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Plan Well, Retire Well

Saving and investing your money

Tips for Retirees in Today's Economy

Many of my posts focus on the needs of working-aged people. But today I want to focus on tips for those already in retirement. The last couple of years have been rough on everyone, but those who already traded a paycheck for retirement are particularly vulnerable to volatile stock markets, inflation, and other economic events. Here are ten tips that might help keep your retirement on an even financial keel.

Tip #1: Know the amounts and types of income you receive.

As a retiree, you may get income from a variety of sources. As a result, it may be hard to know how much income you have each year.

A good place to start is by looking at your income tax return and 1099 statements from last year. How much did you receive from:

• Guaranteed/fixed sources:

• Social Security $________________

• Pension $________________

• Annuity payments $________________

•Variable sources

• Distributions from IRAs and employer retirement plans $________________

• Interest, dividends, and sales of investments in taxable accounts $________________

• Other $________________

Total: $________________

Tip #2: Keep track of expenses.

Track all of your expenses for a few months whenever you go through a major life change. Retirement is a major life change. So is moving, losing a spouse, or going through the worst economic crisis since the Great Depression.

Tally up all your expenses at the end of the first week, and every couple of weeks after that, to catch over-spending quickly.

Compare to your monthly income. Overspending when you're on a fixed income will put you in a hole that may required drastic changes to get out of.

Will your guaranteed sources of income cover your basic living expenses and monthly commitments such as debt payments? That is the ideal situation. You can then use your variable sources of income for discretionary expenses: vacation, furniture purchases, gifts, clothing. In years or months when those sources of income are smaller, you can delay or reduce those expenses.

Avoid making discretionary purchases on credit; you do not want to have monthly commitments that are greater than your guaranteed sources of income.

Tip #3: Plan for surprises, part I.

Your budget needs some flexibility to handle the unexpected expenses that are part of life: the dog gets sick and you take him to the vet; you break your eyeglasses and have to buy new ones. So don't budget every penny of your income. Set aside some money each month is for the unexpected.

You also need an emergency fund for bigger unexpected expenses. As a retiree, you aren't worried about losing your job and losing your paycheck. But you still need an emergency fund for when the roof has to be replaced, the car needs a major repair, or you have large medical deductibles or co-pays.

At your death, your emergency fund can pay for final expenses including your funeral. That liquidity will relieve pressure on your heirs so that they do not have to make hasty decisions about selling assets.

Tip #4: Know how much you owe, and how much you own.

Calculate your net worth (what you own minus what you owe) once a year. It will show you whether you're making progress, or falling behind. Use the tool at under Assessing Your Financial Situation.

Tip #5: Plan for surprises, part II.

Surprises also come in the form of stock market losses, high inflation, or a decline in home values. To weather these surprises, having an investment plan is important. Your plan should, at a minimum, include diversification, asset allocation, and liquidity.

If too much of your portfolio is tied up in one company, one industry, or one asset (for example, a family business or family home), you are taking on unnecessary risk. Increase your diversification by gradually shifting out of that asset and into other asset classes.

If you panicked and sold investments during the 2008-2009 recession, your asset allocation may have been too risky. Assess your risk capacity using these tools: Choose one of the tools under Asset Allocation.

What is the gap between your monthly income from guaranteed sources (Social Security, pension, annuity payments) and your expenses? Many retirees keep enough money to cover 3 or more years of those expenses in laddered CDs.

Start building up this cushion before retirement. Example: Three years before retirement, sell enough investments to cover the gap for one year. Put it in a 3-year CD. The next year, sell enough to cover another year. Put it in a 3-year CD. When you reach retirement, you'll have a CD maturing to cover that year's gap. But you will also sell enough investments to cover another year's gap and put it into a 3-year CD, maintaining your 3-year cushion.

If you were doing this when 2008 happened, you could have skipped selling investments for a year or two and still had "cash" in the pipeline for another year or two. As investments began to recover, you could have sold extra and rebuilt your cushion.

Tip #6: Rebalance on a schedule or based on triggers.

