Planning For Prosperity: Strategies For Late-Stage Retirement Investing

If you're two years away from retirement, it's time to take stock of your finances and make some key decisions that will impact the rest of your life. The first step is to create a detailed monthly budget for your retirement and determine if you can afford to withdraw from your savings without incurring tax penalties. It's crucial to understand Medicare and Social Security, and decide when to claim these benefits. Review your investment portfolio and make adjustments to ensure it provides enough income during retirement. Consider refinancing your mortgage, and plan how you'll spend your time during retirement to maintain a sense of purpose. Additionally, consult a financial planner for advice on tax-efficient strategies and long-term care insurance.

Understand the different types of investments

When it comes to different types of investments for retirement, there are quite a few options to choose from. Here are some of the most common types of investments to consider for your retirement plan:

Retirement Savings Accounts

Retirement savings accounts are a popular way to save for retirement. The two most common types are 401(k)s and Individual Retirement Accounts (IRAs). With a 401(k), you choose how much you save each month, and your employer may also match your contributions. On the other hand, an IRA is an account where you can invest money in various assets, such as stocks or bonds, and there is usually no limit to how much you can contribute. One of the advantages of retirement savings accounts is that they often offer tax breaks, allowing your savings to grow faster. However, there may be penalties if you withdraw funds before retirement age, typically 59.

Stocks

Stocks, also known as shares or equities, are a well-known and simple type of investment. When you buy stock, you're purchasing a piece of ownership in a publicly-traded company. Many large companies are publicly traded, allowing you to buy their stock. Some examples include Exxon, Apple, and Microsoft. The potential upside of stocks is that their prices can increase over time, leading to capital gains. However, stock prices can also decrease, resulting in potential losses. Stocks offer the potential for high returns and provide diversification across different sectors. Nevertheless, they are generally considered volatile, with prices fluctuating over short periods.

Bonds

Bonds are a type of loan or fixed-income security. When you buy a bond, you lend money to a company or government entity, which agrees to pay you back the principal plus interest over a set period. Bonds are typically seen as less risky than stocks, providing more stability. However, they usually offer lower returns compared to stocks. Government bonds, such as Treasury bonds, notes, and bills, are considered very safe investments.

Mutual Funds

Mutual funds are investment vehicles where money from multiple investors is pooled and invested in a diverse range of securities, such as stocks, bonds, commodities, currencies, and derivatives. Mutual funds can be actively managed by fund managers who aim to outperform the market, or passively managed, known as index funds, which simply track a stock market index. Mutual funds offer diversification benefits and carry similar risks to stocks and bonds, although the risk may be lower due to inherent diversification.

Exchange-Traded Funds (ETFs)

ETFs are similar to mutual funds in that they also pool money from multiple investors and track a market index. However, ETFs are traded on stock exchanges, allowing you to buy and sell shares throughout the trading day. ETFs provide diversification and are often recommended for new investors. They offer lower share prices compared to mutual funds, making them more accessible for investors with limited funds.

Real Estate

Real estate is another popular investment option for retirement. It involves investing in property, such as apartment buildings, office complexes, or rental houses, or investing in Real Estate Investment Trusts (REITs), which are funds that own real estate. Real estate offers the potential for high returns through property value appreciation and cash flow from rent payments. It also provides diversification benefits and potential tax breaks. However, real estate is an illiquid asset, making it challenging to sell quickly, and it often requires ongoing maintenance and insurance costs.

It's important to remember that the right investment strategy depends on your unique circumstances, including your age, risk tolerance, time horizon, and financial situation. Diversification is key to managing risk and maximizing returns. Consider seeking advice from a financial advisor or utilizing tools like VectorVest to make informed investment decisions.

Plan for healthcare costs

Planning for healthcare costs is an essential aspect of retirement, as health care is expected to be one of the largest expenses for retirees, and it is important to understand the potential costs and options for coverage. Here are some key considerations and steps to help you plan for healthcare costs effectively:

