A retirement plan is a work in progress. You begin the plan with certain assumptions about your spending, inflation, taxes, investment returns, and other factors. Reality won’t match your assumptions as the years roll on. That’s why every few years, the plan needs to be adjusted. Once you are in or near retirement, you should make regular adjustments every year or so to avoid having to make less frequent but more severe adjustments.
If you’ve been following my advice the last few years, you shouldn’t need to make big adjustments this year. But the recession, bear market, historic low interest rates on income investments and other factors put major crimps in many retirement plans. If you are a new subscriber or took some more aggressive positions in the past, your plan might need some significant adjustments. If your retirement plan is off course, consider taking one or more of these actions to get back on track.
Earn more investment income. If you were caught by the steep drop in yields on safe income investments, grab some higher yields. Real estate investment trusts (REITs) offer yields equal to or higher than those on treasury bonds. Plus the cash payouts are likely to increase most years, and you have the likelihood of earning capital gains. My favorite REIT fund is Cohen & Steers Realty Shares.
If you prefer the safety and security of bonds, you can earn higher yields than from treasuries. I recommend PIMCO Total Return or mortgage bonds through either Vanguard GNMA or TCW Galileo Mortgage-Backed Securities.
If you need still higher income, you’ll need to take more risk. I recommend three investments that carry a reasonable level of risk for the yields they generate. Investment grade corporate bonds through Vanguard Intermediate Term Corporate Bond fund or Dodge & Cox Income should do well as the economy recovers. Each pays a yield of about 7%. Preferred stock usually yields 8% or more. The value of your principal will bounce up and down with long-term interest rates. The best way to buy is through a closed-end fund, such as Preferred Income (PFD), which must be purchased through a broker. Finally, another investment that should do well as the economy recovery is high-yield bonds. I recommend Columbia High Yield. See the February issue for details.
Work longer. In the last few years, Americans started retiring a little later and going back to work after first retiring. These trends should continue. The labor shortage in many fields, even during the recession, makes working an easier decision. If you can add to your retirement fund most of your salary for two or three years, your fund should really be beefed up. One recent survey found the bear market caused many people to delay retirement by four years.
Reduce taxes. There are a host of ways you can reduce taxes on your investments, IRAs and more. These are available in the archive section of the web site, and I bring new ideas in the monthly visits. For example, consider taking advantage of the new super-low capital gains rates of as low as 18% – or 8% for your children or grandchildren. Take advantage of investment losses to reduce taxes as described in the October 2001 issue. Most of all, manage your IRA and other retirement accounts for maximum benefits. Learn when you should convert a regular IRA to a Roth IRA, when you should consider taking more than the minimum required distribution from an IRA, and how to minimize required distributions from a retirement account.
Reduce housing costs. If your plan needs major changes, consider moving to a smaller home or one in a lower-cost area. I know of many people who left the Northern Virginia area where I live. By moving just two hours away, they buy the same size house for a lot less money than the old home was sold for and pocket the difference. Real estate taxes and insurance also are slashed. It increases their standard of living tremendously, yet they still are near old friends and haunts. Other people find that they will be more comfortable in a smaller house.
Consider debt management. Can you refinance a mortgage at a lower interest rate? Consider doing so if you won’t incur high costs to refinance the mortgage. You might also consider paying off any mortgage you have. If the after-tax return on your investments does not at least equal the after-tax interest rate on the debt, then it makes sense to sell the investments and pay off the debt (if you won’t incur a lot of capital gains taxes to sell the investments).
Reverse mortgage. A reverse mortgage on a home can generate cash flow for the right people. But I always encourage people to be very cautious before taking out a reverse mortgage, because the costs are high. You generally should be in your late 70s or older to use a reverse mortgage and not care if your children inherit the home or its value. Be sure to get good counseling on the loan terms. Check with your local Office on Aging if you don’t have a financial adviser. I last covered reverse mortgages in detail in the June 2001 issue.
Make sensible, aggressive investments. Always remember to only take risks that have a margin of safety. Don’t expect the big winners of the last bull market to come rocketing back. Instead, you could follow my Aggressive Portfolio as presented on page 11 of each issue with part of your assets. Or you could switch to a higher-return portfolio from my recommendations. For example, move from Income Growth to Balanced or from Balanced to Sector. Or you might make my Sector Portfolio less diversified by focusing only on those investments with the best growth potential. These strategies should increase your returns over the next few years without the risk of putting your retirement goals farther away.