How to invest for retirement (the smart and stress-free way)

How to invest for retirement (the smart and stress-free way)

By Dahna M. Chandler, Next Avenue Contributor

Numerous Americans over 50 haven’t saved for retirement. In fact, the Insured Retirement Institute found that only 54% of boomers (age 53 to 71) have retirement savings. Quite a few Gen X’ers over 50 have little or no retirement savings, too. The boomers and Gen X’ers are in this position for multiple reasons; the most common one is postponement. If you’re one of them, it isn’t too late to get started funding your retirement and avoid future missteps, though. And there are a few smart ways to do it.

“People practice ‘As soon as I,’ ‘After I’ and ‘When I’ financial planning,” says Professor Barbara O’Neill, the family resource management specialist at Rutgers University Cooperative Extension. “They delay retirement savings in favor of sequencing actions, like pursuing debt reduction first, instead of accomplishing several goals simultaneously.”

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But, in many cases, notes O’Neill, “’life happens’ and retirement savings get postponed even further.” Financial setbacks from a health or personal crisis, losses sustained during the Great Recession, student loans or other major debts and family care can leave little money for retirement savings. Moreover, your salary may not keep up with living costs and your job may lack a 401(k)- type plan or a pension.

Here are eight retirement savings tips for late-starters

1. Reframe your thinking to get past fear. Lamenting the past causes a fear of savings failure and keeps you stuck.

“’I wish I would have started earlier’ is a phrase I frequently hear,” says Seth Priestle, a Certified Financial Planner and investment analyst for Pension Corporation of America in Cincinnati who has worked with thousands of employees on their employer retirement plans. “Dwelling on the past is a hindrance.”

O’Neill’s advice: “Think positive, empowering thoughts, like ‘Any savings is better than doing nothing’ and ‘The best day to start taking action is today.’

2. Steer clear of retirement calculators — for now. Nancy Anderson, a Certified Financial Planner with Key Private Bank in Salt Lake City thinks people who haven’t saved for retirement by the time they’re 50 or older would be best to avoid using retirement calculators — at first.

“Late starters already know they are behind, so starting with a calculator that shows them just how far behind may reinforce planning paralysis,” says Anderson, a Forbes Retirement contributor who writes the blog for 50+ late-starting savers, Acres of Acorns.

Instead, Anderson suggests, figure out where you’re overspending and begin cutting those costs.

3. Know that you can catch up, but not just by putting more money into savings. “You’ll need to execute a variety of strategies,” says Anderson. “Just saving more won’t be enough in most cases.”

O’Neill concurs. “There are over a dozen viable retirement catch-up strategies that you can combine for greater impact,” she says.

A few examples: take advantage of the “catch-up” rules allowing people 50+ to put more into IRAs ($1,000 more) and employer-sponsored retirement plans ($6,000 more) than younger people; automating investment deposits and downsizing to a smaller, less expensive home.

4. Rethink your retirement plans. “This could mean working a few extra years or working part-time in retirement,” says Priestle.

“Working until age 67 or 68 has high benefits,” O’Neill says. They include: more years to put money into employer-sponsored retirement plans or IRAs, higher Social Security benefits than by claiming in your early or mid 60s and possibly higher pension benefits. You’ll also see payoffs from delaying retirement account withdrawals. “Together, these benefits can stretch meager retirement savings longer,” notes O’Neill.

One other benefit: Anderson points to an Oregon State study which found that “people who worked longer, lived longer. So working longer can be good for your health,” she says.

If you don’t have an IRA, open one. You can do this through any bank, brokerage or mutual fund. For 2017, you can contribute up to $6,500 if you’re 50 or older. You may be able to get a tax deduction; the rules are slightly tricky, so you’ll want to check them out at IRS.gov.

5. Use apps that increase your automated savings. A few to consider are Digit, Qapital, Acorns and Stash.

6. Look for ways to generate income beyond investing. At your job, ask for a raise, work towards higher bonuses or commissions and agree to work overtime, if that’s an option.

You might get a part-time job or start an at-home side business. A tax pro can show you how your side business can reduce your taxes, too.

“You can deduct costs like a home office or cell phone use and continuing education from your income taxes,” says Manuel Cosme, a CPA with CFO Services Group in Washington, D.C. “For example, if you make deliveries or drive for car-sharing companies, you can deduct mileage, depreciation, gas and other costs.”

You could also sell some of your unused things or rent out a room of your home on Airbnb.