• Understand the potential costs of healthcare in retirement: Healthcare costs can be significant, and it is important to have a realistic understanding of the potential expenses. According to the Fidelity Retiree Health Care Cost Estimate, a retired couple aged 65 in 2023 could face approximately $315,000 in long-term medical expenses, excluding long-term care, over-the-counter medications, and dental services.
• Know what Medicare covers and its costs: Medicare, the federal health insurance program for people aged 65 or older, has different parts that cover specific aspects of healthcare. Original Medicare (Parts A and B) covers hospital stays and medical services but does not include vision, hearing, dental care, prescription drugs, or medical care outside the US. You can add a drug plan (Part D) and a Medicare Supplement Insurance Policy (Medigap) to help cover out-of-pocket costs. There are also Medicare Advantage plans (Part C) offered by private insurers, which bundle coverage but often restrict you to a limited network of providers.
• Consider the gap between retirement and Medicare eligibility: If you retire before the age of 65, you will need to plan for healthcare coverage until you become eligible for Medicare. Options include joining your partner's plan if they are still working, sticking with your employer's insurance plan under COBRA for up to 18 months, purchasing health insurance directly, or buying a high-deductible health plan that qualifies you for a Health Savings Account (HSA).
• Plan for long-term care needs: Long-term care is not covered by Medicare, and the costs can be significant. Consider purchasing long-term care insurance, which can provide a monthly benefit towards long-term care for a specified period or your lifetime. Alternatively, look into hybrid life insurance/long-term care policies or adding a long-term care rider to your life insurance policy.
• Utilize Health Savings Accounts (HSAs): HSAs offer tax advantages for saving for healthcare costs. They are available with high-deductible health plans, and you can use them to pay for certain medical premiums, including Medicare premiums and long-term care insurance premiums. If you are over 50, you can maximize your HSA by taking advantage of catch-up contributions and employer contributions.
• Increase contributions to tax-advantaged accounts: Consider increasing contributions to tax-advantaged accounts, especially HSAs, to help fill the gap in saving for healthcare expenses. HSAs offer tax-free spending on qualified medical expenses in retirement.
• Consult a financial advisor: A financial advisor can help you estimate healthcare costs in retirement and develop a tailored strategy to save for those costs. They can guide you in adjusting your financial plan, including recommending a one-time lump-sum investment or increased regular contributions to cover healthcare expenses.

Planning for healthcare costs in retirement is crucial, as it can help you avoid outliving your savings and ensure you have the necessary coverage. By understanding the potential costs, knowing your coverage options, and utilizing the right tools and advice, you can effectively navigate the financial aspects of healthcare in your retirement years.

Create a retirement budget

Creating a retirement budget is an important step in planning for your retirement. It will help you to understand how much money you will have to spend each month and ensure that you don't run out of savings. Here are the steps to creating a retirement budget:

Add up your income streams

Make a list of all your sources of income during retirement. This might include tax-advantaged retirement accounts (e.g. 401(k), 403(b) or Roth IRA), social security benefits, pensions, part-time earnings, taxable investments, real estate income, and annuities. Calculate the total income from these sources and divide it by the number of years you plan to be retired. This will give you a rough estimate of your annual income, which you can then break down into monthly income.

Plan your distributions carefully

Your retirement accounts will likely be your biggest source of income. Work with an investment professional to plan when, how, and from which accounts you will take distributions. Make sure you are aware of any required minimum distributions (RMDs) that may apply to your traditional retirement accounts.

Have a plan for healthcare expenses

As you age, healthcare costs are likely to increase. Meet with an insurance professional to review your health insurance coverage, long-term care insurance, and Medicare benefits. Make sure you understand how much you will need to budget for healthcare expenses.

Create a zero-based monthly budget

A zero-based budget ensures that you plan for every dollar of your income. First, write down your monthly income. Then, list your monthly expenses, including both essential and non-essential expenses. Essential expenses are those that are necessary for living, such as rent, mortgage, loans, household bills, and groceries. Non-essential expenses include things like subscription services, hobbies, and gifts.

Start your sinking funds

In addition to your regular expenses, you should also plan for larger, less frequent expenses. Set up sinking funds to save for things like vacations, holidays, and new vehicles.

Manage your spending

Once you have created your budget, the final step is to stick to it! Find an accountability partner, such as a spouse or friend, to help you stay on track with your spending. Remember that you are in control of your budget and can make adjustments as needed to ensure you are living the retirement you want.

Learn about Social Security benefits

Social Security is a crucial aspect of retirement planning, providing a guaranteed source of income for retirees, disabled individuals, and their families. Here's a comprehensive guide to help you learn about Social Security benefits:

Understanding Social Security:

Social Security is a government program that collects taxes from working Americans and redistributes these funds to qualifying retirees, disabled workers, and their families. It serves as a financial safety net, ensuring that individuals and families can meet their material needs.

Eligibility and Credits:

To be eligible for monthly Social Security benefits, individuals typically need to earn 40 credits throughout their working lives. A credit is defined as a certain amount of earned income, with the specific amount adjusted annually. For example, in 2023, a credit was equivalent to $1,640 of earned income, while in 2024, it increased to $1,730. Individuals can earn up to four credits per year.

