If you are like the vast majority of Americans, most of your retirement income will not come from your financial assets. But that doesn’t mean you can’t live well in retirement – if you recognize that there’s more to retirement planning than what’s in your investment portfolio.
"Wall Street ad campaigns and the financial media tend to focus on affluent families -- the households for which the return on financial assets may be the single largest part of retirement income," says Scott Burns, chief investment strategist for AssetBuilder and co-author of the upcoming book "Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard – Today and When You Retire."
"Unfortunately, there is little discussion of the practical financial decisions that are far more important for most people – the neglected majority of those planning for retirement."
For most Americans, Burns explains, the virtual wealth of Social Security and/or corporate pensions is far larger than the potential returns of their investment portfolios. And for many, the value of home ownership and the options it offers presents more opportunities than all of their financial assets.
For these Americans – the vast majority of soon-to-be retirees – Burns offers the following three strategies for living well in retirement:
Strategy 1: Turn Your Home Equity into Income by Downsizing, Moving or Renting
More Americans are "house poor" than plain poor. Deciding to move to a smaller and less expensive house is one way to have an immediate impact on your cost of living.
Retirees can achieve even greater benefits by relocating from a high cost area to a low cost area. New Englanders can enjoy substantial cuts in their cost of living by moving to Florida just as residents of Michigan can benefit from a move to Nevada or Arizona.
Retirees should also consider renting rather than owning. It's the logical extension of downsizing. Operating expenses are lower in apartment complexes than they are in single family homes or even condos. Also, the entirety of your home equity can be put to work to generate income.
Strategy 2: Delay Your Retirement and Draw Income Later – and Wisely
Retirement wasn't a problem in the past because it seldom lasted very long. It is only a problem today because our life expectancies have increased but we've made no adjustment in how long we work. According to one exercise, if the length of our expected retirement was to be in the same proportion today as it was 50 years ago, the normal retirement age would now be 72.
Most people take Social Security benefits as early as possible. That's exactly the opposite of what they should do. Delaying benefits, even at the cost of spending down investment accounts, will mean a higher lifetime standard of living. This is particularly true for married men with younger wives.
In addition to drawing benefits later, there can be major advantages to some unconventional draw downs of retirement accounts, particularly if future tax rates are higher. Most young people should choose Roth accounts over regular IRA accounts.
Strategy 3: Reduce Your Investment Risks and Expenses
Many retirees go from relatively low cost 401(k) plans to much higher cost managed plans when they retire. In fact, they should be going in the other direction, reducing costs because each percentage point saved increases their income. Investment expenses can be reduced by more than 2 percentage points a year for some retirees.
In addition to reducing investment expenses, retirees should take steps to reduce investment risk and increase their peace of mind. For example, workers who retire without employer pensions face a lifetime of worrying about whether they will outlast their savings. They can increase their income and improve their savings' survival odds by turning a portion of their savings into a life annuity.
Many retirees (and investment managers) don't understand that taking more risks to get higher returns doesn't automatically mean a higher lifetime income. In fact, it generally means the opposite. Unless retirees are willing to accept a lower spending rate today, they may achieve their highest lifetime spending power by reducing risk and investing in Treasury Inflation-Protected Securities (TIPS).
Concludes Burns: "Note that none of these decisions involves significant knowledge of investments or insight into the Federal Reserve. Indeed, the common theme of these decisions is that they are personal decisions that tend to reduce risk, not increase it. They also give the majority of Americans the best chance to live well during retirement."
Scott Burns is a newspaper columnist and author who has covered personal finance and investments for nearly 40 years. Today, he is one of the five most widely read personal finance writers in the country, according to The Dallas Morning News. In 2006, he co-founded AssetBuilder, a Registered Investment Advisor (RIA), where he serves as chief investment strategist.
AssetBuilder offers weary investors a science-based alternative to the unnecessary costs, risks and complexity of traditional Wall Street firms. With fees that rank among the lowest in the financial services industry, AssetBuilder provides customers a menu of pre-constructed, risk-managed portfolios that make choosing and implementing a personal investment strategy simpler than ever. Co-founded by personal finance writer Scott Burns, AssetBuilder's portfolios are an extension of Burns' widely praised "Couch Potato" methodology. Based in Dallas, AssetBuilder is a Registered Investment Advisor. For more information, visit the company's Web site at www.AssetBuilder.com.
Click here to purchase Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire.