How to Make Your Money Go Further
Sometimes it makes sense to trim retirement contributions so you can pay the bills.
OUR READERWho: Judy Yontz, 68Where: Columbus, Ohio
Question: How do I avoid running out of money in retirement?
Like many retirees, Judy worries that her money is insufficient to cover expenses and might eventually run out. She gets $2,100 a month from a combination of Social Security, a pension and a part-time job as an administrative assistant at a hospital. Her only debt is the $450 monthly mortgage payment on her condominium, and her strict budget even accounts for the $2 tip to her hairdresser. "I try to live very frugally," she says.
Nevertheless, Judy projects that her monthly expenses will reach $2,600, while her income, at best, is fixed -- and will likely fall once she stops working entirely. She has $8,000 in the bank and $113,000 in a 403(b) retirement plan, to which she adds $600 a month. Any unplanned expenses, such as a jump in utility bills or condo fees, would be troublesome.
Wiggle room. Judy is one of those rare people who should trim or eliminate retirement-fund contributions. "I've been totally fixated on building up my 403(b) plan," she says. Putting that $600 (or most of it, allowing for paying the extra taxes) into accessible short-term savings would provide valuable wiggle room. Judy can also look for ways to wring a few extra dollars of income from her investments without undue risk.
For instance, she could tweak the allocation of her mutual funds. Judy has been extremely cautious, investing only 10% of her portfolio in stock funds. "When the market collapsed, I wanted to put it all in bonds," she says. Right now, though, bonds pay little, and the principal is vulnerable to higher interest rates and inflation. Increasing her stock allocation to 25% -- or, at most, 50% -- would help Judy's retirement plan grow over time and reduce the risk that she will run out of money. Low-cost growth-and-income funds that invest in high-quality, dividend-paying stocks are ideal for seniors who want a moderate stock allocation. One good choice is T. Rowe Price Equity Income (symbol PRFDX), which yields nearly 2%.
With the remainder of her savings, Judy is open to buying an immediate annuity, which pays a guaranteed monthly income. "I see no other way to stretch my money unless I continue working for several more years, which is not what I want to do," she says. In general, retirement annuities form a solid foundation. But current interest rates are so low that the fixed monthly check would be small and likely to lose purchasing power over the years. For instance, if Judy pays $60,000 today, she would get about $370 a month for life, according to ImmediateAnnuities.com.
Alternatively, she could create a bond ladder, which provides more flexibility than an annuity, says Jim Davis, a financial planner in Columbus, Ohio. Laddering means staggering the maturities of bonds and the timing of interest payments. It protects against rising interest rates and inflation because you regularly get money from maturing bonds, which you can reinvest in new ones, often for a higher yield. Laddering takes more work than purchasing an annuity, but mutual fund companies, online brokers and financial planners can help -- at little or no cost.