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I’m taking a bit of a break, so now through July 4th I’ve combed the archives to find earlier content that might interest new readers (as most of my readers are new). This article originally ran July 12, 2006. 

Yahoo! has a top ten list for retirement planning. After this week’s story about the number of people having to retire early, it might be a good idea to look over the list and make sure we are on the right track. I covered the first five yesterday. Here is the second five.

1. Save as much as you can as early as you can.
2. Set realistic goals.
3. A 401(k) is one of the easiest and best ways to save for retirement.
4. An IRA also can give your savings a tax-advantaged boost.
5. Focus on your asset allocation more than on individual picks.
6. Stocks are best for long-term growth.
7. Don’t move too heavily into bonds, even in retirement.
8. Making tax-efficient withdrawals can stretch the life of your nest egg.
9. Working part-time in retirement can help in more ways than one.
10. There are other creative ways to get more mileage out of retirement assets.

Stocks are best for long-term growth.

Historically, stocks have had higher returns over long time periods. While their returns are more volatile, if you’re investing for a long time frame (say 10 years) there is no reason to be in bonds at all. If you are at 10 years or less before needing to tap your funds, I think that the change to bonds should happen gradually. Maybe 5% per year until you reach a 60/40 split of equities and bonds. If you do invest in real estate, I would include that as more of a bond because of their interest rate sensitivity and the income they are forced to distribute. If you invest in commidities, get out. They are extremely volatile and aren’t really a good choice for investments in retirement.

Don’t move too heavily into bonds, even in retirement.

See above. Many investors are way too cautious and either move entirely into bonds or largely into bonds at retirement. Even the lifestyle funds designed by Fidelity and Vanguard to be a one-stop shop for IRAs are too heavy in bonds. Free Money Finance had an article about an interesting strategy back in January. Someone ran a simulation with a portfolio invested half in dividend paying stocks and half in REITs. That portfolio only ran out of money in one simulation out of 10,000 done. That happened in the 29th year. The average portfolio not only lasted 30 years, but was worth 16 times more in year 30 than in year 1. As I said above, you may be able to substitute real estate for bonds in your portfolio, in this portfolio a combination of dividend paying stocks and REITs not only gave you the current income of bonds, but the appreciation of stocks.

Making tax-efficient withdrawals can stretch the life of your nest egg.

The more you pay in tax, the less you get to enjoy. The article suggests drawing from taxable accounts first and then draining tax-free accounts and letting those compound for several more years. That may work for most, but not necessarily all. You will have to look at your entire tax situation including other sources of income such as Social Security or other types of investments (rental houses, annuities, etc…) before making a decision on which funds to drain.

Working part-time in retirement can help in more ways than one.

The article focused on the social aspects of continuing to work rather than the financial (for the brief description there was). The social aspect is important because anecdotal evidence suggests that people are healthier if they continue to be engaged in social situations after retirement. Lower health care costs means lower expenses means your retirement assets will last longer. Add that to the current income you will be making and your nest egg will seem a whole lot bigger. Every dollar you don’t drain at 65 can compound until you are 70 or older. An additional 5 years of compounding can make each dollar equal to $1.20 at a 5% annual return. That’s a 20% bump in assets by delaying distributions for just five years.

There are other creative ways to get more mileage out of retirement assets.

The article suggests moving to an area with a lower cost of living or taking out a reverse mortgage to make assets last. The first is a good idea, but not always practible. The second idea is only a good one as a last resort. I’m not a huge fan of reverse mortgages. Basically, a reverse mortgage is a home equity loan that’s paid off when the house is sold or the occupant dies. The owner can choose to get a lump sum (which would be invested in an annuity I’d imagine) or a monthly payment based upon their life expectancy. Reverse mortgages have a ton of fees that can eat into the home equity quickly. Plus, interest compounds on the amount of the mortgage not paid so that the balance quickly balloons.

There are other ways to make retirement assets last including the use of annuities and trusts, but that’s really beyond the scope of this blog. If you are interested in making your money last creatively, speak to a financial advisor that can look at your particular situation and design a tax-efficient method of doing so.