On the verge of retirement, bear markets and high living costs can cut into your nest egg. How to reduce those risks.
78. Be ready for a bear attack. As you near retirement, you have less time to recover from a severe bear market (and fewer future paychecks to replenish your portfolio). One way to limit the damage from a market plunge is to beef up your cash cushion during these years.
Look ahead to your spending in retirement, says financial planner Harold Evensky, and calculate what portion you'll have to fund with investments rather than Social Security or a pension. Then build up a year's worth of those self-funded expenses in cash. You can avoid selling stocks in a slumping market, and you'll have money to deploy if a crash creates buying opportunities.
79. Retire from your company stock. Vanguard 401(k) savers with balances of at least $250,000 have an average of 13% of their money in company stock. What's optimal: Don't keep more than 5% of your money in a single stock. Sell to cut your nest egg's risk.
80. Give yourself shelter. If you're a couple making over $250,000 a year, you could be facing higher tax rates, a new Medicare surcharge, or both. So stash your least tax-efficient assets, such as taxable bonds, in 401(k)s or IRAs. Put your most efficient holdings, such as index funds and muni bonds, in taxable accounts. The payoff:
After-tax value of a $1 million portfolio after 10 years
Tax-inefficient: $1.4 million
Tax-efficient: $1.5 million
Notes: Assumes 33% federal bracket and 3.8% Medicare tax, 6.6% pretax average annual return.
Source: Vanguard
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