Eliminating debt, assessing spending habits are essential to secure retirement

Q. My husband and I will soon retire. We are in our 60s. We have no debt. We will have adequate income from Social Security and pensions. But after consulting with different advisers about our portfolio - a 401(k) that didn’t lose much, IRAs, and CDs - we have come away with as many opinions as there are advisers.

There seems to be no consensus on what to do with investments in order to have an adequate income in the future - except to diversify. To some that means one thing, to others, another. Can you offer any broad guidelines to follow when planning one’s retirement future?

K.D., Grand Prairie, Texas

A. Here are the essentials for a secure retirement:

■ Eliminate all debt. You do this because it takes more than $1,000 of retirement asset earnings to service $1,000 of debt. It is important to eliminate debt if the bulk of your retirement savings is in tax-deferred qualified plans. Just because you are credit-worthy doesn’t mean borrowing money is a good thing to do.

■ Take careful measure of your spending priorities. Many retirees never think about their de facto commitments. Many are overcommitted to real estate. They would benefit from a serious reconsideration of the size of house they live in - and whether they should own or rent. Downsizing or renting is likely to provide an increase in discretionary spending power.

■ Nail down some secure monthly income. This was easy until recently because many people retired with Social Security, a company pension, and retirement savings. Today, an increasing number of retirees don’t have pensions. You can create a personal pension by converting a portion of your savings into an individual life annuity or a joint and survivor life annuity. The income from the annuity is high enough that you won’t have to draw as heavily on your remaining assets.

■ Minimize all investment expenses. You can minimize investment expenses easily by becoming an index fund investor. With investment products that have expenses of 3 percent a year, the self-directed alternative can liberate the entire dividend and interest yield of a diversified portfolio.

■ Diversify across asset classes. Start with domestic fixed-income, expand to domestic stocks, and then branch out to international stocks, international fixed-income, REITs, energy and emerging markets. This can all be done at minimal expense by building portfolios such as my Couch Potato Building Block portfolios, Bill Shultheis’s “Coffee House portfolio,’’ or the index portfolios suggested in William J. Bernstein’s “The Investor’s Manifesto.’’

■ Remember that smart spending is as valuable as smart investing. Spend your income carefully. Every $1,000 not spent works like having an additional $25,000 in retirement savings, more if you consider taxes. Many retirees, for instance, have an opportunity for savings by replacing expensive prescription drugs with generics that do the same thing. This is not a small opportunity.

Source: Boston.com