Investing At 60: Strategies For Late-Start Retirement Planning

Investing for the first time in your 60s can be tricky, especially if you're close to retirement. It's important to remember that it's never too late to start investing, but it's crucial to be careful about how you do it. Here's a guide to help you make investment decisions at this stage of your life:

- Diversify your portfolio: It's recommended to have a portfolio with stocks, bonds, and other investments, and then further diversify within each category. This helps protect against losses and boosts performance.

- Know your risk tolerance: Generally, it's not advisable to invest in stocks if you need the money within seven years due to the volatility of the stock market. A rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio that should be in stocks.

- Consider low-risk investments: As a senior, you may want to focus on low-risk, low-return investments. Options such as high-yield savings accounts, certificates of deposit (CDs), treasury bills, notes, bonds, dividend-paying stocks, and money market accounts offer relatively low risk and can provide a steady income.

- Max out retirement contributions: If you haven't retired yet, make sure you're contributing enough to your retirement plans, such as a 401(k) or an Individual Retirement Account (IRA). Take advantage of catch-up contributions if you're over 50 years old.

- Plan for healthcare costs: Healthcare and long-term care can be significant expenses during retirement. Understand the coverage provided by Medicare, and consider additional insurance options to cover any gaps.

- Know your income sources: In addition to Social Security, consider other income sources such as pensions, part-time employment, or rental property income. You may also want to purchase an annuity to provide income protection throughout retirement.

- Pressure test your strategy: Prepare for unexpected events that could impact your retirement plans, such as living longer than expected or a market downturn. Consider creating an emergency fund or incorporating insurance into your strategy.

- Consolidate your retirement accounts: If you have multiple retirement accounts, consolidating them with one provider can make it easier to manage your investments and reduce fees.

- Reposition your assets: As retirement approaches, the purpose of your portfolio shifts from getting you to retirement to sustaining you through retirement. Consider a more balanced mix of equities and fixed income, focusing on investments that provide current income and stability.

Plan for health care costs

Planning for health care costs is an important part of investing at 60. Here are some detailed tips to help you plan for health care costs at this stage of your life:

Understand the Average Cost of Health Care

Knowing the average cost of health care as you age is crucial for planning. On average, the monthly cost of health care exceeds $1,000 by the time you turn 60. As you get older, you can expect to pay more for health care, as the need for medical care and treatments rises. This information can help you assess how much you need to budget for health care expenses.

Take Advantage of Workplace Wellness Programs

If you are still employed, consider taking advantage of any workplace wellness programs offered by your company. These programs can help reduce the cost of healthcare as you age and are a valuable benefit to utilize.

Choose the Right Health Care Plan

Selecting the most suitable health care plan is essential. Research and compare different plans to find one that offers the best coverage and cost structure for your needs. Consider factors such as monthly premiums, out-of-pocket expenses, and the specific benefits included in the plan.

Utilize Health Savings Accounts (HSAs)

HSAs offer tax advantages that can help reduce the financial burden of health care costs. These accounts allow for tax-free contributions, investment growth, and withdrawals for qualified health care expenses. HSAs can be used in conjunction with other retirement plans, such as a Roth 401(k), to cover medical costs effectively.

Plan for Long-Term Care

While you may think you will never need long-term care, government data suggests that around 70% of older adults will require it. Consider long-term care insurance and annuities to help fund these needs. Research these options carefully, as they may have downsides or restrictions.

Maintain a Healthy Lifestyle

Although not always possible, maintaining a healthy lifestyle can help reduce health care costs. Staying active, eating healthily, and managing stress can lower the risk of chronic conditions and reduce the frequency of doctor visits.

Remember, planning for health care costs at age 60 is a crucial aspect of your overall investment strategy and can help ensure a more comfortable retirement.

Calculate annual expenses

When calculating your annual expenses for retirement, it's important to consider your expected average costs per month. It can be easy to underestimate your expenses, so making a list of anticipated costs is a good place to start. You may also want to track your expenses for a few months to check that your estimates are accurate.

Your retirement budget will depend on when you plan to retire. For example, if you retire early, you may need a larger sum to carry you through your retirement years, and you won't receive the maximum Social Security benefits. If you retire later, you'll have fewer years with less income.