7. Once you’ve begun taking these steps, it will be time to use a retirement calculator. Then, you’ll see how you’re doing and can make adjustments as needed to fund a comfortable retirement. A good one: Ballpark E$timate from the Choosetosave.org site.

8. Finally, protect your future. When life happens, that can sabotage your retirement savings. So you may want to purchase disability insurance or long-term care insurance to cover unexpected costs.

“It’s the combination of actions that can make the difference,” says Anderson. “That’s how people eventually can retire even when they started saving late.”

How to invest for retirement (the smart and stress-free way)

Next Avenue is public media’s first and only national journalism service for America’s booming older population. Our daily content delivers vital ideas, context and

Next Avenue is public media’s first and only national journalism service for America’s booming older population. Our daily content delivers vital ideas, context and perspectives on issues that matter most as we age.

How to invest for retirement (the smart and stress-free way)

Many people make the mistake of building their retirement funds by simply saving money in the bank.

Putting your money in a savings account that earns less than one percent per year will not help you to retire early. You would still probably be working at the time when you should have already retired.

In order to grow your savings, you need to invest regularly. When you invest, your savings will grow faster because the returns that you will get from your investments will accumulate over time.

But building an investment portfolio for the long term can be challenging because it requires you to carefully tailor fit your strategy to your risk appetite and life goals.

Your strategy to achieve your goals must align with your retirement timetable. You cannot afford to delay your plan to start investing because time is gold as they say.

Every day that goes by can be another wasted opportunity to put your money to work.

Planning your investment strategy early in the game is one sure way to achieve early retirement in the future.

Here are the five ways you can build your retirement investment funds in the Philippines. This also helps you answer the question of how to build your retirement funds?

1| Determine the amount of money you need to retire

When you decide to retire someday in the future, it means that you stop working to earn a living. You must have saved enough money to sustain your living expenses until you die, without the need to work.

How much money do you need to achieve in order for you to retire comfortably?

Try to look at your current personal expenses. Most probably there are expenses you will no longer need to spend when you retire someday but certainly there are essential expenses you need to keep you healthy and happy.

You need to estimate these expenses on a monthly basis because this is the amount of income that your retirement fund will need to generate passively in the future.

2| Determine the amount of money you need to invest regularly

Let’s say you have figured out that you will need around P20 million to support your financial needs when you retire beginning at 65 years old.

Given this amount as your retirement fund, you need to know how much you need to invest now, on a monthly basis, in order to achieve your goal.

Your monthly investment will depend on your time horizon and target returns. The younger you are, the lower the amount you need to invest and the higher the chances that you can achieve your goal.

For example, if you are 25 years old now, you will have 40 years to build your retirement fund. At target returns of eight percent per year, the annual investment you need to contribute in order to achieve P20 million goal by 65 years old is P77,203, which translates to monthly savings of just P6,433.

If you are older at 35 years old, you will need more money to invest to achieve the P20 million goal. You will roughly double your budget because your time horizon is shorter.

Your challenge will be to look for returns higher than eight percent to keep your investment low. Perhaps you may have to look for more aggressive, riskier investments to get higher returns.

3| Determine your investment allocation to achieve best returns

Once you have settled with your investment plan, the next item you need to decide is the asset allocation.

How much should you invest in stocks? Stocks are riskier investments but earn far more than fixed income or cash historically.

One way to determine your exposure to stocks objectively is to use the formula 120 minus your age. If you are 25 years old, your stocks exposure can be as much as 95 percent, but if you are 55 years old, your exposure should not be more than 65 percent.

As you get older, it is advisable that you invest less in stocks and focus more on less risky investments such as fixed income.

4| Determine your risk preference by diversifying your assets

When you invest in stocks, you can manage your risks by diversifying your investments in different types of stock such as blue chips, and small caps.

If you are looking for stability, choose blue chip stocks with predictable earnings and less volatility. Stocks such as PLDT, Meralco, Ayala Land and SM Prime have compounded annual returns of not less than 10 percent in the past five years.

These stocks can be your core holdings because they provide secured growth that will last, not to the mention the annual cash dividends that they give which help lower your investment costs over the years.

On top of your core holdings, you can consider other stocks that have historically high returns.

Stocks such as Megaworld, Bank of Philippine Islands and Metrobank have annual compounded returns of 25 percent for the last five years while Universal Robina, Aboitiz Equity Ventures, ICTSI and Jollibee have historical annual returns of at least 40 percent per year.

