There are a number of unique things that people in their 60s should be focusing on in their retirement. Today I will be discussing 6 things that you need to focus on to have a solid retirement strategy.
These include things such as how to handle your expenses, tips on how to optimize Social Security, what your investment portfolio should look like, how to handle health insurance, what to do about your mortgage, and ways to minimize your taxes.
Whether you are currently retired or not, you will learn important information that you can apply to your life.
RETIREMENT STRATEGY IN YOUR 60s
A well laid out strategy will focus on the following 6 items:
1. Determine Your Expenses
It’s often times very difficult for people to know where they’re spending money.
But, from a retirement planning standpoint, it’s really important.
It’s important because if you don’t know how much you’re spending how would you know how much to withdraw from your investment portfolio to meet your needs.
It’s important because it gives you some perspective on whether or not you’re spending money frivolously. And if you’re spending money frivolously, then you could find that you’ll run out of money. And knowing where you’re spending money allows you to look at which expenses can be reduced or cut out altogether.
It’s important because it helps you to ultimately determine whether or not you can spend more money! This is a fun one. A proper retirement plan will help you to know whether or not you can actually increase your expenses (i.e. standard of living) and still have a high probability of success.
If you haven’t yet retired, then it’s helpful to begin tracking your expenses now so that you have time to figure out what they are. If you’ve already retired, then it’s not too late. The sooner you start the sooner you can determine whether you are spending too much or too little.
To help you out with determining your expenses, I’ve created an Expense Spreadsheet that you can download for free by CLICKING HERE.
2. Optimize Your Social Security Benefit
One of the greatest things that you can do to ensure a successful retirement is to maximize your Social Security benefit.
If you take Social Security early then you are voluntarily agreeing to receive a lower amount for the rest of your life. This is usually not the best strategy unless you absolutely need the money, you plan to invest it, or you expected to have a short life expectancy.
If none of those apply to you then you should give some consideration to delaying when you receive your benefit. The earliest you can receive your Social Security retirement benefit is age 62. If you delay until your full retirement age (usually age 66 or 67) then you’ll receive approximately 30% more. And if you delay all the way to age 70, you’ll approximately receive an additional 30%. That’s a 60% increase by delaying from age 62 to 70 (technically if you do the math it’s actually more than 60%, but hopefully you get the point).
On top of that, if you are married, were age 62 by 12/31/2015, and haven’t yet taken Social Security, then you could qualify for the Restricted Spousal Application Strategy. This is a tremendous benefit that can greatly optimize your Social Security benefit.
3. Minimize the Tax Bite
When it comes time to take money out of your investment portfolio, you’ll want to do it in a strategic manner so that you don’t create a tax burden. In fact, if you don’t withdraw from the right accounts at the right time, you could cause up to 85% of your Social Security to become taxable. Or you could cause yourself to pay a whole lot more for Medicare than would be required.
In some cases you may make too much money and you can’t avoid this. But in other cases, you may be able to avoid this with strategic withdrawals.
The economic environment we live in will likely dictate which investments you withdraw from. For example, we are currently in a very low tax environment. Therefore, it would likely make sense to withdraw from your pre-tax accounts (i.e. Traditional IRAs and 401ks) and go ahead and pay tax at today’s low rates. But of course you have to measure that against how it affects Social Security and Medicare.
Another thing that you should consider, is moving some money from pre-tax accounts to tax-free accounts (i.e. Roth IRA). This is known as a Roth Conversion. Doing this would allow you to shelter your money in a tax free manner for life. But again, be careful in doing this as it could negatively impact your taxes in the year that you do it.
4. Plan for Health Insurance
If you retire in your early 60’s, then you will likely have to obtain health insurance on the open market until you reach age 65. Once you reach age 65, you will qualify for Medicare. One VERY IMPORTANT point for you to know is that once you do turn age 65, don’t just settle for Medicare. You need to attach some sort of supplement to it.
Medicare is known as an 80/20 Plan meaning that Medicare covers 80% of your bill, but you are responsible for 20% up to an unlimited amount. As such, it will be necessary for you to protect yourself by having either a Medicare Supplemental Plan or a Medicare Advantage Plan. But the key takeaway is not to have Medicare alone!
Be sure to factor healthcare costs into your retirement plan so that you don’t have any nasty surprises later on. This goes back to point #1 (Determining Your Expenses). If you’re not painting an accurate picture of your expenses, then you could find yourself running out of money!
5. Don’t Worry About Your Mortgage
At first glance this may seem counterintuitive since you’ve likely heard that you should attempt to have your mortgage paid off by the time you retire. But let me explain.
The idea of having your mortgage paid off does sound like a great idea since it is likely your greatest expense and you wouldn’t have that expense in retirement. And as a result, you wouldn’t need to withdraw as much from your investments.
If you’re on track to have your mortgage paid off by the time you retire, then great. But I would encourage you not to pay extra toward your mortgage today to make this a reality.
If you’re not on track to have your mortgage paid off, then I suspect that you have considered using your investments to make this happen. However, doing so would likely cause you to end up with a lower net worth over time. The concept is actually pretty simple – if your projected investment return is greater than your mortgage interest rate, then you should give some strong consideration to not paying off your mortgage. This is known as Opportunity Cost.
For some reason, there’s an urge in people to pre-pay their mortgage as they step into retirement. However, there is no urge for people to pre-pay their groceries, utilities, or any other expense they have in retirement. I suggest to you that it’s better to treat your mortgage just like every other expense you have and pay it along the way!
6. Reduce Your Portfolio Risk
The last thing that you want is to be like retirees in the late 1990s (when the stock market was doing very well) who went into retirement with an all stock portfolio. Although stocks have historically provided great long term returns, an all stock portfolio is just too risky to have in retirement. Many of the 1990s retirees lost a significant portion of their investments and had to go back to work when the stock market crashed from 2000 to 2002.
The remedy for this is to add bonds to your portfolio. Bonds are historically safer than stocks and they can serve to lower the risk of your overall investment portfolio. And it can serve to allow your investment portfolio to last for your entire retirement.
There have been numerous studies done on the right mix of stocks and bonds in retirement and the consensus is that a 60% stock / 40% bond portfolio is an appropriate place to start. I never like to use “rules of thumb” as a panacea. Instead, it’s much better to identify your retirement goals (age you retire, amount you need to spend, etc…) and run some analysis to see what works specifically for your situation. In many cases, people discover that they can reduce their risk even further, which can be a very comforting thing.
CONCLUSION
Hopefully you have found this blog post helpful and you’ll considering implementing these 6 ideas to set yourself up for a success retirement strategy in your 60s.
If you’re retired and in your 60s what advice would you give to those planning to retire? If you’re planning to retire in your 60s, what concerns do you have? Please share any thoughts, comments, or questions below.
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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™