Once you have determined an appropriate asset allocation for your situation, you must monitor it periodically, and rebalance when needed. Rebalancing means selling investments from the asset class that has grown to be too large a portion of your portfolio, and using that to buy more of the asset class that is now too small a portion of your investments.

You can also rebalance by taking your distributions from the over-weighted asset class and directing interest, dividends, or capital gains into the underweighted investment.

Many people rebalance on a set schedule, such as once a year. Others rebalance when their assets have strayed by a certain percent from their target asset allocation, such as 5%.

Tip #7: Protect the important things.

Should you buy an extended warranty on your Blu Ray DVD player or wide screen HD television? Should you drive across town to save a couple of dollars on groceries, or a couple of cents per gallon on gasoline?

It's easy to get wrapped up in smaller issues and not give enough attention to the larger ones. Here are some reminders of issues that might deserve more attention:

•Use insurance to protect against big, bad things. Weight the cost of the insurance against the benefits you might receive. Examples of insurance that cover "big bads" are: •Medicare and Medigap insurance. •Long term care insurance (But not everyone has the assets or income to justify its purchase.) •Auto insurance. Choose larger deductibles and higher coverage limits, so you're protected against potential large claims but don't ding your record with smaller ones. •Homeowners insurance, or renters insurance. Check that your homeowners insurance is sufficient to rebuild your home. •Have a medical power of attorney, a power of attorney for property, a will, and perhaps a trust if your assets and circumstances warrant it. You will save your loved ones much heartache by taking care of these details in advance. •Check that your smoke and carbon monoxide detectors are in working order. Keep a fire extinguisher in the kitchen. •See your doctor regularly, and report any new symptoms.

You could add many more to this list, but you get the idea. Deal with the truly important issues, and don't get too tied up with the minutiae of life.

Tip #8: Use your financial power wisely.

You've built up financial security and assets over your lifetime. You probably have a good credit history. That gives you financial power that others might liker to tap into.

Adult children may come to you for financial help. They might ask you to help with a down payment on a home, financing for a business, or money to live on if they lost their job. If you have a clear picture of your own financial situation, you can make an informed decision about whether (or how much) you can help without sacrificing your own financial security.

Don't cosign a loan unless you're willing and able to make all the payments. Tell the person, "In order to cosign, I would have to know that I could make the payments, and I can't do that."

And watch out for scams and frauds. The Securities and Exchange Commission investigated "free lunch" investment seminars. They found that 100% of them were sales presentations, 50% used exaggerated or misleading claims, and 13% appeared to be fraudulent. When making any major decision:

  • Sleep on it.
  • Get a second opinion.
  • Investigate. Check the broker or investment adviser's registration and qualifications. Check that the investment is registered, and read the prospectus. Do a web search on the company, the sales person, and/or the investment with words like "complaint" or "problem" or "fraud" to see if there is a record of problems.

Tip #9: Watch your withdrawal %.

You've heard the recommendation that your assets should last at least 30 years if you withdraw 4% to 4.5% of your investment portfolio in the first year, and increase the amount by inflation each year after that. But if your portfolio suffered extensive losses and has not recovered, you might be getting nervous about this approach.

Divide your planned withdrawal by the current value of your portfolio. Recent research indicates that you might need to keep your withdrawal to no more than 6.5 to 6.7% of your portfolio's current value. So you might forego the inflation increase for a couple of years, or even reduce your withdrawal to be more assured that your money will last as long as you do. Of course, the older you are, the less risk you face if you do continue with the larger withdrawals.

Tip #10: Get help when you need it.

There are many types of financial professionals. For example:

  • Credit counselors can help you set up a budget and negotiate with creditors.
  • Investment advisers can help you select investments that are appropriate for your goals.
  • Brokers can help you buy or sell securities.
  • Financial planners (who may also be investment advisers) may review and make recommendations about many aspects of your finances: income taxes, investments, financing your retirement, estate planning, insurance, and job benefits.

A change in your life can trigger a need to use a financial professional. For example, many people seek the advice of a financial professional when they inherit money, marry or divorce, or start a new job. Another common time for someone to use a financial professional is when they are approaching retirement.

Extension's new website, Choosing a Financial Professional (, can help you learn how to choose someone to meet your needs.

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