repost­ed from
by: Andrea Coombes
Decem­ber 19, 2012

If your retire­ment date is just a few years away, it’s time to start fine-tun­ing your 401(k) and your over­all sav­ings strat­e­gy. Retire­ment experts offered these nine tips for savers who are near­ing retirement.

1. Stash some sav­ings out­side of retire­ment accounts

Many savers keep all of their retire­ment sav­ings in a 401(k) or sim­i­lar tax-qual­i­fied account. But con­sid­er putting some mon­ey in an account that’s not tax-advan­taged, said Mack­ey McNeill, founder and pres­i­dent of Mack­ey Advi­sors in Belle­vue, Ky.

That way if you need a lump sum—and new­ly retired folks often come up with a few big expen­di­tures, she said—you’re not bump­ing your­self into a high­er tax bracket.

“Every time it comes out of the 401(k) or IRA, it’s tax­able,” McNeill said. Hav­ing a sep­a­rate account “allows you to be more tax-efficient.”

Say you decide to down­size to a con­do and you find one you want to buy—but your home hasn’t sold yet, so you need to pull the down pay­ment from your retire­ment sav­ings. That’s a tax­able dis­tri­b­u­tion and, com­bined with your reg­u­lar dis­tri­b­u­tions for liv­ing expens­es, could push you into a high­er bracket.

Tips to fine-tune your 401(k)

If you plan to retire in five years or less it may be time to adjust your invest­ing strat­e­gy. Mar­ket­Watch’s Andrea Coombes dis­cuss­es tips on how to improve your 401(k) plan.

“Some­thing like that gets to be pricey because it’s not just the down payment—it’s the tax­es, too,” McNeill said. “If you could take a lit­tle bit now and a lit­tle bit lat­er or have some mon­ey out­side the IRA, you can man­age your tax hit.”

2. Make a pro­vi­sion for cash flow

To make sure you’re not forced to sell stocks in a down mar­ket, con­sid­er invest­ing some sav­ings in short-term bonds and cash. Retirees should have “at least two to five years of cash flow in their port­fo­lio, prefer­ably five,” McNeill said.

“The first four or five years of retire­ment, those are the peri­ods that are most like­ly to send you back to work,” she said. “It’s when those first few years have intense neg­a­tive performance—that’s when the port­fo­lio is going to fail,” McNeill said. “If you have to sell stocks when they’re down, [your port­fo­lio] doesn’t have enough oomph in it to recov­er because you’re with­draw­ing too fast.”

You can hold this mon­ey inside your tax-qual­i­fied account, such as an IRA, she said. “This is mon­ey we can use in a mar­ket cor­rec­tion,” McNeill said.

Some clients, McNeill said, like hav­ing two IRAs, with one invest­ed in short-term bonds and cash and the oth­er in equi­ties. That sec­ond account “has more volatil­i­ty but I don’t have to wor­ry about that because I’m not going to tap into that for five years,” she said. The first account acts as your pay­check. “If you phys­i­cal­ly sep­a­rate them, peo­ple feel bet­ter about it.”

3. Assess your bond portfolio

Maybe you’ve been shift­ing more mon­ey toward bonds as you get clos­er to retire­ment. The ques­tion is: what type of bonds?

Dan Goldie, pres­i­dent of Dan Goldie Finan­cial Ser­vices LLC, in Men­lo Park, Calif., sug­gests stick­ing to short-term, high-qual­i­ty bonds.

“The pur­pose of fixed income in the over­all port­fo­lio is to pro­vide sta­bil­i­ty,” said Goldie, who is also co-author, with Gor­don Mur­ray, of “The Invest­ment Answer.” “The two things in the bond mar­ket that affect risk and return are cred­it qual­i­ty and matu­ri­ty length. I use high-cred­it-qual­i­ty, short-matu­ri­ty bonds,” he said.

In oth­er words, he avoids longer-term and high-yield bonds, because they “are more high­ly cor­re­lat­ed with stocks,” he said. “If stocks go down, chances are your long-term bond fund and your high-yield bonds will go down at the same time.”

Goldie said that, in gen­er­al, a port­fo­lio that’s 70% stocks and 30% short-term bonds has about the same volatility—but high­er returns—than a 60% stock, 40% bond port­fo­lio that uses long-term and high-yield bonds. “You get more bang for your buck” with the first port­fo­lio, he said.

4. Get more con­ser­v­a­tive, but don’t over­do it

Peo­ple often assume they need to over­haul their invest­ing approach as they near retire­ment. For peo­ple in rea­son­ably good health, that’s not nec­es­sar­i­ly true.