• How many years are left on your mortgage?
• Do you plan to move or downsize your primary residence?
• How will your health insurance premiums change after you retire?
• Have you factored in increased out-of-pocket medical costs that often accompany age?
• Do you have all the insurance you need, or should you budget for additional premiums, such as long-term care insurance?
• Will you spend more on travel or hobbies once you have more time for them?
• How much could inflation impact your cost of living?

Your expenses can be divided into three categories: essential (must-haves), discretionary (optional), and one-time (a remarkable but necessary occurrence).

Essential average monthly expenses in retirement typically include household, transportation, living expenses, family care, and medical/health costs. Discretionary expenses include entertainment, eating out, hobbies, subscriptions, travel, charitable donations, gifts, and gym memberships. These are more flexible and can be reduced or forgone if necessary.

One-time expenses refer to unexpected or irregular costs, such as a child's wedding, emergency home repairs, or the passing of a loved one. By planning ahead and factoring these into your budget, you can reduce the chance of financial strain.

Don't forget about taxes when formulating your retirement budget. You may need to factor in federal, state, and local income taxes, as well as property taxes if you own a home.

• Your expenses are likely to change over time, so you may need to adjust your retirement income plan accordingly.
• Build an emergency fund: It's generally recommended to have at least 3-6 months' worth of living expenses readily available in a savings account or liquid asset.
• If you're still working, aim to save a portion of your annual income for retirement. The recommended amount varies between 10% to 15% of your income.
• Take advantage of employer-matching contributions if you have access to them.
• If you're close to retirement, consider switching some investments from aggressive stocks or funds to more stable, low-earning funds like bonds and money markets.
• The IRS allows those approaching retirement to put more of their income into investment accounts. For 2024, workers aged 50 and older can contribute an additional $7,500 per year to a 401(k).
• If you have a defined-benefit pension plan, review your benefit statements to understand how your pension benefits are calculated.
• You can get a personalized estimate of your future monthly Social Security benefits using the Social Security Retirement Estimator if you've contributed for 10 years or more.
• Your Social Security benefits will vary depending on when you start collecting them. They are reduced if you take them early (from age 62) and increase if you delay receiving them until age 70.
• Remember to include taxes in your calculations. Withdrawals from traditional 401(k) plans or traditional IRAs are taxed at your ordinary income rate.

By carefully considering your expected expenses and utilizing the available tools and resources, you can make informed decisions about your retirement budget and investment strategies.

Plan your withdrawals

Planning your withdrawals is an important part of retirement. Here are some things to keep in mind when it comes to making withdrawals from your retirement savings:

• Know the rules: With most retirement plans, you can start making penalty-free withdrawals when you turn 59 1/2. However, if you need to access your funds earlier, you may incur an additional 10% early withdrawal tax penalty unless an exception applies. Additionally, traditional IRAs and 401(k)s have required minimum distributions (RMDs) that you must start taking at a certain age (currently 73 but will increase to 75 by 2033). Failing to meet these requirements can result in penalties.
• Consider the 4% rule: This rule suggests withdrawing 4% of your retirement savings in the first year of retirement and then adjusting for inflation in subsequent years. For example, if you have $1 million saved, you would withdraw $40,000 in the first year and $40,800 in the second year (a 2% increase for inflation). This approach is simple and provides a predictable income, but it may not account for rising interest rates or market volatility.
• Fixed-dollar withdrawals: This approach involves taking a fixed dollar amount from your retirement account each year, which can be helpful for budgeting. However, it may not protect against inflation, and you may need to liquidate more assets in a down market to meet your withdrawal needs.
• Fixed-percentage withdrawals: With this strategy, you withdraw a set percentage of your portfolio annually. This method can be beneficial if you want to ensure you don't deplete your portfolio, but it can result in inconsistent annual income.
• Systematic withdrawal plan: This approach only withdraws the income generated by the underlying investments in your portfolio, such as dividends or interest. Your principal remains intact, and your portfolio maintains its potential to grow. However, the amount of income you receive may vary, and there is a risk of being outpaced by inflation.
• Withdrawal "buckets" strategy: This strategy involves dividing your retirement savings into three buckets: short-term, intermediate-term, and long-term. The short-term bucket typically holds three to five years' worth of living expenses in cash or cash equivalents. The intermediate bucket focuses on fixed-income securities, while the long-term bucket contains equities and other investments for long-term growth.
• Tax considerations: Withdrawals from tax-deferred accounts like traditional IRAs and 401(k)s are taxed as ordinary income. In contrast, withdrawals from qualifying Roth accounts are generally not taxed since contributions are made with after-tax dollars. Working with a tax advisor can help minimise your tax burden.
• Regular review and adjustment: It's important to regularly review and adjust your withdrawal strategy to ensure it aligns with your long-term financial goals and changing market conditions. This may include adapting to life changes, market fluctuations, and adjustments to your spending habits.