The stock market has compounded annual returns of 15 percent per year for the past years.

It is possible that when you do your investment planning, you can also make several scenarios assuming your target returns can be as low as four percent and as high as 12 percent so you can estimate how much more or less savings you need to contribute to your fund.

5| Determine your capacity to invest to improve your returns

Throughout your investment journey, there will always be opportunities for you to save more from higher income. You don’t have to stick to your monthly or annual investment contribution.

If you can invest more, the better for you because this will help you cut down the number of years to achieve your investment goal, or increase the amount of the fund you originally projected for your retirement.

Creating an investment fund for retirement may not be easy if you don’t have the skills to do it. It will be helpful if you can also consult an expert or a Registered Financial Planner (RFP®) to assist you in developing your investment plan.

In this way, you will be guided and learn from it at the same time. Avoid the temptation to outsource the job to other people like a financial consultant or fund manager.

Always make an effort to learn and understand the process in order to build your confidence in decision-making.

Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice [email protected] or follow him on Twitter @henryong888

How to invest for retirement (the smart and stress-free way)

Many people make the mistake of building their retirement funds by simply saving money in the bank.

Putting your money in a savings account that earns less than one percent per year will not help you to retire early. You would still probably be working at the time when you should have already retired.

In order to grow your savings, you need to invest regularly. When you invest, your savings will grow faster because the returns that you will get from your investments will accumulate over time.

But building an investment portfolio for the long term can be challenging because it requires you to carefully tailor fit your strategy to your risk appetite and life goals.

Your strategy to achieve your goals must align with your retirement timetable. You cannot afford to delay your plan to start investing because time is gold as they say.

Every day that goes by can be another wasted opportunity to put your money to work.

Planning your investment strategy early in the game is one sure way to achieve early retirement in the future.

Here are the five ways you can build your retirement investment funds in the Philippines. This also helps you answer the question of how to build your retirement funds?

1| Determine the amount of money you need to retire

When you decide to retire someday in the future, it means that you stop working to earn a living. You must have saved enough money to sustain your living expenses until you die, without the need to work.

How much money do you need to achieve in order for you to retire comfortably?

Try to look at your current personal expenses. Most probably there are expenses you will no longer need to spend when you retire someday but certainly there are essential expenses you need to keep you healthy and happy.

You need to estimate these expenses on a monthly basis because this is the amount of income that your retirement fund will need to generate passively in the future.

2| Determine the amount of money you need to invest regularly

Let’s say you have figured out that you will need around P20 million to support your financial needs when you retire beginning at 65 years old.

Given this amount as your retirement fund, you need to know how much you need to invest now, on a monthly basis, in order to achieve your goal.

Your monthly investment will depend on your time horizon and target returns. The younger you are, the lower the amount you need to invest and the higher the chances that you can achieve your goal.

For example, if you are 25 years old now, you will have 40 years to build your retirement fund. At target returns of eight percent per year, the annual investment you need to contribute in order to achieve P20 million goal by 65 years old is P77,203, which translates to monthly savings of just P6,433.

If you are older at 35 years old, you will need more money to invest to achieve the P20 million goal. You will roughly double your budget because your time horizon is shorter.

Your challenge will be to look for returns higher than eight percent to keep your investment low. Perhaps you may have to look for more aggressive, riskier investments to get higher returns.

3| Determine your investment allocation to achieve best returns

Once you have settled with your investment plan, the next item you need to decide is the asset allocation.

How much should you invest in stocks? Stocks are riskier investments but earn far more than fixed income or cash historically.

One way to determine your exposure to stocks objectively is to use the formula 120 minus your age. If you are 25 years old, your stocks exposure can be as much as 95 percent, but if you are 55 years old, your exposure should not be more than 65 percent.

As you get older, it is advisable that you invest less in stocks and focus more on less risky investments such as fixed income.

4| Determine your risk preference by diversifying your assets

When you invest in stocks, you can manage your risks by diversifying your investments in different types of stock such as blue chips, and small caps.

If you are looking for stability, choose blue chip stocks with predictable earnings and less volatility. Stocks such as PLDT, Meralco, Ayala Land and SM Prime have compounded annual returns of not less than 10 percent in the past five years.

These stocks can be your core holdings because they provide secured growth that will last, not to the mention the annual cash dividends that they give which help lower your investment costs over the years.

On top of your core holdings, you can consider other stocks that have historically high returns.

