Investing In Mutual Funds: A Wise Move At 63?

Investing in mutual funds at 63 years old is a complex decision that depends on various factors. While some individuals may choose to shift their focus from growth to income preservation, others may opt for a more balanced approach. It is generally recommended that investors nearing retirement age adopt a more conservative investment strategy by allocating more funds to bonds and less to stocks. However, it is essential to note that completely abandoning stocks may hinder the potential for portfolio growth. As such, individuals in their 60s should consider maintaining a balanced portfolio that includes stocks, mutual funds, and exchange-traded funds (ETFs) to safeguard their financial future.

Estimate how long your savings will last

Estimating how long your savings will last in retirement is a complex task with many variables at play, such as investment returns, inflation, and unforeseen expenses. However, a simple way to calculate this is to weigh your total savings and expected investment returns against your annual expenses.

There are a few strategies that can help you stretch your retirement savings further:

• The 4% Rule: Withdraw 4% of your savings in the first year, and then that dollar amount plus an inflation adjustment in each subsequent year. This rule is based on research that found investing at least 50% of your money in stocks and the rest in bonds would likely allow you to withdraw an inflation-adjusted 4% of your savings annually for 30 years or more.
• Dynamic Withdrawals: Adjust your withdrawal amount in response to investment returns. This means that the amount you can spend depends on the market's performance.
• Income Floor Strategy: Ensure your basic expenses are covered by guaranteed income sources, such as Social Security, and a bond ladder or annuity. This strategy helps control how long your money will last by preventing the need to sell stocks when the market is down.

Additionally, reducing fixed expenses, such as downsizing your home to lower mortgage, property tax, utility, and insurance costs, can also help make your savings last longer.

It is important to consult a financial advisor or planner to determine the most appropriate strategies for your specific circumstances and goals. They can provide professional advice and help you feel more secure about your financial future.

Calculate annual expenses

When considering investing in mutual funds, it is important to understand your financial situation, including your annual expenses. Here is a step-by-step guide to calculating your annual expenses:

Step 1: Gather Your Financial Statements

Collect all your financial documents, such as bills, mortgage statements, account statements, and receipts. These sources will help you understand your spending patterns and identify your largest expenses.

Step 2: Create a List of Monthly Expenses

Start by listing your fixed monthly expenses, which remain consistent each month. This includes rent or mortgage payments, car payments, insurance, and utilities. Then, consider variable monthly expenses, such as groceries, which can fluctuate but are still necessary. Finally, list your discretionary expenses, such as dining out or entertainment, where you have more control over the spending amount.

Step 3: Examine Your Expenses

Organize your expenses into categories to identify patterns in your spending. You can use online tools or spreadsheets to track your expenses and create an overview of your finances. Categorization can help you understand which expenses are essential and which can be reduced or eliminated.

Step 4: Calculate Monthly Expenses

Add up all your fixed monthly housing expenses, such as rent or mortgage, electricity, water, gas, phone, and cable. Use average estimates if some expenses vary from month to month.

Step 5: Include Transportation Costs

Calculate your monthly transportation costs, including car payments, insurance, and average gas expenditure. If you have other transportation expenses, such as public transportation fares or ride-sharing services, be sure to include those as well.

Step 6: Add Health Costs

Consider your health-related expenses, such as gym memberships, health insurance, doctor's copays, and medication costs. These costs can vary depending on your specific situation, but it's important to include them in your overall calculation.

Step 7: Estimate Food Costs

Estimate your monthly food expenses, including groceries, meals at restaurants, and other food and beverages purchased outside the home. This category can vary depending on your eating habits and the number of people in your household.

Step 8: Calculate Monthly Spending

Add up your spending on items such as clothing, electronics, books, and household goods. Also, include personal care items that are not covered under your grocery budget. Entertainment expenses, such as streaming services or leisure activities, should be considered here as well.

Step 9: Add Any Additional Monthly Expenses

Don't forget to include other monthly payments, such as student loans, credit card debt, or any other type of loan. If you are contributing to savings or investments, such as retirement funds or emergency funds, add those amounts as well. Other potential monthly expenses might include childcare costs, child support, alimony, or charitable donations.

Step 10: Calculate Annual Expenses

To find your baseline annual expenses, multiply your total estimated monthly expenses by 12. This will give you a rough estimate of your annual costs.

Step 11: Identify Less Frequent Expenses

Make a list of expenses that you incur less frequently than monthly. This might include car maintenance, property taxes, insurance payments made annually, vacations, gifts, or magazine subscriptions.

Step 12: Estimate Annual Costs for Less Frequent Expenses

For each category of less frequent expenses, estimate how much you spend in a year. For example, if you spend $120 per year on oil changes for your car, include that amount in your calculations.

