Save, save, and save some more is one of the mantras of retirement preparation. These days, it's been joined by "work, work, and work some more." People have responded to investment, employment, and housing shocks by deciding to continue working. Some surveys show people are typically adding a full five years onto their employment plans.
This would be a huge financial and lifestyle change for older Americans. If it happens. For years, retirement surveys have found a large gap between when people say they plan to retire and when they actually mothball their office and factory wardrobes. Consistently, actual retirements have occurred nearer age 62, the earliest date at which people can elect to begin receiving Social Security benefits. This has been several years earlier, on average, than the dates preretirees say they plan to stop working.
So, first off, let's wait and see what actual retirement patterns look like once the economy has settled into what appears to be a sustained period of disappointingly low growth. Before this can happen, of course, we need to get past the Congressional impasse on the nation's debt ceiling and deficit crises, hopefully while avoiding a repeat visit to Recessionland.
But as you consider your own retirement prospects, here's a checklist of investment and income issues you should review:
Work-retirement tradeoff. For each additional year you work, you should be able to generate an additional two to three years of retirement coverage. There is, of course, the extra year of work itself. Presumably, you will be spending none of your retirement nest egg during that year, and hopefully will be adding to your savings. Let's say this adds 6 percent to your nest egg (the 4 percent you didn't spend and 2 percent in new savings). You'll also be getting an extra year of earnings on your retirement funds. That should be worth another 6 percent. Lastly, you can extend the age at which you begin collecting Social Security. Social Security benefits rise by roughly 8 percent a year for each year you delay taking benefits between ages 62 and 70. That's 12 percent more in your nest egg and 8 percent tacked onto your Social Security income for each year you continue working. Oh, the added income may even raise your Social Security benefit if you earn enough to raise your lifetime wage base.
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Longevity and retirement. Once you turn 65, current longevity statistics say you'll live, on average, another 18 (men) to 20 (women) years. Your retirement savings will need to stretch over a shorter period should you keep working until age 70.
International investments. Traditionally, diversification of retirement investment portfolios has been about asset classes. Making sure there was an appropriate balance between stocks and bonds, and paying attention to the risk and return characteristics within each type of asset. Increasingly, your investment mix needs to become focused on foreign holdings. That's where the world's economic growth will be found, and it's where a good percentage of your retirement funds should be invested as well.
The U.S. dollar. Retirement investments are affected by the dollar in several ways. If the United States is to boost its share of global trade, the dollar's exchange rate will have to decline, at least in the short run. This will add to U.S. prices for imports, but stimulate exports and domestic economic growth. Much of our national debt is also held overseas in dollar-denominated treasury securities. Interest rates on those securities will rise if foreign investors don't see meaningful progress in attacking U.S. deficits. This, in turn, will drive up all interest rates. Finally, the dollar remains the world's primary medium for foreign exchange. Higher oil prices have been caused, in part, by a weakening of the dollar.
Volatility. Expect a lot of volatility in your investments' performance. This argues for setting aside more reserve funds, so you aren't forced to sell investments at a bad time. Flexibility is essential here, so don't lock too much of your funds in holdings that cannot be changed.
Glide path. As we age, our investment holdings should gradually become less risky and provide better protection against market declines. The changing mix of stocks and bonds is known as a glide path. Make sure you know what the glide path is for your holdings, and do the homework needed to make sure it's an appropriate path for you. Lots of people don't have a financial adviser and may not be comfortable actively managing their investments. If this describes you, consider investing in target-date mutual funds. They are geared to people of different ages and automatically shift investment holdings to achieve specific glide paths explained in the funds' offering prospectuses.
Higher medical expenses. The biggest failing of most retirement investment plans is underestimating out-of-pocket medical expenses. This will become even more of a problem if Medicare's financial challenges are addressed by shifting more program costs to consumers. When you calculate how much you will spend in retirement, and thus how much money your retirement savings will have to provide you each year, don't ignore medical expenses.
Income spigots. Investment assets don't pay the bills. You will need to convert those assets into regular monthly income. IRAs and 401(k)s require minimum distributions once you turn 70½. There are tax considerations that can govern which investments you sell and when. Your nest egg conversion, in short, will require a lot of planning. It's best to build your plan several years before you actually retire.