Work in Progress

Jonathan Clements

RETIREMENT MAY MARK the end of fulltime work—but that doesn’t mean we should stop working on our finances. Even after we quit the workforce, there’s much we can do to strengthen our retirement plan and, indeed, that may be necessary if we find we’re drawing down our nest egg too quickly.

Are you concerned that you might outlive your savings? Consider these six financial tweaks:

1. Work part-time. I’ve heard folks claim that if you’re still doing some work for pay, you aren’t truly retired. I think that’s silly—as silly as the related notion that a happy retirement is one devoted to blissful nothingness.

My contention: Working part-time in retirement is not only a great way to bolster our retirement finances, but for some folks it may also be the key to a happier retirement, because it delivers the sense of purpose they need. Working a day or two each week may not be as appealing or even possible later in retirement, but it could be a smart strategy during our initial retirement years. Think of it this way: If you could earn $10,000 a year by working part-time, that’s like having a nest egg that’s $250,000 larger, assuming a 4% portfolio withdrawal rate.

2. Spend less. During our working years, we often temporarily cut back on discretionary spending if we find ourselves out of work or if we get hit with large, unexpected expenses. Even after we quit the workforce, such spending adjustments should remain a key weapon in our financial arsenal.

Facing steep medical bills? Worried because stocks are down sharply? Temporarily reducing spending could get your finances back on track. Thanks to the pandemic, most of us have discovered there’s plenty of fat in our budget. Think about how much you saved over the past 14 months by not going on vacation, cooking at home and avoiding the shopping mall. During retirement, if your nest egg looks a little depleted, perhaps you should adopt a “pandemic budget” for six months or a year.

3. Delay Social Security. The math is crystal clear: As long as you live until at least your late 70s or early 80s, you’ll come out ahead financially if you cover costs in your early retirement years by spending down your cash and bond holdings, while delaying the start of Social Security benefits, so you lock in a larger stream of government-guaranteed, inflation-adjusted income.

What if you’ve already claimed benefits and realize you’ve made a mistake? If you’re younger than your full Social Security retirement age (FRA) of 66 or 67 and you claimed benefits within the past 12 months, you can repay the benefits you received and reverse the decision. Alternatively, if you’ve already reached your FRA, you can suspend benefits. You can then leave your monthly check to grow at eight percentage points a year, plus any inflation increase, up until age 70.

4. Buy income annuities. Another way to squeeze more income out of your nest egg is to use a slice of your savings to buy immediate fixed annuities that pay lifetime income. Yes, that means turning over a chunk of your portfolio to an insurance company. But unless you die early in retirement, it could be a smart move.

As I’ve mentioned before, I plan to put a significant sum into immediate fixed annuities. The resulting regular income will allow me to invest my remaining portfolio more heavily in stocks—and that could mean a larger inheritance for my kids, despite the money I “lost” by buying the immediate annuities.

My plan is to purchase those immediate annuities in my 60s. But buying annuities could also salvage your later retirement years. Suppose you and your spouse are age 80 and have $300,000 left in savings. A 4% withdrawal rate would give you $12,000 a year. What if, instead, you stashed the entire $300,000 in an immediate fixed annuity? You’d collect annual income of almost $24,000, according to a quote from Charles Schwab. Note that this income would be fixed. If you wanted the income to rise each year by, say, 2%, so you have some protection against inflation, the initial income would be somewhat lower.

5. Keep at least 30% in stocks. Retirees often favor bonds and cash investments. But if you want your nest egg to generate a healthy stream of income that keeps up with inflation, you should stash part of your savings in stocks. To understand why, check out Vanguard Group’s retirement nest egg calculator. It uses something called Monte Carlo analysis to see how a retirement portfolio might perform in a host of market scenarios.

Suppose you’re looking to fund a 30-year retirement and want to use a 4.5% withdrawal rate. If you play around with the calculator, you’ll see that a very high stock allocation probably won’t hurt your chances of funding that 30-year retirement—but a low allocation likely will. Indeed, once your stock allocation drops below 30%, things start looking pretty grim, especially if you stash the remaining money heavily in cash investments.

If anything, I’d favor a minimum stock allocation closer to 40% or even 50%. Why? Vanguard’s calculator is built on historical returns. At today’s miserably low bond and cash yields, such conservative investments will struggle to keep up with inflation. To be sure, future stock returns may also be disappointing by historical standards, given today’s rich valuations. But at least stocks give investors a decent shot at outpacing the twin threats of inflation and taxes.

6. Tap home equity. Downsizing to a smaller, less expensive home is a hassle, but it strikes me as the smartest way to use home equity to pay for retirement. Done right, it should allow retirees to convert part of their current home’s value into spending money, while also lowering their monthly living costs.

I’m less keen on reverse mortgages or accessing home equity by remortgaging a home. Both should be viewed as last resorts, I believe. Still, I wouldn’t rule them out. You only get one shot at retirement—and I’d rather see folks take out a reverse mortgage than spend their final years pinching pennies.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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