Retirement security is the ability to live a comfortable retirement without the burden of financial stress. Early planning is the best way to ensure a financially secure retirement, but not everyone has the luxury of time to prepare. The financial decisions you make in the years approaching retirement will have a significant impact on your retirement security.
Here are seven steps you can take to ensure a secure retirement:
-- Maximize retirement savings.
-- Reduce payment obligations.
-- Establish retirement income sources.
-- Regularly rebalance your investment portfolio.
-- Reduce asset risk.
-- Downsize your home.
-- Take Social Security wisely.
You can take action in the years leading up to retirement to lower your risk and raise the likelihood that your money will last. Here's how to boost your ability to retire comfortably.
Maximize Retirement Savings
Your chances of a secure retirement increase if you can start building your retirement savings early in your career. At whatever point you can, take full advantage of the tax savings provided by retirement accounts. Start with your employer-sponsored plan or fund a traditional IRA. If there's money left over and you qualify, contribute to a Roth IRA with after-tax money up to the allowable limits. Keep your money invested in low-cost funds allocated in an age-appropriate portfolio. Reinvest the earnings you receive to create a compounding effect over time.
Reduce Payment Obligations
One key to creating financial security at any stage in life is to reduce payment obligations. Though debt can help you afford the education, home and car of your choice sooner, debt carried into retirement is a financial burden. In retirement, you'll want your savings to go toward living your ideal life, not toward payments to a bank.
Some retirees choose to enter retirement with a mortgage or other outstanding debt. Borrowed money can help free up cash for living expenses. But paying interest on the debt eats away at your retirement savings. Set a goal to be debt-free before you retire. You'll sleep better knowing you don't owe money to anyone.
Establish Retirement Income Sources
Your retirement plan should define the specific income sources you will receive when you stop working. These income sources may change at different stages of retirement. In addition to pensions and retirement account withdrawals, some retirees may consider rental real estate or other investment assets to supplement income. If you prefer steady guaranteed income from annuities for a portion of your income, consult a fee-only fiduciary advisor to evaluate your options and avoid making a mistake.
Aim to create a steady monthly income stream that is greater than your spending needs. The excess cash buffer can help you absorb a high spending month and leaves extra money for special occasions or emergencies.
Regularly Rebalance Your Investment Portfolio
If you manage your own money, you need to remember to rebalance your portfolio on an annual basis. Each year, asset classes fluctuate, which throws off your target allocation. For example, if stocks increase by a large percentage in a given year, your portfolio will become over-weighted toward stocks. An over-weighted portfolio puts you at a higher risk of losses at a time when you should be lowering your risk. Rebalancing involves buying and selling portfolio assets to get back to your target allocation.
An appropriately weighted investment portfolio is critical for retirement security. If your investments are too aggressive, you risk losing too much money in a market correction. An overly conservative portfolio might not last for as long as you need it. Set a reminder to rebalance your portfolio on the same date each year. Remember to adjust your allocations to reduce asset risk as you age.
Reduce Asset Risk
The ratio of stocks to bonds in your retirement portfolio should be reflective of your age and risk tolerance. As you age, more of your assets should be moved toward fixed-income and cash and away from stocks. Stocks are more volatile in the near-term, while fixed-income securities tend to be more stable. At the stage of your life when you need your retirement savings the most, you want your investment income to be steady and reliable. If the thought of a stock market correction causes you to second guess your asset allocation, you're probably too heavily invested in stocks. Slowly increase your bond allocation to reduce the volatility of your portfolio. Always diversify your investments to reduce risk further.
Downsize Your Home
Housing is a substantial cost for most retirees. If your current home is paid off and it serves your long-term needs, staying there may be your best option. However, moving can also increase your retirement security in some cases. A home that is too large for your needs will require higher maintenance and utility costs and keep your taxes high, and you may determine those costs are not the best use of your retirement savings. If the equity in your home is a large portion of your net worth, you may need that cash for living expenses. You could take out a home equity loan or reverse mortgage, or sell the home to unlock the equity and buy a less expensive and more suitable residence with the proceeds or rent.
Take Social Security Wisely
Though it may be tempting to begin taking Social Security at age 62, those who can afford to delay should consider doing so. Each year you delay receiving your check, you increase your annual benefit for all subsequent years. The benefit increase is the same as a guaranteed rate of return. Only take Social Security early if you absolutely need the money or if you have reason to believe your life expectancy will be below average. Otherwise, hold off to reap the benefit of the government retirement security program in the later part of your retirement, when you will need it the most.
Craig Stephens is a blogger at Retire Before Dad.