How To Rescue Your Retirement Nest Egg Now

 

“When men get in the habit of helping themselves to the property of others, they cannot be easily cured of it.” 1909 New York Times Editorial on the IncomeTax

Will I Ever Retire?

Two thirds of respondents in a recent CNNMoney.com poll said they'll have to postpone their retirement as a result of the current financial crisis. And, more than a third worried they'll be chained to their desk for life. But while the challenges are great, so are the opportunities for a comeback.

In the following few paragraphs, I’ll outline a plan for you to follow to maximize the chances for you to have a financially secure retirement.

Income Sources

The first thing to consider when deciding if and when you can retire is to tally up all sources of income. Social Security, for instance, will likely make up a least 20 percent of your retirement income. And, the longer you wait (you’re eligible at 62) the more money you’ll get. In fact, every year you delay up to age 70 adds about 8 percent to your payout.

As an example, if you were retiring this year and you qualify for the maximum benefit, that would mean the difference between about $21,000 a year (in today’s dollars) at age 62 and $38,000 if you wait until age 70.

Saving More

Americans, in general, don’t like to hear this, but repairing your beaten up portfolio and saving your retirement will likely require serious monetary saving on your part.

As an example, a 50-year old making $100,000 a year with no pension and $400,000 in savings should be saving 9 percent of his or her income. With $300,000 in savings at age 50, you’re looking at about a 16 percent savings rate to retire comfortably.

Increased savings as an aid to rescuing your retirement can not be overstated. Still, increased savings is only one of the tools at your disposal. And, to be successful, you need to use all available tools.

Stick With A Mix

Having the right blend of investments is key. You may feel that diversification let you down this past year, but understand that this past year was very unusual in that virtually every asset class went down. But iversification is a long-term strategy that pays off over a period of decades, not months or even a few years. Imagine how much steeper the drop in your portfolio might have been if you hadn’t had your money spread among several kinds of investments.

Let’s consider an all-bond portfolio, no equities. It may sound safe, but a new study by T. Rowe Price shows that switching completely into fixed-income investments after a market crash would give you only a 31 percent chance of your nest egg lasting through retirement. With a 100 percent bond portfolio, you simply can’t keep up with inflation and your own longevity.

Keep the Paycheck

Keeping your full-time job for a few extra years isn’t a silver bullet, but it comes pretty darn close. For starters, you’ll be able to postpone drawing Social Security, setting yourself up for a much larger monthly check when you eventually retire. Working longer also gives your portfolio more time to grow and at the same time you’ll be shortening your retirement span and the period over which you have to support yourself with those savings. Combine all of these factors and the results are powerful: A 62-year-old who keeps working until age 65 will experience a 25 percent boost in annual retirement income.

Lighten Up

But what if staying in your current job isn’t an option? To stay employed longer, you may have to change jobs, which could involve a pay cut or shifting to a part-time position—the typical worker 45 and older experiences a 12 percent drop in salary after a layoff. Fortunately, earning less or working fewer hours once you reach the career home stretch probably won’t put a dent in your retirement rescue efforts, as long as you earn enough that you don’t need to start collecting Social Security or dipping into your retirement savings.

Say for instance, that you end up switching jobs at 62, making only half as much as you did before and you keep working until 65. You’d end up with only 5 percent less in annual retirement income than if you’d kept your full-time position until 65, as long as your able to cover living expenses. The reason: The benefit of delaying Social Security and not tapping into retirement accounts far outstrips the value of any extra savings you could accumulate between ages 62 and 65. This part-time income can have a profound effect on your retirement lifestyle.

Rethink Retirement Withdrawals

Small changes in the way you manage your withdrawals in the early years of retirement can go a long way toward closing any gaps. Planners generally recommend that you limit your initial withdrawal from your retirement accounts to about 4 percent of your portfolio’s value. Then in subsequent years, you would boost your withdrawals to keep up with inflation. The problem occurs when the market crashes just prior to or during your retirement.

There’s an easy fix: Simply forgoing the inflation adjustment in the first five years of your retirement can cut your risk of running out of money in half. At the long-run inflation rate of about 3 percent, you wouldn’t be giving up much – about $900 in the first year on a $750,000 portfolio and about $3,700 by year five.

Add up all the moves and despite the hardships of the past year, the odds are good you’ll still be able to retire in comfort.

Invitation

If you’re not a client yet, and you’d like to explore the option of developing a professionally managed investment portfolio comprised of no-load mutual funds, please give me a call.

I’d be happy to sit down with you and explain how as a fee-only investment advisor I can assist you in meeting your financial goals.

Marshall Sitarik - CFP
Ph. 407-977-3800