This post has the key ideas from the book: The Smartest Retirement Book You Will Ever Read by Daniel Solin.
1. Simple, commonsense solutions are often better than complex, costly ones. Keep this in mind, as the financial industry has its own agenda.
2. You have to fortify your portfolio against inflation. Bonds cannot fight against inflation. Therefore you should have stocks in your portfolio to fight against inflation.
3. When you retire, you should set enough of a cash reserve to provide for your living expenses for at least 2 years. Let us say you want a portfolio of 60% stocks and 40% bonds. You have to change it to 55% stocks, 35% bonds and 10% cash. You take the 10% cash and put it in a savings account. Then each month you can take some money from the account for your living expenses. After a year, sell some of your holdings and replenish the cash account. If stocks have had a bad year, then sell your bonds. Each year you rebalance your account to 55% stocks, 35% bonds and 10% cash. The cash cushion and the well-balanced portfolio will cut your portfolio’s volatility and help you keep invested in stocks.
4. When you invest in stocks and bonds, do not invest in individual stocks and bonds. Invest in index mutual funds. A good portfolio may be like this:
- Stock part: 70%Total US Stock Market, 30% Total International Stock Market
- Bond part: 100% Total Bond Market
Based on your risk appetite, your asset allocation will be:
- Low risk: 20% stocks, 80% bonds
- Medium-low risk:40% stocks, 60% bonds
- Medium-high risk: 60% stocks, 40% bonds
- High risk: 80% stocks, 20% bonds
5. One key thing to remember is to invest in index funds.They give you market returns, which are very difficult to beat. They also give you low expenses, broad diversification, tax efficiency and minimal cash holdings(which can reduce your portfolio’s return). You can also invest in target date funds, like those provided by Vanguard. ETFs are more expensive and have commissions. Therefore for most people you do not need ETFs, unless you happen to live in a country where there are no good and cheap index funds. For bond funds, keep things simple and just invest in a broadly diversified, low-cost, bond index fund. Most investors do not need TIPS(Treasury Inflation Protected Securities). This is because they have lower returns, higher volatility and do not help when there is deflation. You also have to remember that there is no thing as a free lunch and there are risks with both bonds and stocks but there is higher long-term risk in cash alone.
6. Make sure your cash deposits with banks do not exceed your government’s insurance limits. Smaller banks and online banks may give you higher yield on your cash deposits.
7. Money-market funds are another way to keep your short-term cash and will generally give you higher yields than cash. Look for a low-cost fund from a highly respected fund family.
8. You can consider immediate annuities. In an immediate annuity, you pay the insurer a lump sum. The insurer then pays you an amount monthly for the rest of your life. It may be worthwhile to buy an immediate annuity that pays for both you and your wife and also pays for a certain fixed number of years( say 30 years). The immediate annuities come in two varieties: fixed and inflation linked. Inflation linked annuities will pay you less initially( usually less by about 30%). Opinion is divided as to which is best. You can also consider a charitable gift annuity under certain circumstances. Never buy variable annuities or equity-indexed annuities under any circumstances.
9. Intelligently tap your retirement egg. First take money from your taxable accounts. Then take money from your tax-deferred amount( like IRA and 401(k)). Finally take money from your no-tax account(like Roth IRA). Look at the rules about retirement accounts in the place you live in carefully and research to see what are the best options.
10. If you don’t need the money urgently, think carefully about taking early Social Security benefits. If you take them early, it can affect the quality of life of your surviving spouse.
11. Do not completely rely on your pensions. If you get a pension, a monthly pay-out is usually better than a yearly pay-out.
12. Sometimes you may have to accept later retirement. If your company forces early voluntary retirement, try to get as much benefits as you can. Age discrimination laws may not help. Part-time work may lead to lower pensions and benefits in many cases.
13. Reverse mortgage should be the last resort you take. When you reverse mortgage, you get 50%-70% of the value of your house as a lump sum or a monthly check. They have a lot of fees and pay you very little and are not what it is made out to be. Property tax assistance, deferred payment home repair loans and relief programs may be better alternatives.
14. Life settlements usually do not make any sense. Avoid them in most situations.
15. Investigate your health insurance options before you retire. If your net worth is more than $750,000, then you do not need long tem care insurance in general. When you buy it, a shorter long-term care policy with bigger benefits is usually better. Make sure you can afford the premiums and make sure the company is reliable in paying out claims.
16. Make a will. Create a living trust.Name a beneficiary for retirement accounts. Establish payable-on-death accounts for your bank accounts and name your beneficiaries. Create a transfer-on-death registration for stocks, bonds and brokerage accounts.All this will avoid problems when you die.
17. Leave your loved ones an IRA. Tell them not to change the name on the IRA. Roll your 401(k) into an IRA. When they withdraw money from the IRA they have to however pay tax. If you convert your IRA into a Roth IRA and then leave it for your loved ones, then they do not need to pay any tax from the withdrawals.
18. Think a lot before making an irrevocable trust. Consider who will manage the assets, how they will manage it and what are the fees.
19. A prenuptial agreement can serve to resolve financial conflicts when older couples marry.
20. Beware of scams. Don’t fall for salespeople touting obscure designations. If a financial professional offers something for free, then run. If you need financial advice, stick with a fiduciary who makes no effort to beat the markets and who uses a well-known independent custodian.