Where do you stand, financially speaking, compared with your peers?
Are you making more than your college classmates? How do your saving and spending patterns stack up against those of the rest of your generation? We're forever asking such questions.
"Our brains are comparison machines, always tuned in to relative differences," says social psychologist Heidi Grant Halvorson, coauthor of Focus: Use Different Ways of Seeing the World for Success and Influence.
Trouble is, comparing can get discouraging. So don't get hung up on what might have been. Instead, Halvorson says, "look at people who are doing it right — or at least better. Don't think 'How good am I at this?' Think 'How can I get better?' "
The tips on the next pages will help you do just that, walking you through the big financial questions you'll face in the next 10 years of your life. It's a pocket guide to your money in your 60s: how to maximize your income, rethink your investments, spend smarter and save more, starting right now.
AARP Financial Ambassador Jean Chatzky
Financial expert Jean Chatzky is a regular contributor to AARP The Magazine and AARP.org. Read Jean's articles, watch her money tips videos and learn more about how to save more and spend less at aarp.org/jeanchatzky.
The Plan for What You Owe (and Own)
1. Start a debt-busting avalanche
Still carrying car loans, credit card bills, lingering Parent PLUS college loans or personal loans? Use these remaining full-employment years to knock down these nondeductible debts.
You'll get the biggest bang for each buck by paying off the highest interest rate debt in your portfolio first, while making minimum payments on the remainder. It's called the avalanche method, and it gets you out of debt cheapest and fastest.
If you have a credit card charging you 19 percent and a college loan at 7.9 percent, throw every extra dollar you have at the higher rate. Once that debt is retired, move on to the next highest rate. (To run your own debt-free calculation, try the Credit Card Avalanche Calculator at JeanChatzky.com.)
2. Make a move on your mortgage
If you've paid off the mortgage, give yourself a hand.
"The happiest clients with the least stress are the ones who go into retirement completely debt free, including the mortgage," says financial planner Bill Losey, author of Retire in a Weekend.
It's easier to deal with the income drop of retirement when the roof over your head isn't going anywhere. Still, the number of 60-somethings with mortgages has grown dramatically since 2000: A third of those 65 and up have housing debt. If you're a long way from paying it off and your interest rate is 4.5 percent or higher, moving to a 10- or 15-year loan can help speed the process (but payments will be higher). Adding an extra payment or two per year might accomplish the same goal without the expense of refinancing.
3. Refi or put in reverse?
Reverse mortgages are marketed heavily to older homeowners, who can obtain them at age 62. Essentially, a reverse mortgage converts part of your home equity into cash.
The payout — tied to life expectancy — can be taken as a lump sum, as a line of credit or in monthly sums that last as long as you or your spouse lives in the house. But reverse mortgages are complex, are laden with fees and won't allow you to tap all of your equity. Plus, the interest rate can be 1 to 1.5 percentage points higher than you'd get by refinancing. Yes, housing debt in retirement isn't ideal (see above), but for many it's unavoidable, and a refi lets you minimize your monthly payments while pulling out cash.
"Refinancing for 30 years could save you $500 a month," says Keith Gumbinger of mortgage information website HSH.com. "That frees up money for a car, if you need one."
The Plan for What You Make and Save
1. Defeat the grind
Now is the time, says Maryland financial adviser Tim Maurer, to realize that life isn't a "two-act play where you work your butt off and then retire. It's a three-act play, and people in their 60s are entering act two."
These are the years to explore a new professional passion. You may bring home a little less money and put in fewer hours, but your new job won't feel like work. Once you transition, he notes, "you may not make enough to contribute to your nest egg, but you also won't have to tap it."
A nest egg untouched can continue to grow, often tax-free, at least until age 70, when mandatory withdrawals typically begin. Staying employed also allows you to put off taking Social Security benefits until age 70, which brings with it an 8 percent bump in benefits for every year past your full retirement age that you delay.
2. Spark a sell-off
If you're like most 60-somethings, your income has already started to trend downward. It's time to take an honest look at where that money is currently going. That not only means the small things (such as reducing the number of premium cable channels you pay for and eating out a little less) but the larger ones (do you really need that second car now that your kids are out of the house?).
You can also work the other side of the equation — income — by doing some strategic decluttering, for cash: Go room by room and then list that mid-century bedroom set or your beloved comic book collection on eBay or Craigslist.
