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Healthy living: A happy retirement

Good health means you have to save a bit more -- but that's because you're living longer.

PART 2: HEALTH

The secret: A greasy burger is worse than a bear market.

When it comes to retirement, good health cuts both ways. As any financial calculator will tell you, living longer actually means you'll need a bigger nest egg. But the healthier you are leading up to retirement, the easier it is to build up the savings you'll need.

A recent National Bureau of Economic Research study by James Poterba, Steven Venti, and David Wise found that people who were among the healthiest 20% in their fifties retired with three times the assets of the least healthy. And the healthy also spent down their wealth more slowly.

Poterba says that's because the impact of health on your finances begins well before you quit working.

"People in good health have lower health care costs, so they have less of a drain on their resources," he says. Also, other research shows that about half of people who retire earlier than they planned cite health as the reason. Staying healthy gives you more power to save for longer.

TAKE ACTION

Know your numbers. According to the U.S. Agency for Healthcare Research and Quality, one-third of adults with diabetes don't know it, and 20% of adults with high blood pressure are unaware. If you haven't been checked for a few years, do so now. Make sure your spouse does too.

Focus on what you can control. Just because you have a family history of a health condition doesn't mean you'll get it as well.

"DNA isn't your destiny," says Laura Carstensen of the Stanford Center on Longevity. "Research shows a very small number of factors make a big difference." Those probably won't come as a surprise: whether you smoke, how much you drink, your weight, and your exercise routine (you've got one, right?).

Any smoking is bad, but how much alcohol or weight is too much? Here's the scoop: No more than seven drinks a week for women or 14 for men, according to the National Institute of Alcohol Abuse and Alcoholism. For weight, check your body mass index at cdc.gov to see if you are in the healthy range.

You don't have to become a triathlete. Just 2½ hours of moderate exercise a week can make the difference, according to the Centers for Disease Control.

Need some extra motivation to hit the treadmill? People who are fit in middle age battle fewer chronic ailments in the last five years of life, so they get to enjoy more of their retirement being active and feeling good.

More secrets to a dream retirement:

Longevity costs, but it's a bargainGood health actually means you have to save a bit more -- but that's just because you're living longer. Every year retired people devote a lot less of their budget to health care.Average lifetime health care costs, starting at 65 Average annual health care costs in middle years of retirement Notes: Annual costs for households with husband ages 70 to 74. Costs include Medicare, home health care, and insurance premiums. Source: Center for Retirement Research
First Published: February 18, 2013: 9:57 AM ET

Six secrets to a dream retirement

Saving for retirement is easier if you spend a moment thinking about your future self.

Hiding in plain view, however, are other keys to post-work bliss that are at least as important as savings rates and stock returns. Especially from your mid-forties, say, to your early sixties, you'll make money-related decisions that have clear implications for the near term but that require some imagination for you to see their critical impact on how you'll live 10, 20, or 30 years down the road.

After consulting retirement experts and poring over the latest academic research, MONEY has identified five of these secrets and, as a sixth, found a new twist on that admonition to save, save, save.

This story will lay out these hidden retirement drivers -- including your investments, health, career, family, midlife changes and debt -- and help you make use of them in your planning. You'll also see how they could affect your finances in the years after you call it a career, based on numbers crunched by Jack VanDerhei at the Employee Benefit Research Institute, whose computer model simulates 100,000 possible market paths.

INVESTMENTS

The secret: 16.6% is the magic number.

How much do you need to save to retire? It's a vexing question because different generations of savers have different luck.

Some feel the market winds at their back during their careers, while others trudge through with low returns. Wade Pfau, professor of retirement income at the American College, which trains financial planners, has crunched the numbers to find a safe level of saving that would have worked in every historical market stretch going back to periods beginning in the 19th century.

He found that setting aside 16.6% of income and putting it in a diversified portfolio of stocks and bonds did the trick every time. (Good news: Employer matches count toward that savings rate.) That's if you're consistent about saving over 30 years.

A slow starter must ramp up higher -- a 45-year-old with two times salary saved would have to go for 20%. "During some boom times, workers could get away with saving less, but you can't count on above-average returns," says Pfau.

That's a useful warning right now because investors face some real challenges in the coming decade. Part of the problem is basic math: The 10-year Treasury bond yields less than 2%, and the Federal Reserve gives every indication that rates will stay low for years. "Current yields are a good predictor of bond returns," says David Blanchett, head of retirement income at Morningstar Investment Management.

Stocks are less predictable -- but risks today include a wobbly global economy and an aging population who may prefer holding bonds to stocks. The more you can save, the less you have to worry about this stuff.

Take action

Do more than the max. For higher earners, "maxing out" your 401(k), as satisfying as it feels, might be a trap. Within your 401(k) you can save $17,500 in 2013. Those 50 and older can save an additional $5,500.

Because of IRS rules that prevent plans from benefiting mainly higher-income workers, some plans limit the contributions you can make even more, says Rick Meigs, president of 401khelpcenter.com. Step up savings by adding to a Roth IRA, where after-tax money can grow tax-free. You may not be able to invest directly in a Roth if your salary is above income limits. (Starting at $178,000 for married couples filing jointly in 2013, the amount you can contribute begins to phase out.) Fortunately there's a backdoor: Save in a nondeductible IRA, which you can then convert to a Roth.

