Be sure to have home, car, health, and possibly life and disability (the latter two can be provided under the Social Security program in many cases prior to and sometimes into retirement). 

Disregard the small policies that make insurance companies wealthier at your expense (the majority of policies). Raise the deductibles to the maximum amounts (usually $1,000), which will lower your yearly premiums. If you are looking to retire prior to age 65, look into the Healthcare Exchanges. If not, educate yourself on Medicare. Also, look at Social Security as a valuable insurance policy against being old and broke, rather than an investment that will pay you back as you age

Life insurance is one of the most oversold policies pushed throughout America today. Why?

There are big fat commissions waiting for the agents who sell the very expensive cash value policies like whole life, variable life and universal life. For many people, life insurance will not be needed in retirement. They will be self-insured or they simply don’t need it. Do you have cash value tied up in a life insurance policy? Identify the cash surrender value if it applies and consider your options such as pulling it out and investing it wisely with an assortment of no-load index mutual funds that will grow your money over time instead of shrink it thanks to the high yearly cost of those insurance policies. Identify your profit or loss on the insurance policy prior to making this move so you have a clear idea of the tax ramifications (run the numbers by subtracting what you have by what you have put in and you will see just how poor of an investment it was and why you could do better elsewhere).

Do you need long-term care insurance? Yes? No? Maybe?

There is no “right” answer for all people. You will want to identify many issues before deciding on this very important issue. How much is your net worth? If you are over $1 Million, you might be able to self-insure. If you are under $250,000 or so, it might not be financially wise (Medicaid kicks in when you run out of money so long-term care insurance doesn’t make much sense for those who don’t have much money going into retirement). If you fall somewhere between those two numbers, it might be worth considering. If you can say yes to all of the bullet comments below, long-term care insurance might be a viable option. Here is an article on the subject that should help you better understand some of the nuances. Read Graduation! by Michael Finley for further details on the subject.

• You want to leave an estate to your heirs.
• You have the income to pay the premiums staying under 4% of your portfolio.
• You don’t have enough in assets to self-insure against running out of money.
• You understand the pros and cons of the issue clearly.

Most annuities are awful products that should be avoided

High yearly cost of 2% or more with high surrender penalties in the early years makes this so, but some are not so bad. First, the awful: indexed annuities and variable annuities. These annuities are “sold” through the free dinners and slick talking life insurance agents. Why? They make a ton of money off the big fat commissions. You want to avoid these annuities. What if you own one? Consider moving it to a Traditional IRA (owning index funds) at Vanguard if it is qualified (pre-tax retirement account) and get rid of the rotten annuity or move it to Vanguard via a 1035 exchange (high cost annuity to a low cost annuity) if it is non-qualified (after tax). Vanguard annuities will cost you about .5% per year with no surrender penalties. See a list of Vanguard variable annuities and their costs here. Make sure to identify the surrender penalties before making any moves. The yearly savings in costs alone can run over 1.5%. It will not take long to recoup your surrender penalties at that rate. Learn more here.

The “not so bad” are immediate annuities are worth your time to investigate.

These annuities (the ones sold through Vanguard with a 2% upfront cost) and the guaranteed fixed-rate TIAA-CREF annuities found in University plans (like UNI) are worth considering (learn more about the TIAA-CREF payout here) if you are looking to turn your annuity into a fixed income payment going into retirement.  Take your time and consider all options if this is a choice you decide to make. Learn more about the immediate annuities through income solutions at Vanguard by going here. When looking at this issue, don’t see it as an either or option. You might consider taking a portion of your investments and turn that amount into a monthly payment for years while keeping other money alone in index funds weighted heavily in stocks. For example: If you had $800,000, you might consider taking $300,000 and turn it into an immediate annuity for a period of years and then keep the other $500,000 in predominately stock index mutual funds (with some bond index funds sprinkled in for income and reduced volatility).

Annuities (The Ugly)

Annuities (The not so bad)

You can turn an immediate annuity or one of the fixed rate annuities at the University level into fixed income as you retire.

This means locking in a fixed amount of money for a specified period of time (like 10 years) or for the rest of your life (unknown period of time). This is kind of like buying a pension as you convert a lump sum amount of money into a fixed monthly or yearly amount to be paid to you over a set period of time. Personally, I would focus on a set period of time in many cases that aligns with other fixed income (like Social Security).For example: You lock in a $1,800 monthly payment for 10 years from age 60 to age 70 with one of those annuities and then you take your Social Security benefit at age 70, which has grown much bigger (increases by 76% from age 62 to 70). Learn more about the Vanguard immediate annuities (must be a Vanguard investor to participate) here. Learn more about the TIAA-CREF Traditional Annuity here.

When you decide to start withdrawing Social Security is a very important decision and that means plenty of thought should go into the decision. 

Take as much time as you need to educate yourself on this issue. Get What’s Yours is a wonderful book that will help you better understand these rather difficult to understand options (it has been updated to reflect the new Social Security changes). Waiting until your full retirement age (FRA is 65, 66, or 67 based on your date of birth) and ideally until age 70 can be a wise move in many cases for many people. Take your time, be patient and run the numbers on each person before making this BIG decision. Avoid the mentality of “getting what you can as fast as you can.” Now is the time to educate yourself on the many benefits that make up the Social Security system. Start with a chart that identifies your full retirement age by going here.

The timing of a pension benefit (if you have one that is) and what option you take are very important decisions as they relate to your fixed income in retirement.

No matter what age you are allowed to take your pension, consider your spouse’s situation at the time with great care if there is a spouse involved. Do you take the monthly payment? When? Is there an inflation adjustment or will the benefit shrink over time as the value of each dollar is reduced? Do you reduce the payment so it will survive you and provide for your spouse? If so, what percentage do you reduce by (50%, 25%, etc.)? Do you take the lump sum (if you do, transfer it to a Traditional IRA at Vanguard and into the right asset allocation of index funds)? Do you take the absolute largest benefit with no benefit left for your spouse when you pass? Do you buy a term life insurance policy for $200,000 or so to cover your spouse if you pass early in retirement? These are all big questions and NOW is the time to answer them.