A survey done by Fidelity Investments in 2014, as reported in USA Today, asked baby boomers to list their biggest retirement concerns.
The results of that survey showed that 84% of us are concerned about paying for health care costs, 79% of us wonder if Social Security will be reduced, 78% question whether Medicare will be reduced, 75% worry about paying for long-term care benefits, and finally, 68% of us wonder whether we will outlive our retirement savings. Clearly, there is real concern. Besides increasing your savings, here are a few tips from that USA Today article to make your retirement savings last.
- Plan for health care even if you are relatively healthy. There is a good chance that two out of five retirees will need some sort of long-term care that could potentially destroy your nest egg. Couples will probably need more than $200,000 for medical expenses over their lifetimes. To prepare for this, if a health savings account is offered at work, take it. It’s triple tax-free. It’s a pre-tax deduction, grows tax-free and is tax-free when withdrawn for medical expenses. The only caveat to an HSA is that to maximize its advantages, you need to have enough income while working to not take withdrawals from the HSA account until after you retire.
- Consider downsizing. A home sale will add to your savings and may reduce your living expenses.
- Consider life insurance. Life insurance may protect your nest egg. If you have even marginal assets or need to use assets in retirement, one way to ease your mind is to include life insurance in your plans. That way, when the first spouse dies, the surviving spouse gets a tax-free benefit. Life insurance is unique to each situation, but when appropriate, it’s a great planning tool.
- Consider the possibility of not waiting until age 70 ½ to begin withdrawing from a retirement account. Most of us wait in order to avoid taxes, but be aware of your current tax bracket and project what your tax bracket will be in future years. After age 59 ½ (at which time there is no longer a 10% penalty), it may be worthwhile to start withdrawals and pay taxes on that income or convert funds into a Roth IRA and pay taxes on the conversion. The money growth in a Roth is tax-free, all Roth withdrawals will be tax-free, and when you reach age 70 ½ there are no required minimum distributions of those funds.
- Have an emergency fund outside of your retirement account. You should have a rainy-day fund that will cover 90-180 days of living expenses as a safety net. Some wealth management companies suggest that several years of living expenses should be insulated from the market, but the emergency fund should not just be cash, which generates no return after taxes and inflation.
- Consider an annuity. Couples should expect that at least one of them will live into his/her 90’s. Most of us underestimate how long we will live in retirement. I’ve never been a big fan of annuities because of their costs and the risk of forfeiting a lot of your savings if you die too soon, but an annuity will provide a steady income stream to protect you against longevity.
- Finally, think about the tax impact of all investment decisions. Most of us want to live on interest from investments, but that’s not always the most tax-efficient way to draw income, because all interest income could be taxable. Look to re- arrange your investments to minimize your taxes.
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