Buck up: Your New Year's resolutions are going to require more sacrifice than usual this year. Layoffs, benefit cuts, and disappearing 401(k) balances have lashed workers in 2008. Yet everyone still has to provide for retirement. Here are 10 ways you can resolve to get your retirement plan back on track in 2009.
Delay retirement. The best way to recoup market losses is to work longer. That gives your retirement accounts time to recover before you begin to draw them down. "Even before the financial crisis, people should have been considering working longer because they are going to live longer," says Alicia Munnell, director of the Center for Retirement Research at Boston College and coauthor of Working Longer: The Solution to the Retirement Income Challenge. "After the financial crisis, you need to work three to five years longer."
A recent AARP survey found that 65 percent of workers ages 45 and over are considering delaying retirement and working longer unless the economy improves significantly. Continuing to work allows you to tuck more cash into your accounts, lets your account accrue returns and work its way up to where it was a year ago, and shortens the length of the retirement you will have to finance. How long will you have to work to recoup market losses? For employees who have worked for 20 to 29 years and leave their 401(k) invested in a mix of stocks and bonds, it will take, on average, one year, nine months of work to resuscitate their 401(k)'s, the Employee Benefit Research Institute calculates. If you pull your nest egg out of stocks, that bumps up the recovery time to two years, one month in the working world, EBRI says.
Put off claiming Social Security. You can sign up for Social Security beginning at 62. But waiting until 70 to claim your due will produce bigger payouts if you're in good health and expect to live a long time. Your Social Security benefit increases by 7 percent until your full retirement age and by 8 percent afterwards, says Laurence Kotlikoff, a Boston University economics professor and author of Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard—Today and When You Retire. That's a far better return than most people are getting in the stock market right now. "You can potentially spend more now because you will have this higher income coming in when you are older," Kotlikoff says.
Get your 401(k) match. The most common 401(k) match is 50 cents per dollar up to the first 6 percent of pay. If you make $50,000 a year and manage to tuck away $3,000, you can get an extra $1,500 added to your nest egg tax free (until retirement). But some financially struggling companies like General Motors, Kodak, and Frontier Airlines have suspended their 401(k) matches this year. Plus, 4 percent of companies plan to eliminate the match next year, according to a Watson Wyatt survey of 248 companies in October. So, it's particularly important to get the match while you can.
Avoid early withdrawals. As unemployment rises and healthcare costs skyrocket, it's more tempting than ever to borrow from your retirement savings to make ends meet. About 18 percent of Americans have prematurely made withdrawals from their retirement accounts because of the recession, according to a Bank of America survey. The top reasons were to pay off credit card debt (26 percent), pay down a mortgage (22 percent), and cope with job loss (22 percent). "Do all that you can to cut expenses and find other sources of cash before breaking the lock on your retirement piggy bank," advises Beth Almeida, executive director of the National Institute on Retirement Security.
Catching up with those early withdrawals will be difficult. "When the money is out of your retirement account, you rob yourself of compounded investment returns. And if you don't pay the loan back, you'll have to pay Uncle Sam taxes on the loan and a whopping 10 percent penalty," Almeida says. Plus, if the worst-case scenario should strike and you're forced to file for bankruptcy, your retirement savings in a pension, 401(k), or IRA are protected from creditors, while most other assets are not.