Stocks such as Megaworld, Bank of Philippine Islands and Metrobank have annual compounded returns of 25 percent for the last five years while Universal Robina, Aboitiz Equity Ventures, ICTSI and Jollibee have historical annual returns of at least 40 percent per year.

The stock market has compounded annual returns of 15 percent per year for the past years.

It is possible that when you do your investment planning, you can also make several scenarios assuming your target returns can be as low as four percent and as high as 12 percent so you can estimate how much more or less savings you need to contribute to your fund.

5| Determine your capacity to invest to improve your returns

Throughout your investment journey, there will always be opportunities for you to save more from higher income. You don’t have to stick to your monthly or annual investment contribution.

If you can invest more, the better for you because this will help you cut down the number of years to achieve your investment goal, or increase the amount of the fund you originally projected for your retirement.

Creating an investment fund for retirement may not be easy if you don’t have the skills to do it. It will be helpful if you can also consult an expert or a Registered Financial Planner (RFP®) to assist you in developing your investment plan.

In this way, you will be guided and learn from it at the same time. Avoid the temptation to outsource the job to other people like a financial consultant or fund manager.

Always make an effort to learn and understand the process in order to build your confidence in decision-making.

Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice [email protected] or follow him on Twitter @henryong888

When it comes to saving for retirement, we feel that there are two types of people: those who have planned to a tee and those who paid a little less attention to saving. If you’re reading this article, chances are that you’re part of the latter.

You might have spent the better part of your life thinking that you had a long way to go before the issue of retirement came up. While you may be a long way away from actually retiring (unfortunately), it is definitely never too early to be thinking about saving for retirement.

You’ve already taken the first step by seeking out and reading this article. Now, we need you to decide what exactly your retirement goals are. Some people might feel that by the time they’re retired, their house will be paid off when their children are grown. They might then decide to live a relatively quiet life with just basic necessities.

However, you, on the other hand, might be on the other side of the fence. To you, retirement might be a time to finally make all those dreams of travel and luxury come true. Alternatively, you might just want to have extra savings in case of a rainy day.

Whatever the case, we know it can be stressful and tedious to save for retirement so we’ve done the work and broken it down for you. Here’s how you can save for retirement in the smartest way possible.

1) Take Advantage Of Employer-matched Retirement Plans

Most big companies offer employer-matched retirement plans. These plans are easy to get on since you simply specify the amount you wish to put away and the funds are automatically deducted each month. This means that you don’t ever actually see the money in your account.

If you’re someone who struggles with managing your finances, this is one of the best things for you. Additionally, many of these plans require your employer to match the amount you put in. This means that you’re essentially receiving free money!

Depending on your company, you might have the option of a traditional 401(k) or a Roth 401(k) plan. If you find yourself within a company that offers both, which one you choose depends on which plan you think benefits you the most.

While both plans share several similarities, the most prominent difference between a traditional 401(k) and the Roth 401(k) plan are that the former’s contributions are made before tax.

What this essentially means is that your taxable income is lowered. However, with the Roth 401(k) your access to your funds is more flexible.

Essentially, it boils down to what works best for you at this point in time. You might find yourself more comfortable with the flexibility of the Roth 401(k) plan. On the other hand, you might enjoy the idea that your taxable income is less on a traditional 401(k) plan.

Whichever option you find yourself leaning towards, both are good ways to take advantage of employer-matched retirement plans.

How to invest for retirement (the smart and stress-free way)

2) Realise The Power Of Compound Interest

If you’re not the kind of person who finds himself/herself as being concerned with the likes of a retirement fund, then you probably only have a vague recollection of the concept of compound interest back from when you were in high school.

Fret not, we are here to help refresh and explore that memory of yours! If you’re already investing in a 401(k) plan or are on an employer’s plan, you’re basically taking advantage of the power of tax-deferred compound interest.

To elaborate, you’re essentially allowing your money to grow faster as money, that might have been otherwise taxed, is reinvested. With a larger sum being put in monthly, your overall sum becomes larger and the compounded interest you earn grows by default.

3) Make Smart Investments When Saving For Retirement

Investments are an extremely smart way to start saving for your retirement. Once again, depending on your retirement goals, what you choose to invest your funds in is going to vary.

There are a few places that you could choose to invest your money. The most common one being interest and dividends from savings. Alternatively, you could rely on interest from dividend-paying stocks and bonds.

Another one of the smartest ways to save for retirement through investments would be through the appreciation of value from real estate. If you’re fortunate enough to own property, you could also rely on the direct income from renting out.

