How should I manage my retirement savings?
Ideally, you could simply live off the interest of your retirement savings. But you'll need a ton of money these days: The bellwether 10-year Treasury note yields less than 4%. To get $50,000 a year at 4%, you'd need to start with $1.25 million.
You can increase your yields with only modest additional risk if you include high-quality corporate bonds in your portfolio, which tend to pay more than Treasuries. For example, 10-year top-rated banking and finance company bonds now yield about 4.5%.
Dividend-paying stocks should have a place in your retirement portfolio, too. Many companies increase their dividends each year — a fine hedge against inflation, provided you can live with the ups and downs of your stock's price.
If you need to tap your principal each year, start cautiously. Most studies show you can take out 4% to 5% of your portfolio each year with little fear of running out, but that's assuming a 30-year retirement. And you need more each year to compensate for inflation. If you take out much more than 7% a year, you risk running out of cash.
And if you are tapping your principal each year, you'll need some money in stocks to provide for your later years. If you retire at 60, the odds are quite good that you'll live to 85 — that's 25 years for your money to grow. Splitting your money between conservative, dividend-paying stocks and high-quality bonds will usually get you through retirement without running out of cash.
Do I want to work after I retire?
Do you need to? The answer to that question may give you an answer to the first question.
A 2001 AARP survey found that 80% of baby boomers plan to work after they retire. The No. 1 reason: because they will "need the money," according to the survey. Forty percent said a phased retirement plan from their employer would encourage them to work longer than they expected to.
But choosing to work after you retire will affect your Social Security payments. Here's how:
• If you wait to retire until you are age 65?, you receive your full benefits no matter how much you might still be earning. The cutoff age for getting full benefits rises gradually; for people born after 1959, the age is 67.
• If you are younger than 65? for all of the year you retire, the government cuts your benefits by $1 for each $2 you earn above $12,000. If you retire during the year you reach 65?, your benefits are cut by $1 for every $3 above $31,800.
• If you wait to claim Social Security until you are 70 or older, you will get higher benefits than you would at 65. There is no limit on how much you can earn.
What is income? If you work for someone else, only wages count toward the Social Security income limit. If you're self-employed, the government counts net earnings. It does not count income from other government benefits, a pension or earnings from investments.