“I often have peo­ple tell me, ‘Well, I’m com­ing up on retire­ment so I need to make a major change,’” Goldie said. “Retire­ment is an impor­tant date because it is the end of your earned income or a reduc­tion in your earned income, but it’s not the end of your life. You still need to keep invest­ing as long as you’re alive.”

Oth­ers agreed. “You’ll most like­ly be get­ting more con­ser­v­a­tive, but it’s more con­ser­v­a­tive based on who you are, not nec­es­sar­i­ly a con­ser­v­a­tive port­fo­lio,” said Scott Hol­sop­ple, chief exec­u­tive of Smart401k, an Over­land Park, Kan., firm that offers plan advice to savers.

If you’re healthy you might have 20 or 30 years in retire­ment. Even if infla­tion is low, it will eat away at your pur­chas­ing pow­er over that time, Goldie said.

“It’s rea­son­able to reduce your equi­ty expo­sure as you enter retire­ment, but by no means should it be elim­i­nat­ed,” Goldie said. “And for most peo­ple it’s a joint lifetime—a hus­band and wife—which is even longer than a sin­gle life expectancy.”

5. Ensure that your port­fo­lio is diversified

You know that diver­si­fi­ca­tion is impor­tant. But how close­ly have you looked at your invest­ments? McNeill said one new client came to her with a port­fo­lio that looked to be diver­si­fied, but on clos­er inspec­tion it turned out that 70% of the hold­ings could be traced back to one company—thanks to invest­ments in com­pa­ny stock, plus bond and mutu­al-fund invest­ments that all linked back to that firm.

“You could eas­i­ly retire and find your­self ‘not retired’ again with this port­fo­lio,” McNeill said.

Before you retire, “Get out that mag­ni­fy­ing glass and look a lit­tle clos­er,” she said.

6. Under­stand tar­get-date funds

Take a close look at any tar­get-date funds in which you might be invest­ed. These set-it-and-for­get-it investments—an increas­ing­ly pop­u­lar 401(k) option—promise to han­dle the hard work of asset allo­ca­tion and rebal­anc­ing for you. The idea is you need just one tar­get-date fund that’s named with your retire­ment year.

But tar­get-date funds with the same name can vary wide­ly in how they invest. Some funds assume investors will with­draw their mon­ey on the day they retire; oth­ers assume investors will stay invest­ed through­out retire­ment. Each strat­e­gy sug­gests a dif­fer­ent approach to asset allo­ca­tion, so check to make sure the tar­get-date fund isn’t tak­ing on more risk than you can handle.

“If you’re going to retire in 2030, don’t just buy the retire­ment 2030 fund. Actu­al­ly look and see what allo­ca­tion that 2030 fund has and try to get a sense of whether that is right for you,” Goldie said.

7. Trim fees

Ide­al­ly, you’ve been invest­ing in low-cost invest­ments since you start­ed putting mon­ey aside for retire­ment. But if you haven’t, now’s the time to start. The less you pay in invest­ment expens­es, the more mon­ey you’ll have to spend in retirement.

Look for low-cost, wide­ly diver­si­fied index funds so that you increase your expect­ed return, Goldie said. That, in turn, means “more poten­tial income in retire­ment,” he said.

8. Ask key questions

Often, soon-to-be retirees focus on their planned date of retirement—perhaps because it’s eas­i­er than focus­ing on the com­plex ques­tion of how much mon­ey you’ll need. But those mon­ey ques­tions are more impor­tant, Hol­sop­ple said.

“Rather than say­ing, ‘I want to retire at 65’ or ‘in 10 years,’ take a step back,” Hol­sop­ple said. Ask “How do I want to live in retire­ment? What is that going to take in terms of sav­ings, and where am I right now?” he said.

“You can con­trol your sav­ings rate and you can con­trol your expec­ta­tions. Those are a big dri­ver on whether you’re able to live the retire­ment you desire,” Hol­sop­ple said.

9. Save more

Ramp­ing up your sav­ings in the years lead­ing up to retire­ment is a good idea for two rea­sons. Obvi­ous­ly, you’re grow­ing the pot of mon­ey you’re going live on in retirement.

But sav­ing more now also means you’re learn­ing to live on less. That’s a use­ful prac­tice for those who haven’t saved enough. And that would appear to be many of us. Read relat­ed col­umn: Retire­ment fears rise among old­er work­ers .

Some esti­mates sug­gest a 67-year-old should save eight times his salary if he wants to enjoy 85% of his pre­re­tire­ment income in retire­ment. Read relat­ed col­umn: Retire­ment sav­ings: How much is enough? 


Andrea Coombes is a per­son­al-finance writer and edi­tor in San Fran­cis­co. She’s on Twit­ter @andreacoombes.

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