Always, remember that whatever income you make from renting out a property you own should go directly towards your nest egg!

Additionally, in this day and age of technology, we are exposed to so many more options than during our parents’ time. Thus, you might want to consider the idea of investing in cryptocurrency. In fact, a single bitcoin currently goes for over 11,000 USD.

You might be surprised (or not) to learn that there exists a wide variety of cryptocurrency, many of which are far more affordable and accessible. Just be sure to do your research and stick with one that follows the US dollar as these tend to be more stable in the long run.

Conclusion

There you have it, our 3 favourite tips on saving for retirement the smart way. When it comes down to it, it’s all about taking advantage of the plans you have around you and the various options you’re presented with.

As we’ve mentioned, some of the options we have today are something our parents never dreamed of, cryptocurrency being one of them. Therefore, the least we can do is to take advantage of them!

Saving for retirement doesn’t have to be particularly difficult. More often than not, all one has to do is be smart about it. So seize and ride opportunities handed to you by your employer and don’t forget to figure out which plans work for you personally. Don’t also forget to consider the pros and cons before jumping on any bandwagon!

If you have any tips that you have found beneficial to you, please feel free to drop them in the comment section below. We would love to hear from you. Frankly, you can never have too many options when it comes to saving for retirement the smart way.

Though it’s synonymous with retirement savings, the 401(k) plan is the best way to start investing, whether you’re in your 20s or your 40s.

A whopping $6.2 trillion was held in 401(k) plans by March 2020, accounting for nearly one-fifth of all retirement assets in the US, according to the Investment Company Institute.

401(k)s make investing simple by directing part of your salary into an investment account and paring down investment options.

How to invest in a 401(k)

1. Find out if you’ve been automatically enrolled

Many companies have an auto-enrollment feature in their 401(k) plans. Unless an employee opts out or changes their deferral rate, a predetermined portion of their pretax paycheck will be contributed to their 401(k). The default contribution rate varies depending on the company’s plan specifics, but typically ranges from 2% to 5%.

To find out if you’re enrolled in your company 401(k), check your pay stub or contact your human resources team.

2. If not, enroll now

If you’re not already enrolled, your human resources team can give you the instructions or forms you need to do so.

3. Find out if you have a company match

Ask your human resources team or check the 401(k) plan documents to find out if your company offers an employer contribution match and exactly how it is calculated.

An employer match is free money. To qualify to get the free money, you’ll need to defer some of your own salary into your 401(k). For example, an employer may promise to match 100% of its employees’ contribution, up to 3% of their salary. That means if an employee who earns $60,000 a year contributes 10% of their salary ($6,000), the employer will contribute $1,800 (3% of $60,000) for the year.

Minimally, many financial experts recommend contributing enough money to your 401(k) plan to qualify for your employer match before turning your attention to other tax-advantaged retirement accounts.

4. Understand your company’s vesting schedule

Any contributions you make to a 401(k) are yours to keep, though you won’t be able to access the money before age 59 and a half without incurring a penalty and/or paying income tax.

That said, any contributions your employer makes to your 401(k), including matches, may not be yours right away. Your 401(k) plan’s vesting schedule outlines exactly when your employer’s contributions will be yours. You can contact your human resources team to find out about your company’s vesting schedule.

Most 401(k) plans have either cliff vesting or graded vesting. A cliff means that contributions made by the employer won’t be the employee’s to keep until they’ve worked at the company for a specific period of time, usually two or three years. Graded vesting means that a specific percentage of the employer’s contribution vests each year the employee is at the company.

For example, your company’s 401(k) plan may have four-year graded vesting — after one year of service, 25% of their contribution is yours; after two years of service, 50% of their contribution is yours; after three years of service, 75% of their contribution is yours; and finally, after four years of service, 100% of any past and future contributions are yours to keep and invest in your 401(k).

If you leave the company before your vesting period is up, you’ll lose any portion of your employer’s contribution that isn’t already vested.

5. Choose your deferral rate

A lot of people get caught up deciding how much to contribute to their 401(k), but anything is better than nothing.

The good news is your deferral rate — the amount of your paycheck that’s deferred from income taxes — is not set in stone. Most plans will allow changes to the deferral rate (also called a contribution rate or savings rate), at any time, though it could take up to a month to go into effect.

