HP Employees: Will You Outlive Your Money?

But HP employees need to be proactive about protecting their retirement by implementing robust budgeting and prudent expense management, says Patrick Ray of The Retirement Group, a division of Wealth Enhancement Group. And starting early can make the most of those strategies work for you - so your savings last into your retirement years, 'she said.'

Retirees from HP companies should take stock of their spending and make adjustments to protect their financial future, says Brent Wolf of the Retirement Group of Wealth Enhancement Group. Talking to a financial advisor early may help you create a customized plan that will help extend the life of your retirement funds.

In this article we will discuss:

1. Factors critical to the longevity of your HP retirement savings: how much you need, how long you need it to last, and how you spend it.

2. Strategies to make your savings last - major and minor changes to your spending.

3. Retirement risk & opportunity management - financial stability.

Aren't You Outliving Your Money?

Figure out how much money you need to retire before you quit HP. The biggest fear for retirees is whether their retirement savings will last - will they run out of money? Social Security isn't a guaranteed source of retirement income as it once was, and people generally do not want to depend on public assistance or their children in retirement.

Whether you will run out of money depends on several factors. What you have saved for your HP retirement, how long you want your savings to last and how quickly you spend your money are just a few of the topics covered. You're better off tackling these issues when you retire to preserve your retirement nest egg. But if you're approaching retirement and still unsure whether your savings will last, there are some things you can do late in the game. The following are ideas to help you not to outlive your money.

Tips for Making Your Savings Last.

You might stretch your retirement savings by changing your spending habits. You can live with modest changes to your spending habits if your HP retirement savings are far below your projected needs. Even little amounts of money can add up if you save them and earn a decent return.

Change Your Spending Habits.

For our HP clients really worried about running out of money, you may have to drastically change your spending to make your savings last. Changes you might consider making include:

Consolidate any outstanding loans to cut your interest rate or monthly payment. Try home equity financing. Consider a reverse mortgage if your mortgage is paid in full. Moving to a cheaper home or apartment cuts down on housing costs. Still owing on a mortgage? Consider refinancing if interest rates have dropped since you took the loan. Sell your second car if it is only occasionally used. Find cheaper insurance. You might be amazed how much you can save a year (and more over a few years) by switching to low-cost insurance policies that still offer the protection you want. These are the two areas where you may save most - premiums can jump dramatically with age and declining health. See your insurance professional. Put your kid in or transfer to a cheaper college (a state university instead of a private one), for example.

This is especially good if the cheaper college is known to be good and accredited. You might save big in two or three years.

Minor Changes to Your Spending Habits.

Remind our clients from HP that small changes can make a big difference. You might be surprised how quickly your savings add up once you write down a budget and make a few small changes to your spending habits. For our HP clients with minor concerns about making their retirement savings last, simple changes to your spending habits may fix that problem. Some ideas for adjusting your spending patterns.

Purchase only the auto and homeowners coverage you need. For instance, cancel collision insurance on an older vehicle and self-insure instead. This won't save you a bundle, but it does. But if you do have an accident, the premium you saved could be gone in a flash. Shop for the best interest rate whenever you need a loan. Switch to a low-interest card. Transfer the balances to lower-interest cards and then cancel the old accounts. Eat dinner at home and carry 'brown-bag' lunches instead of going out. Purchase a clean used car instead of a new car. Pay only for the magazines and newspapers you read instead of full price at the newsstand. Reduce utility and other household costs wherever possible. Use your local library instead of buying or renting books and movies. Spending plan avoid impulse buying.

Manage IRA Distributions Carefully

For our HP clients trying to stretch their savings, you might want to withdraw money from your IRA as slowly as possible. It will also preserve the principal balance and allow your IRA funds to grow tax-deferred as you age and retire from HP. But for our HP clients you start taking required minimum distributions (RMDs) from traditional IRAs (but not Roth IRAs) after age 70½ (age 72 if you turn 70½ after 2019). You'll pay 50% tax on the difference if you don't withdraw at least the minimum.

Note: Required minimum distributions for defined contribution plans (except Section 457 plans for nongovernmental tax-exempt organizations) and IRAs have generally been suspended through 2020.

Caution When Spending Down Your Investment Principal.