3. Launch a side project
One in four Americans ages 44 to 70 harbors dreams of becoming an entrepreneur, according to the Small Business Administration. If you're one of them, the time to make a move on that dream is now, while your career is still active. "Start part time at least three to five years before you retire," says financial planner Losey. "Do it in the evenings and on weekends. If it's profitable by the time you retire, keep it going."
The Plan for How You Invest
1. Run the numbers
By 60, say the folks at Fidelity Investments, you should have saved about six times your current income. That's assuming you will grow your portfolio by 5.5 percent annually, retire at 67 and live to 92. It also assumes replacing 85 percent of your preretirement income when you stop working.
If you're off track, adjust one of the factors you can control accordingly, says Beth McHugh, vice president of Fidelity Investments. Could you delay retirement? Live on less? Work part time in retirement? A retirement calculator can help you see if you're on track. (Try AARP's at aarp.org/retirementcalculator.) "The closer you get to retirement, the harder it is to close that gap," notes McHugh.
2. Find balance
At least once a year you should rebalance your holdings so that you have the appropriate amount in stocks, bonds and cash (as well as all of their subcategories) for your age and risk tolerance.
This gets more important as you near retirement; should the market stumble, you have less time to make up what you've lost. That means you not only want no more than 50 to 60 percent of your assets in stock, but you also want no more than 5 to 10 percent of your assets in company stock. The average for people in their 60s is 7.3 percent. Scale back if you've got more than that. Not the rebalancing type? Put your money in a target-date retirement fund, which can automatically transition from stocks to bonds as retirement looms.
3. Break the rule
The financial industry has long rallied around the "4 percent rule," which states that your money should last 30 years as long as you withdraw no more than 4 percent annually. But for people who retired right after the markets crashed in 2008, the rule doesn't seem to be holding up.
One alternative: Convert 20 to 25 percent of your assets into an immediate annuity that will provide a fixed income stream for the rest of your life. "I prefer you do it after age 65, even 70," says planner Losey. "The older you are, the shorter your life expectancy, the higher your payout."
An annuity is essentially insurance, not an investment; it won't rise with inflation, and when you die, the principal's gone. But an immediate income annuity will ensure that you won't outlive your money. "Because today's low interest rates are currently not working in your favor, it makes sense to annuitize in chunks as you age," says Losey. "Then, you invest the remainder of your nest egg to provide the growth you need to keep up with inflation."
The Plan for How You Spend
1. Look at a map
One way to dramatically lower your living expenses: Go somewhere cheaper.
This doesn't have to mean moving across the country, says planner Tim Maurer. Trading a high-tax school district for one nearby with lower taxes can make a substantial difference. If you're willing to go a few hours — say from San Francisco, where the median home price is $685,000, to Carson City, Nev., where it's $140,000 — you can transform your standard of living. "This is the most powerfully positive thing that someone can do to improve their retirement situation," says Maurer.
2. Reimagine your life (insurance)
Maybe you first bought life insurance when you had a baby. Now the baby's in law school. Time to think about how much longer you'll need the coverage. If your obligations are behind you — for example, your spouse could live on the money in the retirement accounts plus Social Security if you died, and the kids are on their own — then drop it.
3. Think long term
If you're mulling long-term care insurance, your window is closing: The younger you are when you apply for coverage, the lower your premiums. According to the American Association for Long-Term Care Insurance, a 60-year-old couple could get policies for about $155 a month each. The initial benefit of $162,000 grows to $329,000 for each individual when that person reaches 85.
At 65, that same policy will cost about $225 a month. Such policies can work for people worth more than $500,000 — too much to easily spend down to qualify for Medicaid, but less than the $3 million it would take to fund their own continuing care.
4. No, really long term
Got great genes and fear outliving your savings? Longevity insurance is a less-expensive policy that won't pay off unless you live, typically, to the ripe old age of 85. Then you'll start receiving monthly sums to help with your living expenses. Say at age 60 you buy a $50,000 policy from MetLife. If you live to 85, you'll start receiving annual payouts of $15,862 if you're a man, $15,511 if you're a woman.
Don't forget about inflation: This money would only be worth $7,576 (man) and $7,408 (woman) in today's dollars. Some companies offer longevity insurance that has inflation protection. It's worth paying for.
Jean Chatzky, AARP’s financial ambassador, is a best-selling author and an award-winning personal finance journalist. With additional reporting by Arielle O’Shea.
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