In 2021, the IRS allows employees to contribute $19,500 to a 401(k), plus an extra $6,500 for folks over 50. To max out your 401(k) this year, you’d need to contribute about $812 every paycheck (assuming 24 bi-monthly paychecks over the course of the calendar year).

6. Choose a beneficiary

You’ll also need to name a beneficiary — the person who would inherit your 401(k) in the event of your death. It can be changed later if needed.

7. Browse investment offerings and pay attention to fees

The investment options in a 401(k) are carefully selected by the employer. Most 401(k) plans offer between eight and 12 investment options, which can be a mix of mutual funds, stock funds, bond funds, and even annuities.

There are two general types of fees you will see in your account:

  • Account management fee charged directly by the 401(k) plan provider
  • Fee charged by the mutual funds and ETFs in your 401(k) account (expense ratio)

If you’re investing in your 401(k), the account management fee is unavoidable. If your provider is charging a management fee above 1% of your account assets, you may consider directing your savings elsewhere, such as an IRA with lower fees. However, it could be worth contributing if your employer offers a match that is higher than the provider’s management fee.

Most mutual funds charge a management fee, too. This is listed on each investment fund as the expense ratio , or the fee rate as a percent of assets. Again, look for funds with an expense ratio below 1%, otherwise the fees could start eating into your returns.

8. Choose your investments

Aside from fees, there are two important factors to consider when choosing specific investments: your time horizon (how many years you have until retirement) and your risk tolerance (how much risk you can withstand).

If you have decades to invest before you need retirement income and are fairly risk tolerant, you may choose a fund with more stocks, as they’re considered riskier than bonds.

Some 401(k)s offer “all-in-one” target-date funds that automatically rebalance to fit into your time horizon. You may see them labeled as “Target” or “Retirement Fund,” plus a year. For example, a “Target 2040” fund is made up of a blend of investments that assumes retirement in the year 2040, so investments will need to be as conservative as possible by that time. You don’t have to choose a target-date fund that matches your actual retirement age.

9. Choose how much of your contributions should be invested in each fund

As you choose your specific investments, you’ll decide how much of your contributions will go toward each investment, usually expressed as a percentage.

If you only choose one fund, 100% of your money will be invested in that fund. If you create a portfolio with three different funds, you can decide what percentage of your contributions will go toward each fund.

10. Log on to your account through your plan provider’s website to periodically increase your contribution rate and manage investments

You can change your contribution rate and manage your investments by logging on to your account through your plan provider’s website (e.g. Vanguard, Fidelity, etc.).

Most experts suggest increasing your 401(k) contribution rate at least once a year, or each time you get a raise.

Good question. And though zillions of books have been written about this, the basics are hardly rocket science.

There are three main kinds of investments, or “asset classes”: stocks, bonds and cash. Your retirement accounts should probably contain a mix of stocks and bonds – and maybe cash too.

You can invest in stocks and bonds in one of two ways: by buying them individually or by buying them via a mutual fund. A mutual fund is simply a collection of stocks, or bonds, or cash equivalents – or sometimes a mix of all three.

Some people also invest in “hard assets” like real estate or gold, but those aren’t always great choices for the average person’s retirement account.

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How to invest for retirement (the smart and stress-free way)

People have long been conflicted about annuities. On the one hand, they like the guaranteed lifetime income that only these insurance products can provide retirees. In fact, a recent survey of people 55 and older found that 73% considered guaranteed income a highly valuable addition to Social Security.

But they don’t like having to give up access to their savings: 75% of working-age investors polled last year for the Wells Fargo/Gallup Investor Optimism and Retirement Index said they want the freedom to spend their retirement savings however they choose, even if it means possibly running out of money too soon.

Fortunately, there’s an easy way to resolve this conflict — compromise.

In this case, give up control of a modest portion of your nest egg, say, 20% to 30%, and invest it in an annuity to receive steady income you can’t outlive.

Then invest the rest of your savings in a traditional portfolio of stock and bond funds that can generate long-term growth to hedge against inflation and act as a ready stash you can tap to pay expenses beyond what Social Security and your annuity will cover.

There are a number of different types of annuities you could use to pull off such a strategy. But if you want to keep things relatively simple and hold down costs, there are two that are especially worth considering:

Immediate Annuities

The first is a plain-vanilla, no-bells-and-whistles immediate annuity. In the world of annuities, this is about as simple and straightforward as it gets.

In return for a one-time sum you hand over to an insurance company, the annuity provider agrees to pay you a specific amount each month. The payments start right after you buy the annuity and continue the rest of your life, whether you live to 85 or 105.

