You've always lived below your means and were a diligent saver, and now you've built a pretty sizable nest egg. Or maybe you've just been lucky enough to work for a company that has a well-managed 401(k) plan and has always matched your contributions. However you did it, you now have a reasonable retirement income that, with the help of Social Security and possibly a pension, provides you with a comfortable retirement lifestyle.
So, you're all set, right? Not necessarily.
Remember the great recession of the late 2000s? And the stock market crash of 2000 and 2001? Financial meltdowns have occurred many times before. And since your retirement can last 20 or 30 years, another one will likely come along in your lifetime, and perhaps more than once.
Here are six ways to prepare yourself for the next bout of economic trouble, so it registers as a hiccup in your financial timeline rather than a galactic explosion that destroys your financial future.
1. Rebalance your investments. If you've enjoyed the run-up in stock prices over the past seven years, you might be too heavily invested in stocks. Financial experts recommend rebalancing your accounts once or twice a year to get back to your target allocations. For example, if you target 50 percent of your IRA or 401(k) in stocks, but now that stocks have appreciated they make up 60 percent of your portfolio, it may be time to sell off 10 percent, to get back to your original level. The same principle holds for bonds, real estate or any other investment.
2. Set aside an emergency fund. Experts recommend keeping enough cash outside your retirement accounts to cover six months of expenses, to use in case of emergency. An alternative: Figure out how much you typically withdraw from your savings to cover the gap between your ongoing expenses and your recurring income from pensions and Social Security. Then set aside enough cash to cover the gap for five years. For example, if you spend $3,000 a month, and take in $2,500 in pensions and Social Security, you have a $500 shortfall. So $500 a month for five years equals a cash balance of $30,000.
3. Plan for a major health care expense. Of course you want to exercise and eat right to try to stay as healthy as possible. But let's get real. You're getting older, and chances are you will need a surgical procedure or expensive drug regimen at some point. Even with the best medical insurance your out-of-pocket costs can run up to thousands of dollars. One way to soften the blow is to set aside an extra cushion of cash. If you're eligible, a health savings account can be useful. Also, consider a long-term care insurance policy. It's expensive, but can make it possible for you to get home health care, or institutional care, if you need it.
4. The time to downsize is now. For most people, the cost of housing is their single biggest expense. Moving to a smaller house in a less expensive neighborhood will likely generate a one-time windfall as you sell the family home and buy a less expensive house (but don't forget to figure in moving expenses). More significantly, the move should ratchet down your ongoing expenses -- as you save on real estate tax, utility bills and maintenance -- and keep you on a lower spending plateau for the rest of your days.
5. Be tax smart. If you're selling your primary residence you will likely not be taxed on your profit. But if you sell an investment property, you will. You will also be taxed for capital gains on investments and withdrawals from your IRA. Even Social Security benefits are partially taxed at the federal level (starting at $25,000 annual income for individuals and $32,000 for joint filers), and there are 13 states that also levy income tax on Social Security benefits. So get out a pencil and paper, open up a spreadsheet or consult your accountant, and plan out how to turn your assets into income with the smallest tax bite possible.
6. Consider an annuity. An annuity is not always a good investment these days, since the income you receive is partially determined by interest rates. Instead, think of an annuity as insurance that at least some income will never run out. There are many kinds of annuities, and they can be complicated, so consult a financial advisor before signing up. And don't allocate too much of your nest egg to an annuity. Remember, you already have Social Security, which is a kind of annuity in itself.
Tom Sightings blogs at Sightings at 60 .