How to Invest at 60 for Retirement

Turning 60 is an important milestone. Although it might not qualify as retirement age in the eyes of the Social Security Administration, it is when many people elect to retire or plan their retirement. Sixty year olds can also begin to take penalty-free withdrawals from their 401(k) plan or traditional IRA.

As you approach retirement, you will likely face many life changes. But these changes shouldn’t distract from your longer-term financial goals. Think of it as a time to determine your retirement income needs, decide when to start taking social security benefits and identify an appropriate long-term investment strategy. This article provides helpful tips, suggestions and advice on how to navigate these important decisions.

Social Security Considerations

Social Security may be a welcome source of additional cash flow during retirement, but it isn’t a replacement for a well-allocated retirement portfolio as your monthly Social Security benefits may not meet all your needs.

How Social Security Benefits Are Calculated

Your Social Security payments are based on the following:

• Your highest 35 years of earnings. The more you have paid in to Social Security over your working life, the higher your benefits will be.
• Your birth year.
• When you elect to receive payments. For instance, you can receive higher payment levels if you delay taking Social Security until full retirement age (which in 2017 was 67 for those born in 1960 or later).

When Should You Start Receiving Benefits?

Generally, for each year you wait, up to age 70, your benefits will grow. If you were born in 1960 or later and you choose to start collecting benefits at 67 you will receive 100% of your retirement benefit, but if you wait to collect benefits until you are 70, your benefit will increase for each month that you wait until it reaches roughly 130% of your benefit at 67 (full time retirement age). If you start collecting your benefit before you are 67 you will receive up to 30% less per month.

Consider the following:

• Collecting your Social Security benefits early can permanently reduce your ongoing benefits. Your Social Security benefit increases by roughly 8% per year between age 62 and 70.
• If your life expectancy is shorter, it may be beneficial to start receiving benefits early.
• A surviving spouse may be eligible to continue receiving their spouse’s Social Security benefits. If you take benefits later and your spouse survives you, he or she will receive a larger benefit.

Will Your Social Security Benefits Meet All Your Income Needs in Retirement?

You can answer this question if you know how much income you will need to cover your expenses after you retire. To get a better sense of your projected income needs, you can consider two categories of expenses:

• Non-discretionary spending for things you will absolutely need.
• Discretionary spending for things you may want but not necessarily need.

Non-Discretionary Spending

• Living expenses: Day-to-day, how much money might it cost to maintain your lifestyle? Think of everything from groceries to gas to the heating bill.
• Debt: You may have credit card debt, a mortgage or car loans. Account for everything you owe when mapping out your expenses, since you will likely continue to make principal and interest payments.
• Taxes: Taxes are often lower for retirees since they often shift from paying income tax rates to paying capital-gains rates, depending on their account types and cash flow sources. However, the government still wants its cut. It is a good idea to set aside money to settle your tax bill at the end of the year.
• Insurance and health care: Health care costs have historically risen faster than inflation and have become a larger share of the retirement budget for most retirees. You will likely need to anticipate insurance payments as well as any emergencies that may require sizable payments on short notice.

Discretionary Spending

• Travel: Many people look forward to travel after they retire. If you have been dreaming about a trip for years, now could be the time to budget for one.
• Hobbies: Retirement is a great time to revisit old hobbies or pick up new ones. Ready to finally get your fly casting down or finish researching your family history? Hobbies frequently incur some costs.
• Luxuries: This is subject to your own budget and definition of luxury, but you’ll likely need to factor non-essential purchases into your expenses.
• Children and grandchildren: For many, this category includes aspects of all the others. If you believe you’ll need a generous budget to make children and grandchildren a focus in your retirement, you’ll have to think about how much cash flow you’ll need to support that.

Withdrawals From Your Retirement Accounts

As you approach or enter your 60s, you may start thinking about the most appropriate time to begin taking withdrawals from your retirement accounts. Keep in mind that before age 59.5, you would incur a 10% penalty plus pay income tax for early withdrawal from many tax-advantaged retirement accounts; in this case, you should consult your tax advisor. But once you have reached 60, you are generally clear to begin taking penalty-free distributions.

Along with this newfound resource come several opportunities, including the freedom to explore new investment options.

New Investment Opportunities

During your working years, your investment opportunities may have been limited to the mutual funds in the retirement plan offered by your employer. Such plans aren’t necessarily tailored to your financial needs or goals. But rolling over your 401(k) to an IRA may provide more flexibility to invest in assets that could help you personalize your portfolio to your long-term goals. Individual circumstances matter when evaluating whether to roll over your 401(k) to an IRA.

Taking Advantage of Catch-Up Contributions

You may be familiar with the term “catch-up contribution,” an additional retirement savings contribution people over 50 can make to their 401(k) or IRA. Starting at age 50, your contribution limit increases to help you “catch up” for years when you could have invested in your retirement savings but didn’t.

If you are in your 60s, catch-up contributions can help boost your retirement savings and enlarge your nest egg.

How much more can you contribute as part of your catch-up?

• 401(k), 403(b) and 457 plans: $6,000 of catch up contributions for 2019, which brings the full contribution maximum to $25,000
• IRA: $1,000 of catch up contributions for 2019, which brings the full contribution maximum to $7,000^[i]

Now Is Not the Time to Get Too Conservative

Many investors believe retirement should mark a change in investment goals and overall risk tolerance. You may be more interested in preserving your wealth at this time. In a low interest rate environment, you may lean toward bonds and fixed-income instruments rather than seeking growth through individual equities or dividend-yielding ones. In this case you still have to consider inflation’s effect on the wealth you are trying to preserve.

Inflation averages 3% over the longer term, and can be insidious.^[ii] How insidious? Suppose you have $50,000 in annual living expenses. If the average inflation rate holds steady at 3% for the next 20 years, you would need approximately $90,000 per year to maintain the same purchasing power. In 30 years, you would need $120,000 per year! That is a long way from your initial $50,000 first year expenses.

Although nominal asset values can be recouped following a short-term market correction or a bear market, the same can’t be said of an asset’s real value in the longer term when it comes to steady inflation. The only way to outpace inflation is to make sure your portfolio maintains steady growth which equals or exceeds the rate of inflation. This means maintaining sufficient exposure to the stock market. If you plan on collecting an income stream, we believe equity market exposure in your portfolio can help ensure sufficient growth to keep up with your withdrawals and inflation, and also help avoid depletion.

If your investments are too conservative in your 60s, you may expose yourself to the greatest risk in retirement: running out of money.

Don’t Underestimate Your Investment Time Horizon

Investors often miscalculate or underestimate their investment time horizon. Some rely on life expectancy tables, which can be misleading. Others may forget their investment time horizon can extend well beyond their lifetime.

Let’s consider the first point on life expectancy versus lifespan. People are generally living longer, due to medical advances and other factors. Depending on your family history and your spouse’s age, your time horizon could be much longer than you expect. If you underestimate how long you need your money to last, and if you get too conservative at this stage of your investing, you could find yourself going back to work when you should be enjoying your retirement.

Follow the Right Steps

Investing and retirement planning at age 60 can be complicated. You’ll likely want to think carefully about your anticipated expenses in retirement as well as your sources of retirement income. Deciding when to start taking Social Security benefits is another important decision. Each investor is unique and there is no one right solution. Our Financial Advisers recognize this and they are ready to help you better understand your options and plan for your future. To learn more, give us a call.

^[i] Source: 401(k) contribution limit increases to $19,000 for 2019; IRA limit increases to $6,000. Access date: 12/6/2018. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19000-for-2019-ira-limit-increases-to-6000.

^[ii] Source: FactSet, as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2017.