Buy cheap funds -- it's like saving more, but easier. One wrinkle of Pfau's study: He didn't include investing expenses in his returns. If you pay a management fee of 1% a year on your funds, says Pfau, the safe savings rate jumps to over 22%. You have one advantage over past investors who enjoyed more bullish times, though. You can buy index funds and ETFs that cost 0.10% or less.

Get in touch with the future you. Behavioral finance research suggests that saving is easier if you spend a moment thinking about your future self. Look at an age-morphed photo of your face, and you are likely to put away more, says NYU researcher Hal Hershfield. You can get a glimpse of your older self via a mobile app, such as Aging Booth (IOS, 99¢; Android, free).

Know when to dial down risk. Five years before retirement, zero in on how much you'll need to pay essential expenses, says financial adviser Harold Evensky of Coral Gables, Fla. Shift the equivalent of one year of expenses to cash or short-term bonds so that if stocks plunge when your quitting date is in sight, you'll know you'll have some extra time for markets to recover. This cushion will help keep you from selling in a panic.

More secrets to a dream retirement:

First Published: February 18, 2013: 9:50 AM ET

Use your retirement plans to lower your taxes

Having your retirement savings in a variety of accounts gives you more flexibility in managing your withdrawals and your tax bill.

Once you determine how much of a saver you are, you have several more decisions to make -- including how to best take advantage of tax-deferred plans.

Decision No. 4: What's the best use of tax-deferred plans?

The decision: When it comes to your 401(k), IRA, and Roth IRA, you potentially face two decisions. One is divvying up your investments between taxable and tax-advantaged accounts. The other is when to tap each type of account.

Why it's important: You have virtually no control over what happens to tax rates. But you can reduce the drag that taxes can have on your investments.

Regardless of how Congress may change taxes in the future, you'll almost certainly continue to face different tax rates on different types of investments. All gains in 401(k)s and traditional IRAs are taxed at ordinary income rates when withdrawn (a top rate of 39.6% in 2013); outside of these plans, you face lower rates on long-term capital gains and dividends (a max of 20% in 2013).

Related: Middle class tax breaks on the line

You can minimize the tax man's take by keeping investments like stock index funds, stock ETFs, and dividend funds in taxable accounts to take advantage of long-term capital gains rates and holding bond funds and actively managed stock funds that trade a lot in tax-deferred accounts.

In retirement, the idea is to blunt the effect of taxes by tapping your nest egg in a tax-efficient manner. The traditional advice is to pull money from taxable accounts first, where you'll presumable pay the lower capital gains rate, then move on to tax-deferred accounts like 401(k)s and IRAs, and finally Roth IRAs. The balances in your tax-advantaged accounts will have more time to compound tax-free.

Best move: While these strategies can be effective -- Morningstar estimates that following both in retirement can up your income by roughly 8% -- stay flexible. In fact, says David Blanchett, Morningstar's head of retirement research, "you should maintain your target stocks/bonds mix first and then allocate your assets as best you can for tax efficiency."

Related: The other way to invest in a Roth IRA

Similarly, you don't want to be too rigid about withdrawals. In some years, for example, you may be able to sell taxable investments at a loss and use that loss to offset taxes on your 401(k) or IRA withdrawals. By liquidating taxable accounts early in retirement, you lose that flexibility. And once you reach age 70½, you're required to draw at least some money from your IRA and, unless you're still working, your 401(k).

Besides, you can't know what the tax system will look like down the road. Having savings in a variety of accounts that receive different tax treatment gives you more leeway for managing withdrawals -- and your tax bill -- later.

See more decisions you need to get right

Are you a saver or an investor?

How should you divide your money?

How much help do you really need?

How much can you draw from your savings?

First Published: February 11, 2013: 10:03 AM ET

How to divvy up your retirement nest egg

You can capture solid returns while minimizing risk with a relatively simple stocks/bonds mix.

Once you determine how much of a saver you are, you have several more decisions to make -- including how you invest your portfolio.

Decision No. 2: How should you divide up your money?

The decision: Once you've amassed a portfolio worth more than five figures, you may wonder whether you should branch out from plain-vanilla stock and bond funds.

To hear some advisers tell it, you can't have a truly diversified portfolio unless you spread your money among virtually every asset class, sector, and subsector under the sun: hedge funds, currency, single-country funds, precious metals, exotic ETFs.

Why it's important: You can capture more than enough of the benefits of diversification -- solid returns while minimizing risk -- with a relatively simple stocks/bonds mix.

Related: Betting your retirement on stocks

Start by making sure you own a broad swath of U.S. stocks and bonds. Then add developed and emerging foreign markets.

For inflation protection, you might pick up some real estate and TIPS. Adding more to this basic blend isn't likely to appreciably boost your performance.

In fact, stocking up on a dozen or more different assets may work against you. One reason is the phenomenon that asset-allocation expert William Bernstein refers to as "overgrazing" -- as more and more investors plow money into a newly discovered alternative investment, the lower its expected return.

