As a first step, divide your nest egg into three parts:
• Money you’ll need within four or five years. Keep it in a bank or a money market fund—any account that is readily accessible when the need arises.
• Money you won’t have to touch for 15 years or more. Keep it in well-diversified stock index funds, which track the market as a whole rather than trying to pick individual companies. Low-cost stock index funds are offered by Vanguard and Fidelity Investments. T. Rowe Price has index funds, too, but they cost a little more.
• In-between money. Keep it in bond mutual funds. When interest rates rise (as most people expect to happen in coming years), the value of bond fund shares will fall. But managers will be snapping up those new, higher-interest bonds, so the income from your fund will rise. When rates fall again, in the next recession, the value of your shares will go back up. If you reinvested your dividends, you’ll have more shares working for you, too.
5. Keep your job, if possible. Or get one, if you’ve already retired. Every extra year of work improves your Social Security benefit, increases your savings (assuming you save) and reduces the number of years that your nest egg has to last. It might bring you health insurance, too. Public schools, hospitals and government agencies offer benefits. Some private companies—including Costco, Home Depot and Wal-Mart—give benefits even to part-timers (usually with a waiting period).
6. Do whatever you can to keep health insurance. If your company offers retiree coverage, don’t even think of moving to another city or state until you find out if you can take your coverage with you. Most plans won’t follow you or will charge you more at a new location.
If you need individual coverage, check with local health insurance agents who can round up plans suitable for you (you can find an agent through the National Association of Health Underwriters). For the lowest premium, pick a policy with a high deductible. You may pay more out of pocket if you become sick, but you’re protected from catastrophic, bankruptcy-inducing costs. Once you have signed up, you’re in the insurer’s PPO network, which gives you discounts of up to 50 percent or so, even on bills you pay yourself.
Health care reform would be helpful for those not yet in Medicare. Any new law is likely to bar rejection for preexisting conditions (at my age, life is a preexisting condition) and provide faster access to generic drugs and subsidies to help cover costs. Those on Medicare will likely see the “doughnut hole”—which requires them to pay some Medicare Part D costs—close over the next few years.
7. Be smart about Social Security. Draw from your 401(k) or IRA first, and claim Social Security benefits later. If you can wait until 70, your check will be about 76 percent higher than if you had started at 62, and will improve the protection for your spouse as well.
8. Be smart about retirement funds, too. If you’re with a large employer, consider leaving your 401(k) money in your company plan, provided that it offers flexible withdrawal options. Your money will be managed at a much lower cost than you’ll find elsewhere, and the funds have been chosen carefully for people in your situation. If you have a traditional pension and take it as a lump sum, don’t hand it to a broker or planner who wants to sell you products. Choose index funds yourself or work with a fee-only financial planner.
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