Types of Social Security Benefits:

There are three primary types of Social Security benefits:

• Retirement Benefits: These are available to workers aged 62 and older who have earned at least 40 credits. The benefit amount depends on your average indexed monthly earnings (AIME) over your 35 highest-earning years and the age at which you start claiming benefits. Claiming before reaching full retirement age will result in reduced benefit checks.
• Disability Benefits: These are available to adults aged 18 or older who are unable to work due to physical or mental disabilities expected to last at least 12 months or result in death. The benefit amount is determined by your average lifetime earnings.
• Survivor Benefits: These benefits are provided to the family members of deceased workers who qualified for Social Security. The amount depends on the deceased worker's average income, adjusted for inflation, and their relationship to the deceased. Surviving spouses aged 60 or older (50 or older if disabled) and children under 18 (or up to 19 if still in high school) are typically eligible.

Timing of Benefits:

The timing of claiming Social Security benefits is essential. If you start receiving benefits before reaching your full retirement age, your benefit amount will be reduced. For those born between 1943 and 1954, the full retirement age is 66. For individuals born between 1955 and 1959, it increases by two months each year. If you were born in 1960 or later, your full retirement age is 67.

Impact of Income:

It's important to note that if you claim Social Security benefits before reaching your full retirement age and have a high income, you may be subject to the Social Security Earnings Test. This means that a portion of your benefits could be withheld based on your earnings. Once you reach your full retirement age, the government will recalculate your benefit to include any withheld amounts.

Family Benefits:

Certain family members can claim benefits based on your work record if it results in a higher benefit amount than they would receive on their own. Eligible family members include ex-spouses (if the marriage lasted at least 10 years), children under 18 (or up to 19 if still in high school), and children of any age who were disabled before turning 22.

Application Process:

To apply for Social Security benefits, you must fill out an application online or at your local Social Security Administration office. A government representative will verify the information and determine your eligibility. If approved, you will start receiving monthly benefit checks.

Additional Considerations:

Remember that Social Security benefits are subject to taxes. If you have substantial income in addition to your benefits, a portion of your Social Security payments may be taxable. Additionally, Social Security benefits can be impacted by other sources of retirement income, such as pensions or investments. It's essential to consider these factors when planning your retirement finances.

Decide how to spend your time

With retirement just around the corner, it's important to plan how you will spend your time. Here are some ideas to help you decide:

Socialising and Community Activities

Retirement is a great opportunity to deepen your social connections and meet new people. You could join clubs or groups centred around your interests, such as books, films, walking, gardening, or quilting. Alternatively, you could join sports teams or take part in activities such as bowling, golf, or water aerobics. Socialising and staying connected with others is not only enjoyable, but it also has positive effects on your health.

Hobbies and Personal Interests

Retirement gives you the freedom to pursue your passions and try new things. You could take up baking, cake decorating, painting, photography, or even learn to play a musical instrument. Hobbies are a great way to stay engaged and interested, and they can also provide an opportunity for social interaction.

Travel and Exploration

With more time on your hands, retirement is the perfect time to explore new places and satisfy your wanderlust. You could take extended holidays, go on cruises, or visit local attractions in your area. Travel can provide a sense of adventure and allow you to create new memories and experiences.

Volunteering and Giving Back

Retirement gives you the chance to contribute to your community and causes that are important to you. You could volunteer at organisations such as Meals on Wheels, teach English to immigrants, become a Scout leader, or work with Habitat for Humanity. Volunteering provides a sense of purpose and can help you stay connected with others.

Relaxation and Leisure

Retirement is a time when you can finally slow down and relax. You can take your time with daily activities, such as lingering over meals or shopping. You can also catch up on sleep, watch TV, or simply do nothing at all. It's important to allow yourself some downtime and enjoy the freedom that retirement brings.

Learning and Self-Improvement

Retirement provides an opportunity to focus on self-improvement and learning new things. You could take up a new language, develop your cooking skills, or explore different types of cuisine. You might also consider taking classes or workshops to learn about art, photography, or other creative pursuits.

Health and Well-being

Staying active and prioritising your health is important at any age. Retirement gives you the chance to focus on your well-being by joining a gym, taking up yoga, or participating in low-impact activities such as swimming or tai chi. You can also take the time to schedule regular doctor's appointments and be proactive about your health.

Pets and Companionship

Adopting a pet can be a wonderful way to bring companionship and joy into your life during retirement. If you're an animal lover, consider heading to your local animal shelter and welcoming a new furry friend into your home.

Family and Relationships

Retirement provides an opportunity to reconnect with family and spend more time with loved ones. You can plan get-togethers, spend quality time with grandchildren, or reconnect with old friends. Strengthening family bonds and social connections can lead to a more fulfilling and meaningful retirement.

Remember, retirement is a time for you to pursue your interests and create a lifestyle that brings you happiness and fulfilment. These suggestions are just a starting point, and you can tailor your retirement journey to fit your unique passions and goals.

Frequently asked questions