Rebalance your portfolio

As you get older, you'll likely want to reduce the risk in your investment portfolio. The general rule is that younger people can afford to take on more risk, while older people should reduce it. However, this is not a one-size-fits-all approach, and other factors such as life expectancy, risk tolerance, and retirement plans should be considered.

The classic principle governing age and asset allocation is the "100 minus your age" rule, which suggests that the percentage of your portfolio in equities should equal 100 minus your age, with the remainder in bonds. For example, if you are 30, you would hold 70% in equities and 30% in bonds. However, with people living longer and changes in the investing world, some experts now recommend using 110 or 120 minus your age to determine stock allocation. This provides more growth potential but comes with higher risk.

As you approach retirement, it's important to assess your retirement readiness and understand your options. Review your savings and create a plan for taking distributions from your various accounts to meet your spending needs. Include your Social Security benefits in this plan and consider delaying retirement to allow your savings to continue growing.

When it comes to rebalancing your portfolio, the frequency depends on various factors such as market conditions, personal risk tolerance, and life changes. Common rebalancing strategies include time-based and threshold-based approaches, or a combination of both. Time-based rebalancing involves adjusting your portfolio at set intervals, such as quarterly, semi-annually, or annually. This strategy is simple and helps maintain discipline but may lead to unnecessary transactions if the portfolio hasn't drifted significantly. On the other hand, threshold-based rebalancing triggers adjustments when your asset allocation goes beyond a predetermined threshold, typically 5% or 10%. This strategy is more responsive to market movements but requires more frequent monitoring and may result in more transactions.

When rebalancing your portfolio, it's important to consider tax implications and transaction costs, especially in taxable accounts. Using new contributions to direct money to underweight asset classes, rebalancing in tax-advantaged accounts like IRAs, and using tax-loss harvesting strategies can help optimise your tax position.

In conclusion, remember that your rebalancing strategy should be tailored to your individual circumstances, risk tolerance, and financial goals. It's crucial to maintain your desired risk level and ensure your portfolio continues to support your retirement lifestyle and long-term objectives.

Consider other sources of income

Stocks and bonds are not the only investment choices in retirement. Two other possibilities are longevity insurance and annuities.

Longevity insurance starts payouts when you reach a specified age. For example, you might pay $50,000 for a policy at 60, and start receiving payouts of $15,000 or more annually at 80.

You've likely heard of annuities, which are financial contracts sold by insurance companies that promise to pay you regular income. Since there are several annuity types, look carefully before you leap.

If you're already hitting the maximum contribution limits for your 401(k) and IRA, there may be other products and strategies that will allow you to contribute additional amounts on a tax-deferred basis. You can also move extra savings to a taxable investment account, such as a brokerage account, which lets you buy and sell stocks, bonds, exchange-traded funds (ETFs), index funds, and other investments. While such an account doesn't offer tax benefits, it does offer much more flexibility than tax-advantaged accounts.

In addition to Social Security, consider other income sources such as pensions, part-time employment, or rental property income. Depending on your situation, it may also make sense to purchase an annuity with a lifetime income benefit to provide some income protection throughout your retirement.

Plan for health care

The cost of health care and long-term care is a significant worry for retirees. Medicare doesn't kick in until age 65 for most people, so you'll need a plan for health care before you're eligible. Once you are eligible, remember that there are a lot of expenses that Parts A and B don't cover, such as deductibles, copays, prescription drugs, and long-term care. There are additional insurance options you can consider to help pay for these costs, but you'll need to plan for them.

Pressure test your retirement strategy

While you can't predict the future, you can prepare for it by pressure-testing your retirement strategy for any unexpected events that could derail it. Living longer than expected, needing long-term care, or a market downturn in your early retirement years are just a few scenarios you should prepare for. There are different ways to protect your retirement, from creating an emergency fund to incorporating insurance into your strategy.

Frequently asked questions