Black Enterprise consulted Certified Financial Planner Ivory Johnson, founder of Delancey Wealth Management, to learn how pre-retirees can catch up with their retirement savings. Here is Part 2 of that interview.
Withdraw conservatively. Make sure you’re not withdrawing too much. “The rule of thumb is don’t take out more than 4% of your retirement savings a year. Retirees with a pension and no mortgage are more likely to adhere to the 4% rule [because they have extra cash flow],” says Johnson.
Assess your portfolio. “The rule of thumb is having 60% to 65% in equities. And the reason why is you want to keep pace with inflation. Those equities that you have should probably be more dividend-paying companies, so then you can reinvest the dividends. So if I get a company that’s paying a 2% to 3% dividend, and the stock drops 3%, I’m even. Or you can take some of that income and you can use that as a distribution, and that takes some of the pressure off the portfolio having to appreciate. So you want dividend-paying stocks, and the rest you want to have in short-term bonds. Or, other alternative asset classes like real estate investment trusts, for example, that pay a nice dividend.”
Take advantage of catch-up provisions. For 2014, the limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $17,500. The limit on annual contributions to an IRA is $5,500. Those 50 and older can make catch-up contributions to a traditional or Roth IRA up to $1,000. If you have a 401(k) or 403(b), you can make catch-up contributions up to $5,500.
Think of ways to create additional income. Lifetime income could be in the form of real estate. If you have rental real estate and by the time you retire your rental real estate has no mortgage, that’s a type of pension, says Johnson. “Rental real estate can provide inflation adjusted income and works best during retirement if the mortgage is low or has been exhausted. Buying rental real estate in the beginning of retirement still offers the tax advantage of depreciation, but the spread between the mortgage and rent may not be attractive.” Johnson also recommends taking on a side job.
Plan for catastrophic illness and other crises during retirement. Obtain disability insurance. “It could be a car accident or a debilitating disease that forces you out of the work force. Also, people over 50 years old should consider buying long-term care insurance. The idea that they’ll never need a nurse to visit the home or be a candidate for a nursing home is statistically inaccurate.”
Make adjustments if you’ve been hit hard by the recession. “The amended plan could include working longer, reducing your current lifestyle, working part time during retirement, or asking your children to shoulder more of the burden for their education. It all depends on what’s important for you,” says Johnson.
Don’t become a financial burden to your family. Johnson suggests looking into purchasing long-term care insurance. “An ill parent with no resources places a burden on the children and can tear a family apart. In my experience, there’s usually one child who bears the brunt of the care and the cost is saddled on the child with the most resources. Not much fun at Thanksgiving when the child who made the most sacrifices to secure a career is left paying the bills.”
Continue to invest throughout retirement. Johnson recommends having exposure to equities to keep pace with inflation. “The best way to do it is through dollar cost averaging, where you invest the same amount of money on a regular basis. In doing so, you buy more shares when the market is low and develop a habit of savings. The proper allocation to equities will be a function of age, risk tolerance, time horizon, and the amount needed to retire,” says Johnson.