competing interests. In reality, one supports the other.
The sooner (and the better) your kids can provide for themselves financially, the less they’ll need to rely on you. No small problem: An increasing number of young adults can’t enter well-paying career fields and remain dependent on their parents well into their 30s.
Plan for a Medicare supplement. Medical crises and costs constitute one of the most common and dangerous outliving-your-money scenarios. Such a crisis can quickly drain even a large retirement portfolio. The best protection: adequate health insurance.
Medicare covers those turning 65 and who have basic insurance – but it doesn’t pay 100% of health-care costs and comes with exclusions.
A Medicare supplement, or Medigap, covers most of what Medicare doesn’t and can prevent you from dipping into your retirement savings ahead of schedule. Medicare supplement policies are standard in most states and you cannot be declined for coverage if you apply within six months of turning 65.
Though Medigap does raise your cost of living in retirement, the money’s well spent.
Create a post-retirement career. Some sort of moneymaking activity or business you can carry into the golden years can be one of your best financial diversifications. A post-retirement career can become a valuable income source during times of high expenditures, uncertainty or stock market dives.
The income can mean that you require less money from your retirement investment plans and preserve more of your capital to take advantage of the market’s rise when any downturn inevitably ends.
Semi-retire for a few years. If you are healthy enough – and most are in their 60s – you can supplement your income working part-time. Again, rely more on earned income in your early retirement and save your investment capital for later years.
Think of it as taking your retirement in stages: retiring from your lifelong career; semi-retiring for the first few years after; then fully retiring when you decide you’ve had enough of working and are confident that your investments can carry you for the rest of your life.
Cut expenses – permanently. Trimming your living expenses helps you free income now to invest for retirement later and reduces the amount of income you need to support yourself in retirement (assuming your pennywise habits stick).