So, for example, 65-year-old man who invests $100,000 in an immediate annuity today would receive about $545 a month for life, while a 65-year-old woman would get about $520 a month (the lesser amount for the woman in this case reflects the statistical probability that she is likely to live longer than a typical man).

That money, combined with your Social Security benefits and any pension payments would represent guaranteed income you could count on throughout retirement, no matter how long you live.

Longevity Annuities

The second type of annuity that works well in such an arrangement is a deferred annuity, a.k.a. a longevity annuity.

Where do they come into play? Let’s say that between Social Security and withdrawals from savings, you figure you’ll have enough money to cover your retirement expenses. But you fear that late in retirement, you may have to rely solely on Social Security if you spend through your nest egg more quickly than expected.

To avoid such a scenario, you could buy a longevity annuity that wouldn’t begin making payments until you reach a specific age, say, 75, 80 or even 85.

Since the payments won’t start until many years in the future, you can get a sizable future payment with a much smaller investment than you’d have to make with an immediate annuity, which means you give up access to less of your savings.

For example, a 65-year-old man who invests $30,000 in a longevity annuity today could begin collecting payments of $1,030 a month at age 85. A woman the same age would receive about $855 a month starting at age 85. (You can get quotes for both immediate and longevity annuities for different ages and amounts invested by going to this annuity payment calculator.)

In both cases, the basic premise and appeal are the same: By investing a modest portion of your savings in an annuity, you get the benefit of additional guaranteed income you can’t outlive, while still having the ability to invest the rest of your stash and draw on it as needed.

When Annuities Don’t Make Sense

Of course, not everyone needs or should own an annuity. For example, it would make little sense to buy one if you have serious health problems that could seriously curtail your life span, as you could end up forking over a considerable sum for relatively few payments (or possibly none at all in the case of a longevity annuity).

That said, if you have a spouse or significant other, you may still want to consider a joint-life payment option, which makes payments as long as either member of a couple remains alive.

Similarly, buying an annuity for extra guaranteed income may not make sense if Social Security and any pensions will already cover most or all of your essential retirement living expenses. And even if that’s not the case, you still may want to forgo an annuity if your nest egg is large enough that your chances of running through it during your lifetime are small. (You can estimate how long your savings might last given different withdrawal rates by going to this retirement income calculator.)

If you decide this “compromise” approach might be right for you, you’ll still want to do a little more legwork before committing to it.

For example, since payouts can vary by 5% to 10% from insurer to insurer, you’ll want to shop around to make sure you’re getting a competitive payment. And you’ll want to consider moves like investing your money gradually rather than all at once and spreading your annuity investment dollars among several highly rated insurers.

For more on these and other tips, check out this column.

You’ve worked so hard to save, and now you’re finally retired. With the right strategy, you can help make sure your retirement savings last.

1. Calculate the approximate amount you’ll need each year

Start by calculating your expenses and your expected income from other sources. The difference between these amounts is what you’ll need to cover with your retirement savings.

2. Determine whether you can safely withdraw this amount

You’ll want to make sure your savings can safely sustain your spending over the next few decades. See what your chances are of making your portfolio last, given your personal asset mix and time frame.

Good to know!

Wondering how to invest now that you’re retired? The answer’s pretty easy.

For most people, your investing approach in retirement should be the same as it was all along—to determine an appropriate asset mix and then stick with it.

That means you need a balanced portfolio of stocks, bonds, and cash investments that:

  • Is appropriate for your timeline (usually 30 to 40 years).
  • Meets your tolerance for risk .

This approach will generally give you the mix of growth and income that you need in order to meet your spending needs and sustain your portfolio over the long run.

3. Decide which accounts to withdraw from first

By the time you retire, you’ll likely have multiple accounts to withdraw from—along with sources of income like RMDs and fund distributions. Here’s a tax-efficient way to use your money.

Get help from a personal advisor

Spending your savings can be a lot more complicated than building them up. And withdrawing assets in the most tax-efficient way can consume time and energy you’d rather spend on other things. A personal advisor can make things easier for you.

Get more from Vanguard. Call 800-523-9447 to speak with an investment professional.

We’re here to help

Talk with one of our investment specialists.

By Tom Feigs on August 20, 2018

By Tom Feigs on August 20, 2018

Step 1: Separate lifetime sources of income from investing sources of income

How to invest for retirement (the smart and stress-free way)

Q: I am writing in the hopes of getting some good financial advice on how to best invest my RRIF and also on the tax implications of drawing money out.

