Retirement
Eight Ways to Protect Your Nest Egg
by Kimberly Lankford
You work hard to build a secure retirement for yourself -- don't let unexpected costs and market turns eat away your savings. We show you how to make sure the money is there when you need it.
Saving for retirement has been compared to climbing Mt. Everest -- it's a huge undertaking on the way up, but can actually be more treacherous on the way down. Withdrawing too much money during the early years or retiring during a down market could have a huge impact on your quality of life in retirement. And any unexpected expenses -- such as a nursing home stay -- could quickly drain your entire savings.
But there are several steps you can take now to protect your savings:
1. Make sure you're saving enough
Estimate your expenses in retirement and then see if you are saving enough.
A study by T. Rowe Price found that a 30-year-old would need to save 11% of his income per year to amass a lump sum that provides 70% of his current income level in retirement (adjusted for inflation). The number rises to 21% if he waits until age 40 to start saving. But if that 40-year-old had already saved an amount equal to his annual salary, he'd only need to set aside another 14% per year. If you want your investments to provide more than 70% of your current income in retirement -- which you probably will if you don't have a pension -- you'll need to increase those figures.
Double-check your estimates. Try a Monte Carlo simulation, which runs through thousands of investment scenarios and assesses the likelihood that you'll reach your retirement goals. Financial Engines offers a personalized retirement forecast, plus an investing newsletter, and advice for $39.95 per quarter or $149.95 per year. Many employers and brokerage firms provide free access to Financial Engines (or provide similar simulators).
2. Lower your housing expenses
See if you could benefit from refinancing your mortgage, even if you've refinanced a few years ago. Instead of paying less money each month, though, keep paying the same amount towards your mortgage -- the extra payments will lower your total interest expenses and help you pay off your house sooner. Not having a mortgage payment can make a huge difference in your post-retirement finances.
3. Pay off credit-card debt
Get out of the habit of carrying a balance on your credit cards and pay them off as soon as possible. The money that you are spending on interest charges and fees could be used to boost your retirement savings, or your income once you're in retirement.
Start by tracking down each card's interest rate. Check the small print on a recent statement or call the card issuer to find out.
Next, see if you qualify for a lower rate or a card that will let you pay off transferred balances at 0% (search for credit cards).
For example, Chase's CashBuilder or Ultimate Rewards Platinum MasterCards charge 0% on balance transfers for one year. Be sure to also compare a new card's interest rate (what you'll pay after the introductory period) with what you are currently paying. If you miss a payment or can't pay your balances off in a year, you don't want to be stuck with a higher rate.
Then, pay off the balance as quickly as possible. If you're grappling with more than one card, focus first on the account with the highest interest rate. Once you pay off that card, use the money to pay off the next-highest rate card, and so on until you are debt-free.
4. Buy long-term care insurance
On average, a private room in a nursing home costs more than $190 per day. Twenty-four hour care at home costs even more, about $432 per day, according to a recently released study by the MetLife Mature Market Institutes. One of the best ways to protect yourself against these potentially devastating drains on your savings is to purchase long-term care insurance. It's generally best to buy a policy in your 50s or 60s. Find out what to look for in a good policy.
5. Buy an immediate annuity
Once you retire, consider using some of your savings to fund an immediate annuity. These insurance instruments are designed to provide a steady stream of income for the rest of your life.
This kind of guaranteed income will help you sleep a little easier knowing that your basic expenses will be covered, no matter how long you live. And with your basic needs covered, you can invest the rest of your money more aggressively. For more on immediate annuities, see Guarantee Retirement Income for Life.
6. Avoid overspending
Run your numbers through T. Rowe Price's retirement income calculator to make sure you won't run out of retirement money if you keep withdrawing at your current pace. That calculator runs through hundreds of potential scenarios and assesses the odds that your retirement money will last as long as you expect to live.
7. Go back to work
If it looks like your retirement funds won't last long enough, consider picking up another job. Working in retirement -- even just part-time -- can make a huge difference in your retirement situation. Not only will you need to withdraw less money in retirement, but you may even be able to continue adding to your savings for several more years. Some jobs even come with health benefits, which could cut your retirement expenses even more. See Help Wanted: From Retirement to Work for more information.
8. Lower your health-care expenses
Shop around for the best medigap policy to fill the holes in your medicare coverage. The government created ten standardized medigap plans -- named Plan A through Plan J -- and every plan with the same letter provides the exact same coverage (see the table at the Medicare Rights Center's Web site for details). Even customer service varies little from company to company. But there is a surprisingly wide price range for medigap policies. So, once you determine which level of medigap coverage you need, shop around for the best price.
Also consider prescription-drug savings cards -- especially if you'll qualify for a $600 annual credit -- and other ways to reduce your prescription drug costs.
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