Related: Investing in TIPS - Can retirees beat inflation?

"The first ones in get sirloin, but the latecomers get hamburger or worse," says Bernstein. Many nontraditional assets also come with hefty fees.

As you pile on more investments, monitoring and managing them become harder.

"If you've got upwards of 20 different investments in 401(k)s, IRAs, and taxable accounts, you're talking about a blizzard of trading every time you rebalance," says Wealthcare Capital Management CEO David Loeper.

Best move: The simplest way to create this mix is by using index funds or ETFs from our MONEY 70 list. Aside from simplicity, they have the advantage of certainty: These funds strictly follow defined benchmarks, so you know exactly how they'll invest.

Most important, though, resist the urge to jump onto the alternative investments bandwagon. Says Bernstein: "Wall Street needs to sell them, but you don't need to buy them."

See more decisions you need to get right

Are you a saver or an investor?

How much help do you really need?

What's the best use of tax-deferred plans?

How much can you draw from your savings?

First Published: February 11, 2013: 9:54 AM ET

Tips for talking retirement with your spouse

Have a heart-to-heart conversation about your retirement plans with your spouse.

Retirement planning isn't the most romantic topic in the world, so you may not want to bring this up on Valentine's Day. But it is important that you and your wife have a tete-a-tete (or heart-to-heart, if you prefer) not just about saving, but about developing a comprehensive strategy to prepare for retirement.

Unfortunately, far too many couples aren't having such conversations. When Fidelity polled 648 married couples in 2011, for example, a third didn't agree or didn't know where they planned to live in retirement, almost half didn't see eye to eye about whether they would continue to work in retirement and nearly two-thirds disagreed about whether they had a plan to create post-career income.

This failure to communicate can be especially worrisome for women. They're statistically likely to outlive their spouses, yet because they're generally not as engaged in investing and planning as their husbands, they're often not prepared to manage the household finances on their own.

Indeed, only half as many wives as husbands (35% vs. 72%) polled by Fidelity felt completely confident they could take full responsibility for retirement planning.

To assure you're both on the same page, here are three steps you and your better half should take:

First, do a retirement reality check. Before making any moves, you and your wife need to know whether you're currently on the path to a secure retirement.

You can do that by revving up an online retirement calculator and plugging in your ages, income, how much you're saving now, your retirement account balances and the age at which you hope to retire. This will give you an estimate of your chances of being able to achieve your retirement goal if you continue doing what you're doing.

Related: 5 retirement choices: Get 'em right, live well

If those chances are uncomfortably low -- say, less than 75% or so -- then you and your wife can see how making adjustments, such as saving more or postponing retirement a few years, can boost them.

By doing this sort of analysis together -- or at least reviewing the results jointly -- you'll both know where you stand now and what you have to do if you want a reasonable shot at maintaining an acceptable standard of living in retirement.

Second, synchronize your efforts. When it comes to retirement planning, a couple working in unison will do better than each spouse going it alone. If you're both working, start by making sure that, as a couple, you're getting the most out of your company retirement plans.

Let's say one spouse's 401(k) has a more generous matching policy. In that case, rather than each spouse simply contributing the same percentage of salary to their individual plans, a couple may be able to get a bigger bang from the same total contributions by directing a larger share of their savings to the more generous plan.

Make sure you're also investing in synch. That not only means agreeing on the appropriate mix of stocks vs. bonds for your household, but that you're achieving that target most efficiently.

Related: Long-term investing: Keep it simple

For example, if your 401(k) has a good lineup of low-cost stock index funds but underwhelming bond choices, then to the extent possible you'll want to do your stock investing in your plan and get your bond exposure in your spouse's plan.

When you're closing in on retirement, you also need to think hard about coordinating how and when you'll claim Social Security to maximize your benefits as a couple. Generally, it pays for the spouse who qualifies for a higher benefit to postpone taking it until age 70, while the other spouse begins collecting checks sooner.

Related: Are you saving enough for retirement?

But with so many different scenarios based on a couple's ages and earnings histories -- and since tens or even hundreds of thousands of dollars in benefits is potentially at stake -- you may want to check out services such as Social Security Solutions and Maximize My Social Security that, for a fee, can help you find the right strategy for claiming benefits given your situation.

Third, keep in touch with each other. Retirement planning isn't the sort of thing you do once and then put on autopilot for the next decade. Ideally, you and your spouse should go through this exercise once a year or so, plugging updated information into the calculator and seeing whether you're still on course.

If you've fallen behind, you can then talk about making adjustments to get back on track.

As part of this annual process, you should also review your portfolio to make sure your investment choices have performed in line with their peers and market benchmarks -- and, if necessary, bring your overall retirement portfolio back to its target stocks-bonds mix.

So as soon as the mood is right, I recommend you broach the subject of retirement planning with your spouse. It may not go over as well as a dozen roses. But the benefit you and your wife will receive from engaging in this discussion will continue long after the flowers have wilted.

First Published: February 13, 2013: 5:07 AM ET