If you want to be financially secure, you need advice that's tailored to your own situation. With that premise in mind, we're looking this week at what people of all ages can do to shore up their finances and make the most of the resources they have.
Yesterday's column focused on those who have already retired. But today, let's turn our attention to people approaching retirement to highlight the specific issues and needs that near-retirees have.
Getting ready to retire
If you're in the final years of your career, you're having to deal with tougher challenges than your parents and grandparents faced. In past decades, a career often meant sticking with one employer for life and then receiving a healthy pension to supplement Social Security and provide you with sufficient income to last the rest of your life.
Now, though, most near-retirees don't have the luxury of a private pension, and with many not having saved enough for retirement, they're dealing with the prospect of trying to hold on to their jobs even as layoffs loom and unemployment is at extremely high levels.
You may not have as much time as you'd like to fix your finances. But here are five ideas to use to get started on the right path.
Idea 1: Save more than you think possible.
If you're one of the fortunate near-retirees who've been able to keep their jobs throughout the recession, you're probably at or near your peak earning potential. Yet as adult children finish college and leave home, and as your mortgage approaches final payoff, you should have fewer demands on your money.
That sets the stage for immense savings. Although typical guidance says to save 10% to 15% of your salary, there's no reason you can't go much higher. For some high-income earners, saving as much as half of your salary isn't impossible, and with 401(k) limits for those 50 and older of $23,000 and an extra $6,500 available for IRA contributions, you can do much of that saving on a tax-favored basis.
Idea 2: Don't hit the brakes on your investing.
Typically, financial advisors tell those approaching retirement to cut back on stocks and emphasize bonds and other fixed-income investments. Yet popular bond ETFs iShares Barclays TIPS Bond and iShares Core Total US Bond both yield just 2% to 2.5%. A longer-term approach requires some more aggressive investments.
As we saw yesterday, dividend investments can be smart. But focusing on value is also a good bet, because you still have time to ride out long periods of undervaluation. Tech stocks Intel , Microsoft , and even Apple are all great examples of stocks trading at very low multiples yet have an attractive combination of growth potential, dividend income, and stability. For Apple, future growth could make current multiples look absolutely ridiculous. Intel and Microsoft face different challenges from the decline of the PC, but with solid franchises that will be slow to decay even in a worst-case scenario, their income potential is highly valuable.
Idea 3: Consider a retirement trial run.
If you've worked nonstop for 30 years or more, retirement may seem like a dream. But if you don't know how you'll spend time and acclimate to the big changes involved, it can turn into a nightmare.
If your finances allow it, consider looking at phasing into retirement by cutting back on work hours or finding job-sharing arrangements. That way, you'll be able to evaluate what you really want to do with your time after you retire.
Idea 4: Plan out your retirement finances.
The best time to figure out how to handle Social Security and Medicare is before you retire. By understanding your benefits before you need them, you can pre-plan major decisions like when to take Social Security or timing your health-insurance needs with Medicare coverage. Especially if you're looking at early retirement, avoiding the high cost of health coverage is a key part of preparing to call it quits for your career.
Idea 5: Get rid of debt once and for all.
The last thing you need as you approach retirement is a big debt monkey on your back. If you've incurred credit card or other high-interest debt, get it paid down now while you still have your paycheck to help you. Otherwise, on a limited income, you may find yourself unable to get out of the hole you've dug for yourself.