You cannot expect to live off the earnings in your investment portfolio and retirement account forever. You might have to start drawing on the principal eventually. These HP clients should not spend too much too soon. It's an easy temptation when you first retire from HP - especially if you travel a lot and buy things you could not afford during your working years. So a good rule of thumb is to spend no more than 5% of your principal in the first five years of your retirement from HP. To quickly chip away at your principal, you won't make enough on the remaining principal to last you through the later years.

Portfolio Review

And your investment portfolio will probably be among your biggest retirement income sources. This means that your level of risk, the investment vehicles you choose and your asset allocation should be appropriate for your long-term goals. You don't want to lose your investment principal but you do want to lose out on inflation, too. Checking your investment portfolio is essential when assessing the longevity of your nest egg.

Continue to Invest For Growth.

Traditional wisdom says retirees should put safety first. For this reason, many people in retirement sell all their investment portfolios to fixed-income investments such as bonds and money market accounts. But this ignores inflation effects. You actually lose money if your investment return is not keeping up with inflation.

Your allocation should become more conservative with age but you should still keep at least some of your portfolio in growth investments. Some financial professionals suggest you follow this simple guideline: The percentage of stocks or stock mutual funds in your portfolio should equal about 100% minus your age. Thus, at age 60 your portfolio might be 40% stocks and stock funds (100% - 60% = 40%). Of course, how you apply this guideline depends on your risk tolerance and other personal factors.

The Basic Rules of Investment Remain in Effect in Retirement.

While your investment portfolio will probably change once you reach retirement age, you should still follow the rules of investing. Diversification and asset allocation remain important as you transition from accumulation to use.

Caution: Asset allocation and diversification cannot provide a profit or cover a loss. No investment strategy is guaranteed to work. All investing involves risk, including principal loss.

Laddering Investments

Laddering involves spreading the maturities of your investments out so they do not all mature at once. You can ladder any deposit, loan or security with a maturity date - bonds for example.

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And laddering may reduce interest rate risk.

Interest rates fluctuate among many factors. They are, therefore, mostly unpredictable. The biggest benefit - whether you use it to ladder a cash reserve or to portfolio invest - is reducing interest rate risk. Laddering investments reduces interest rate risk because you will invest at different times and at different interest rates. So you should probably not be snagged with below-market interest rates forever.

A single large deposit or investment that matures during an interest rate slump will give you two bad choices for reinvestment. Keep it in a low-interest savings account until rates rise or roll it over at the current low rate. Yet we caution our HP clients that a rebound of interest rates later could keep you locked into that low rate forever. Breaking your investment into smaller pieces and laddering maturity dates avoids this situation.

How Do You Do It?

For your very first laddering attempt, you will need a few term deposits (e.g., certificates of deposit) or securities with specified maturity dates. Initial terms on each investment should be different lengths and you should plan to hold them until maturity. That sets your staggered maturity dates. So you might buy three different certificates of deposit - one for three months, one for six months, and one for nine months. You should also reinvest as your CDs mature so you can keep the maturity dates staggering, or laddering. Keep your laddering strategy intact and redeposit each maturing investment for a new term.

Long-Term Care Insurance

An unexpected catastrophic injury or debilitating disease that forces you into a nursing home can undo your best-laid financial plans. Whether you take out a long-term care insurance policy that covers nursing home care, home health care, adult day care, respite care or residential care depends on your individual needs. For our HP clients who are buying such a policy, you'll need to pick the right time. Except for any chronic condition that increases your risk for long-term care, there is generally no reason to start thinking about it before age 50. It usually makes sense to buy such a policy before age 60.

Will Medicare Cover Any Long-Term Care Expenses You May

Sources:

1. Reddick, Chris. 'How to Effectively Save for Retirement in HP Companies.' Chris Reddick Financial Planning, LLC,  www.chrisreddickfp.com .

2. 'HP and Large Company Employees.' Warren Street Wealth Advisors,  www.warrenstreetwealth.com .

3. 'Retirement Strategies | Guide for Employers.' ADP,  www.adp.com .

4. 'Employee Retirement Plans.' Morgan Stanley at Work,  www.morganstanley.com .

5. Forbes Finance Council. 'Planning for the Future: Four Changing Retirement Trends.' Forbes, 13 Nov. 2018,  www.forbes.com/sites/forbesfinancecouncil/2018/11/13/planning-for-the-future-four-changing-retirement-trends .