Step 13: Add Annual Expenses to Baseline

Finally, add all your annual expenses to your baseline annual expenses calculated in Step 10. This will give you an estimated total of your annual living expenses.

Calculating your annual expenses is a crucial step in understanding your financial situation and planning for the future, especially when considering investments in mutual funds at 63 years old. It provides a comprehensive view of your spending and can help you make informed decisions about your retirement savings and investments.

Plan your withdrawals

Planning your withdrawals is an important part of retirement planning. Here are some things to keep in mind when it comes to making withdrawals from your investments as a 63-year-old:

• Understanding the rules around withdrawals: Different rules apply at different ages when it comes to withdrawing from retirement plans without penalties. In the US, you can generally start withdrawing from your 401(k) without penalty when you reach the age of 59 and a half. However, if you're still working at that age, there might be different rules set by your employer. There are also some exceptions to the early withdrawal penalty, such as becoming disabled, using the money for certain medical expenses, or in cases of economic loss due to a federally declared disaster.
• Required minimum distributions (RMDs): Starting at the age of 73 (or 75, depending on when you were born), you must begin taking RMDs from your tax-deferred retirement plans, such as IRAs and 401(k)s. These are minimum amounts that you are required to withdraw each year. If you don't need the money, you can choose to leave it in your retirement account to continue earning investment income.
• Tax implications: Withdrawals from traditional 401(k)s and IRAs are subject to income tax. On the other hand, withdrawals from Roth IRAs and Roth 401(k)s are tax-free if you are over the age of 59 and a half and have held the account for at least five years. It's important to understand the tax implications of your withdrawals to avoid any unexpected bills.
• Hardship withdrawals: In certain circumstances, such as an "immediate and heavy financial need", you may be able to take a hardship withdrawal from your 401(k). This is allowed by the IRS and is usually not subject to the early withdrawal penalty. However, you must show that you were unable to obtain the funds from another source, and the distribution can only be for the amount required to meet that specific financial need.
• Timing your withdrawals: If you are still working at age 59 and a half, you might want to consider leaving your money in your retirement account to continue growing tax-free. However, if you need the money, you can start making withdrawals without incurring a penalty. Withdrawals before this age will usually result in a 10% early withdrawal penalty, unless you meet certain exceptions.
• Consulting a financial advisor: Withdrawing money from your retirement accounts can have a significant impact on your financial future. It's important to understand all the rules and options available to you. Consulting a financial or tax advisor can help you make informed decisions about your withdrawals and ensure that you are following the correct procedures.

Know your income sources

When considering investing in mutual funds at 63 years old, it is important to know your income sources. This knowledge will help you determine how aggressively you need to save for retirement and what types of investments are most suitable for you. Here are some key considerations:

Traditional Pensions:

If you have a defined-benefit pension plan through your current or previous employer, you should receive an individual benefit statement at least once every three years. You can also request this information from your plan administrator annually. This statement will outline the benefits you have accrued and when they will vest, i.e., become yours. Understanding how your pension benefits are calculated can also help you maximise your pension income. Many plans use formulas based on salary and years of service, so staying in the job longer may increase your benefits.

Social Security Benefits:

Once you have contributed to Social Security for ten years or more, you can use the Social Security Retirement Estimator to get a personalised estimate of your future monthly benefits. Your benefits will be based on your 35 highest years of earnings, so they may increase if you continue working. The age at which you start collecting Social Security benefits will also impact the amount you receive. Starting at 62 will result in a reduced benefit compared to waiting until your full retirement age (67 for anyone born after 1960). Delaying until age 70 will yield the maximum benefit.

Other Sources of Income:

In addition to traditional pensions and Social Security, you may have other sources of income during retirement. These could include investments such as stocks, bonds, mutual funds, or annuities. Understanding the mix of these assets in your portfolio and their potential returns will help you assess your overall income picture.

Emergency Savings:

It is important to have a cushion of savings in cash or short-term certificates of deposit (CDs) to prepare for unexpected expenses or market downturns. This emergency fund should be large enough to support you for at least 18 months to two years, according to some experts.

By understanding all your income sources and their relative weights in your retirement plan, you can make more informed decisions about investing in mutual funds or other assets at 63 years old.

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 buy.

You could also consider target-date mutual funds, equity and bond exchange-traded funds, and income-generating individual stocks for your portfolio. Target-date funds are offered by many investment management firms and invest your funds in a mix of stocks and bonds that automatically adjust as you near retirement.

If you prefer to design your own investment portfolio, you might want to invest in exchange-traded funds (ETFs). ETFs own a number of investments and allow investors to focus on specific groups of equities and bonds depending on their investing style and goals. They are also more liquid because they can be bought and sold throughout the day.

Frequently asked questions