So much financial planning is focused on getting people to
retirement. Planning and investing during those golden years is even more
critical because missteps can be disastrous.
Spending down money in retirement is trickier than
accumulating it while working. Retirees don’t know how investment portfolios
will perform during retirement, how long they will be drawing money from them,
or what sort of health they will be in.
Increased longevity means today’s 70-year-old man will live
an average of 14.6 years, and a 70-year-old woman another 16.8 years, according
to the Social Security Administration. Those are just averages. Some 34% of
these men and some 45% of these women will live into their 90s, and people need
to prepare for that possibility.
Financial advisors say retirees should have three main
priorities: getting portfolio allocations right; having affordable healthcare
even if their health declines; and making arrangements to get help should the
day ever come when they can’t manage their own affairs.
Here are some tips for success in each of these areas:
Keep Part of Your Portfolio in Stocks
Despite the perils of bear markets to retirement portfolios,
becoming overly conservative has its own dangers, advisors warn. Build the nest
egg with high-quality, dividend-paying stocks, preferably those with rising
dividends. In a time of soaring prices—like right now—dividend-paying equities
can act as an inflation hedge, says Stephen Dunbar, managing partner, Business
Strategies Group, a division of EquitableAdvisors. Dunbar suggests putting as
much as 60% of the portfolio in equities, with the idea this money won’t be
touched for at least eight to 10 years.
Other advisors take a more conservative approach with
retirees. Mike Kazakewich, director of planning at Coastal Bridge Advisors,
allocates just 35% to 40% of the portfolio to equities for his clients. He
currently recommends investing a bit more than half the portfolio in domestic
large-cap stocks, equally split between growth and value, and putting the
remaining money into international stocks.
Jennifer Bellis, private wealth advisor at US Bank Private
Wealth Management, is even more conservative. She advocates an equity portion
that’s closer to 20% to 30% of the retiree’s portfolio, with an emphasis on
dividend-paying stocks. She also puts her clients in real estate investment
trusts and preferred stocks because of their income streams.
In a rising-rate environment, Bellis recommends a
fixed-income overweight to complement equities. Fixed-income securities “might
lose some value in the immediate term, but if you’re holding them to maturity,
they will provide a nice income stream,” she says.
Jay Winthrop, principal of Douglass Winthrop Advisors, says
investors who prioritize capital preservation over performance can buy
high-quality, medium-term bonds, such as U.S. Treasury notes or
investment-grade bonds. “You’re locking at a 3.7% to low 4%, risk-free rate for
10 years. For many people in retirement, fixed income now has a place that it
didn’t for 15 years,” he says.
Because the Fed will continue to tighten rates, advisors
recommend individual bonds to bond funds. Bond-fund owners will take losses
when rates rise, but those who own individual securities can hold them until
they mature.
The advisors also advocate holding a year’s worth of
expenses in cash to avoid having to sell off holdings in a down market. With
some online banks paying close to 3% in interest, it pays to shop around,
Bellis says.
Healthcare Options
Having the right healthcare combination matters. For 2022,
premiums for Medicare Part B and Medicare Prescription drug coverage can be as
low as $170.10 a month for married couples who had modified adjusted gross
income under $182,000 and as high as $578.30 based for those whose income
topped $750,000.
Retirees shouldn’t rely solely on Medicare, which picks up
only roughly 80% of most costs. Seniors in good health or who can’t afford
additional premiums for supplemental coverage may choose a Medicare Advantage
plan, many of which have no premiums. But for those who have health problems or
need treatment from specialized doctors or hospitals, they may be better off
staying on traditional Medicare and buying a supplemental policy to cover costs
that Medicare doesn’t. Members of the military should also look into what
medical benefits they are entitled to have.
Every retiree dreads the thought of ending up in a nursing
home, and the cost of long-term care policies has risen sharply. In retirement
these policies are even more expensive. Before buying one, check carefully how
much coverage you’ll receive and how incapacitated you have to be before it
kicks in.
In recent years, hybrid long-term care policies, which are
life insurance policies with riders, have become popular—if a policy owner dies
without needing care, the policy can turn into a death benefit that goes to his
or her heirs, Dunbar says. He says these hybrid policies are also more flexible
than traditional long-term care policies when it comes to who can provide your
care.
For retirees who want to self-pay, Dunbar says they can
earmark part of their portfolio to cover costs should the need arise. The
average total cost for long-term care is about $300,000.
When to Get Professional Advice
Even if retirees are successfully managing their portfolio,
it may be worthwhile to have a financial advisor review the portfolio, says Tim
Steffen, director of tax planning at Baird Wealth Management.
An advisor can check that the portfolio is in suitable
investments or that retirees are spending down their portfolio at a sustainable
rate. “It sets your mind at ease,” Steffen says. “Maybe you don’t have to do
any crazy changes, like you might have been thinking you had to just because
you’ve seen what’s happened in the market.”
Retirees are likely to have some sort of physical or mental
decline at some point in their life, so now is the time to explore delegating
future financial planning tasks, especially for successful DIY investors,
Bellis says. Doing it now allows DIY investors to get comfortable with those
they have selected to take over when necessary.
Retirees who have a trusted relative or friend can prepare a
power of attorney agreement or healthcare proxy so that the designated person
can make decisions for the retiree when he or she is no longer able. Retirees
may also need to make arrangements for someone to manage their portfolio.
“If you becoming incapacitated, and you don’t have a
financial power of attorney in place, no one can act on your behalf and pay for
your healthcare needs or your liabilities,” she says.
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