Retirement means no more hard work, right? Think again! When you retire, your new job is to make sure your money lasts long enough to keep you living in the lifestyle you want.
With longevity trends on the rise, this is no simple task. Combine that with record low interest rates of late, and it’s even more challenging.
Many people figure they can do this alone. However, this is a big gamble… you could end up short of money when you are least prepared to do without and unable to work.
Your best bet is always to work with a professional financial advisor, simply because there is so much at risk. However, you need to choose the right professional who will help you objectively and not try to sell you products. Be sure to check out an advisor carefully before hiring—you want to use a fiduciary, who is a person legally required to always act in your best interests. There are several other things to look for, or you can rely on an independent agency that evaluates and rates financial advisors on these important factors, such as Paladin Registry.
Regardless, it’s always best to stay educated and involved, so you’re smart to be taking this seriously.
Here’s our tips to help make sure your money lasts as long as you do.
Tip #1: Be sure you are taking the right amount of risk.
Risk is an inevitable part of life, but here’s the thing: you can afford to take risks and fail when you’re young, when you have decades to recover. As you approach retirement, however, you don’t have that luxury. With little time to recover, you don’t want to discover too late that you were not doing this right.
And, this is a delicate balancing act: too much risk and you stand to lose big if you get caught on the wrong side of the market. On the other hand, too little risk, and your money will not keep up with inflation. This may be more gradual than a bigger stock market correction, but over time can be just as dramatic.
Complicating things, most of us humans are naturally poor at evaluating our own risk tolerance. Most of us feel more comfortable with risk, for example, after the market has been going up for years. Think pre-dotcom, when everyone wanted to talk about their latest investments. It seemed safe to continue to add money to stocks simply because everyone else was doing it. Fast forward to after the dotcom crash, or 2008. Suddenly, there was no more talk of stocks at cocktail parties…no one wanted to touch them. Sadly these natural instincts get us into trouble. We claim we have more risk tolerance when markets are going up, so we take on more risk at the worst time. Then when markets correct and there’s much less risk, we suddenly have no appetite for risk.
So be aware of these tendencies. When you work with a professional, they can help you carefully evaluate your ability to take risk, which is really more important than your attitude about risk.
They can also “stress test” your investments to see how you will fare in all types of scenarios. Knowing you will be okay in any weather is great for the peace of mind.
Tip #2: Vigilantly manage your investment expenses.
Just like inflation can eat into your buying power, these “hidden” expenses can reduce your returns and income from your portfolio. What are these? Typical expenses include the expense ratio for each mutual fund or exchange-traded fund (ETF) you own. This fee doesn’t appear on your mutual fund statements so you have to look for it. This fee is in addition to what you pay your financial advisor and it represents the payment to the fund or ETF manager as well as the funds or ETF administration costs.
There can be other fees too such as transaction fees and loads.
Always consider all of these fees and expenses when selecting mutual funds and ETFs. Look to see if there is a similar, lower cost option so you can reduce your expenses. The good news is…any reduction in expenses goes straight to your bottom line. It’s the easiest way to increase your earnings without increasing your risk.
If you use a financial advisor, be sure to always ask him or her if they are using the lowest cost options for each investment you own. If you hire someone who is not a fiduciary, it’s perfectly legal for them to put you into more expensive funds simply because it pays them bigger commissions, as long as the investment is generally “suitable” for you. That’s unfortunately very common—to the tune of costing Americans about $17 billion per year-so it pays to stay alert for this. Currently, the government is grappling with creating regulations to avoid this, but in the meantime, you can usually avoid these situations by working only with fiduciaries.
The payoff? Even a small decrease in investment expenses can result in a large cumulative gain over the years. It’s the lowest risk way to keep your money working harder for you.
Tip #3: Manage your taxes by holding investments in the most tax-efficient manner.
Another way to cut your costs is to reduce your income tax load on your investments. An easy way to do that is to make sure you are holding investments with the highest expected tax impact in your tax-deferred accounts (like an IRA). These might be strategies that involve the most activity (generating short term capital gains). This might also include taxable bond investments that generate interest payments that would be taxed at higher ordinary income rates. Then, you would keep the more tax efficient investments, like tax-free municipal bonds, in your taxable accounts. These small tweaks can help enhance your returns, again, without taking any more risk.
A lot goes into building a portfolio that can take you to the finish line. If you do it yourself, be very careful to make sure you’re not taking more, or less risk, than you should. If you’re using an outside professional, you can relax a bit, but remember, it’s your money! No one will ever watch it as closely as you do. Don’t put it on auto-pilot and assume everything is handled for you. Stay involved, ask questions and always monitor your monthly statements.
Jeanne Klimowski is Founder of Wavelength Financial Content Inc., a provider of employee financial wellness programs and digital content for financial advisors.