Building a better nest egg
Having enough to retire on is about more than just stocks
Index funds, which mimic the holdings of market indexes such as the Standard & Poor's 500 or the tech-heavy Nasdaq, can be bargains; they have low annual operating expenses. But most indexes are weighted by capitalization, so larger companies have disproportionate influence on price movement; that can make an index fund volatile at times.
Robert Bubnovich, a financial planner with Rio Financial Advisors in Irvine, Calif., likes the Vanguard Health Care fund for its high returns even during the latest bear market and a 15-year average annual return of 20 percent. (The minimum investment is $25,000, however.) Funds that invest in dividend-paying stocks can be a good bet for retirees and preretirees, as they provide growth, income, and benefit from recently lowered taxes on dividend income.
Many retirees burned by stocks have turned to bonds as a safe haven. But while bonds should be part of a retirement portfolio, financial experts caution against overemphasizing them, especially in a volatile market. In a climate of low interest rates and, consequently, low yields, locking up a chunk of your portfolio in long-term bonds like treasuries leaves you vulnerable to inflation--which some believe is already beginning to show its ugly face.
Intermediate bond funds are one way to limit risk. They fend off inflation with decent, if stodgy, returns. Bubnovich recommends the FPA New Income and Harbor Bond funds, both of which have 7 percent returns over five years. Check for fees on bond funds. The FPA fund, for example, imposes a 3.5 percent initial sales fee.
Your Home
A home has been one of the best-performing investments in the past decade for most people across the country. And for many, using the equity built up in a home is a way to help finance retirement. "This is an asset that can be used to fund your retirement, especially if you're behind," says Hoffman. The most straightforward strategy is to take out a home-equity loan or line of credit to use for living expenses or to invest in the market for rebuilding your portfolio. (But a line of credit can get you in trouble; it behaves like a credit card, and your house is on the line if you charge too much.)
Lesser-used strategies could offer more comfort. With housing markets still red hot in many parts of the country, you might sell a home that has built up considerable equity through appreciation and either move to a smaller, less expensive home that also costs less to maintain or relocate to a smaller, out-of-the-way city with less-expensive housing. Then bank or invest the returns.
This plan can shake loose hundreds of thousands of dollars and speed retirement, but it also involves lifestyle changes that may not be for everyone. Cook advises caution. "View this as your hole card; you don't want to use this card until you've used everything else," he says. "That's because once the equity is gone, that's it." If the new home is a rental, you'll also lose the tax deduction of a mortgage.
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