by Wendy Connick
November 10, 2017
by Wendy Connick
November 10, 2017
Saving enough money to pay for all the things you want to do in retirement is no small task. Many retirees end up compromising on their retirement plans because there simply isn't enough money to do it all. But if you can get the most out of every dollar, you may be able to do more than you ever dreamed.
Time and money may not be exactly equal, but when something needs to be done, you can generally spend either more time or more money on it. Because retirees generally have more time on their hands than money, it makes sense to spend more of the former.
For example, finding and collecting coupons takes a lot of time, but it can also save you a significant amount of money. The same is true of keeping track of supermarket specials and planning your menu for the week around the store's markdowns. Cooking your own meals takes a lot more time and effort than going to a restaurant, but it's a whole lot cheaper. Learning how to do simple home repairs, like replacing a worn-out washer in your faucet, can also save you a bundle.
The ultimate way to trade time for money, of course, is to get a job. Going back to a 9-to-5 job doesn't exactly appeal to most retirees, but you may be able to stretch your savings a lot further by getting a part-time job or setting up a side hustle.
As a rule of thumb, the riskier an investment is, the higher its potential returns will be. After all, if a risky investment didn't offer higher rewards, no one would buy it. Retirees generally want to minimize risk in their portfolios, as they depend on that money, and they don't have years to recover from a stock market crash. However, if you embrace a bit of risk in your portfolio, you can increase your returns without adding too much volatility.
Many retirees use the formula of 110 minus their age to calculate the percentage of their portfolio that should be in stocks. Thus, a 70-year-old would have 40% of his portfolio in stocks with the remainder in bonds and cash equivalents. Pushing your stock percentage just a little bit higher can give you a significantly higher overall return without a major increase in risk, as long as you thoroughly diversify your stock holdings.
For example, let's say you had $500,000 in your retirement portfolio, with $200,000 of it invested in stocks and the remaining $300,000 in bonds (a 40/60 asset allocation). Since 1926, stocks of large companies have returned an average of 10% per year, while government bonds have returned between 5% and 6%. Based on these figures, in an average year, the stocks in your portfolio would earn you $20,000, and the bonds would bring in around $16,500, for a total annual return of $36,500.
If you shifted your investments to a 50/50 split between stocks and bonds, then in an average year the stocks would yield $25,000, and the bonds around $13,750 for a total annual return of $38,750. That's an extra $2,250 per year in exchange for only a slight increase in volatility.
If that aforementioned 70-year-old had 50% of his holdings in stocks instead of 40%, the money should definitely not be in just one or two companies. Instead, he'd be wise to spread it out over several different funds or ETFs, and perhaps throw in a handful of dividend aristocrats to boost his dividend yields.
Just because you're retired from work doesn't mean you're retired from taxes. Uncle Sam will continue to demand his cut, and you may need to pay state income taxes as well. And then there are sales taxes, property taxes, excise taxes, capital gains taxes, etc. You'll probably never be able to cut your tax bill to zero, but by taking advantage of every possible tax break, you can shrink it down to a fraction of what the government would like to collect from you.
For example, if your taxable income for the year is high enough, not only do you have to pay taxes on that income, but you also have to pay taxes on your Social Security benefits. So for retirees, having lots of taxable income is a double whammy. The solution is to find a way to make much of your income not taxable, and the easiest way to manage this is to have your retirement savings in a Roth account. Unlike traditional IRAs and 401(k)s, a Roth account gives you a tax break on the money you take out of the account instead of the money you put into the account. Fortunately, even in retirement, you can convert your traditional retirement accounts to a Roth account (although you have to pay taxes on the money when you convert it, so careful planning is essential).
If you really want to get the most out of your money, you need to know exactly how much is coming in and where and when it's going out. In other words, you need a budget. Budgeting is a hassle to set up, but it's not all that difficult to keep going once you get in the habit, and a basic budget can make an enormous difference in your financial situation. Give it a try, and you may even find that you enjoy knowing what every one of your pennies is up to.