When you approach retirement, a sound investment strategy becomes more important than ever as you seek to secure your finances during your golden years. After years of saving and investing, you'll need to devise a plan that will maximize your money while minimizing risk. Here are five smart money moves for 60-somethings.
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As you transition from the accumulation stage to the distribution stage, generating income will be the most important piece of the retirement puzzle, says Jim Sloan, president and wealth manager of Jim Sloan and Associates.
Most investors will accumulate money through two distinct forms of income: "maybe" income and "guaranteed" income. "'Maybe' income is generated from a conservative portfolio of fixed income investments. It is not guaranteed and the accounts are usually 100 percent liquid," he explains.
On the other hand, "guaranteed" income is generated from fixed annuities with lifetime income riders. The account will grow between 6.5 percent and 8 percent per year for income purposes, and there is a fee of 0.4 to 1 percent annually for these riders, he notes.
Hold off on your distributions
Once you've reached your 60s, you can begin dipping into Social Security and your retirement accounts without paying a penalty. While it may be tempting to begin reaping the rewards of a lifetime of investment, it's usually wise to hold off for a few more years. For every year that you postpone dipping into your 401(k) or IRA, they will continue to gain compound interest. What's more, if you tap into your Social Security before you've reached full retirement age, you might see your benefits slashed by as much as 25 percent.
Consult a financial advisor
When devising long-term plans for your finances, it's always prudent to seek professional advice. Jim Sloan says there are several critical questions that baby boomers should ask their financial advisors when approaching retirement. Investors should consider how their investment strategy will affect their future tax returns, income and liquidity needs, while also being mindful of how an investment plan will eventually affect the transition of their estate to their heirs.
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Make realistic projections
When mapping out your financial future, realistic and accurate predictions will help you to avoid any nasty surprises. Retirees often overestimate the rate of return on long-term investments, Sloan says.
"Many retirees believe that long-term investors will earn 8 to 10 percent. However, in the past decade, very few investors have earned anything, much less an average yield of 8 to 10 percent," he says. "Once you deduct turnover costs, transaction fees and other expenses, it is difficult for the masses to earn anything when the market hasn't grown during that period."
Before entering retirement, you'll need to ensure that your finances are sufficient to support you throughout the rest of your life. Experts say that you'll need roughly 70 percent of your normal pre-retirement income to maintain your previous style of living, though if you plan on traveling or making major purchases, you'll need to factor those in to your long-term predictions.