I am turning 71 this year and have to convert my $443,000 RRSP into a Registered Retirement Income Fund (RRIF). My husband just turned 62. When I retired five years ago I paid for some financial education and investment advice. I moved all our investments from a broker to a self-directed online investing account. However, I have become very apprehensive about a big market correction and I have been sitting in just money market funds for some time. I seem to need some help getting back into the market. I would like a simple couch potato portfolio that makes at least 4% with some stop loss so if the markets drop 10%, I can sell and get out.

I also have trouble understanding the real costs of various scenarios and tax implications. My husband is on a disability pension that will end when he turns 65. He only has $70,000 in his RRSP and will probably only get $100 per month in CPP.

We look poor on paper right now so I have been getting Guaranteed Income Supplement (GIS). We have been living on his disability and my government pensions. We live in Richmond, B.C. and own our townhouse. We each have $57,000 in TFSA accounts.

A: As we move through our stages in life, we adjust our values, reinvent our priorities and develop different skills. The same goes for our Financial Wellness stages. The biggest financial transition comes along when wealth generation peaks and working life ends. Understandably, Alexis is struggling with some aspects of her transition as it is also complicated by her age gap with her husband and her husband’s disability.

Alexis faces investing decisions year by year. This feels daunting as there is no recourse to go back to work if something goes wrong. A good approach is to separate lifetime sources of income from investing sources of income.

Source of Income Lifetime From Investing Assets Before Age 65 After Age 65 % of Total Income
Disability Pension N N Y N
Husband CPP Y N N Y Approx 45%
Alexis CPP Y N N Y
Husband OAS Y N N Y
Alexis OAS Y N N Y
Alexis RRSP N Y N Y Approx 55%
Alexis TFSA N Y N Y
Husband RRSP N Y N Y
Husband TFSA N Y N Y

This is an example income exercise that approximates Alexis’ situation. It helps to see the lifetime income foundation you have before looking to the investing assets for added income.

The next exercise is to map out your spending desires. What does your essential/basic spending amount to? Do you have a purchase coming up such as a car? What are your discretionary/flexible spending desires? This should generate a picture of how your income sources match with your desired spending pattern.

Essential Spending One-off Spending Discretionary Spending
$ $ $

Purchasing a life annuity is a good way to top-up your lifetime income to match your level of essential spending. Let’s say Alexis finds her essential spending to be 60% and the rest 40%. She could take a lump sum amount from her RRIF to formulate more lifetime income thereby closing this gap (up from 45%).

Now we have investment management positioned to be mostly associated with discretionary spending. An investment portfolio with a goal of 4% annual rate of return would have just under 50% equity (the volatile part). The rest would be low volatile income from bonds, money market, and interest-bearing securities. Alexis has now built up her low-volatile income to 80%. Her apprehension about a big market correction has an impact on the other 20% only.

Trying to time the next market correction is usually futile. Even if you get out at the market peak by a stroke of luck you then must time the market bottom to buy back in. It’s best for Alexis to go back to a balanced portfolio and ride out the ups and downs. Regularly re-balance your asset mix once a year.

Withdrawals from RRSP/RRIF accounts are fully taxable income. The best way to manage this is to spread the withdrawals over the largest number of years at the smallest amount each year.

Alexis has a one-time opportunity to set her RRIF minimum withdrawal rate on her own age or her younger spouse’s age. I suggest she elect to have her husband’s age determine her minimum RRIF withdrawal rate. That would reduce the rate from 5.28% to 3.57%.

Income and spending during retirement require year by year modeling to the end of life. There are no amount of courses that can replace an engagement with a certified financial planner to put together a clear, comfortable retirement income outlook. I recommend that Alexis do this.

On a separate note: Alexis’s husband’s CPP disability pension was calculated based on his income earnings before becoming disabled plus a flat-rate amount. Your husband’s CPP disability benefit will indeed end at age 65 and then converts to his CPP retirement benefit. You can calculate this age 65 benefit.

Let’s run the numbers. Subtract the flat-rate portion ($485.20 in 2018) from your husband’s CPP disability benefit and divide the result by 75%. Example: A person receives $800 per month CPP disability benefit and is about to reach age 65.

($800 – $485.20) / 75% = $419.73 per month or $5,036.80 per year.

Tom Feigs is a fee-for-service financial planner, money coach and retirement planning expert based in Calgary, Alberta.