Many Americans are forlornly examining their battered and bruised retirement accounts. To most, it probably looks as if years of diligent saving have gone to waste, and they are wondering what to do next. Retirement savers certainly need more growth in their portfolios to build up shrunken nest eggs. But at the same time, investors are seeking assurance that the stock market won't swallow what's left of their 401(k)'s and IRAs. The choices to repair your retirement prospects are difficult: work longer, reduce expenses, invest smarter, and, yes, try to tuck even more money away for retirement. Here is how you can take back control of your retirement, at any age.
10 or More Years From Retirement
Youth is the perfect time to take a few chances in your retirement accounts. "Be as aggressive as your stomach can handle," says Hal Guy, who is a certified financial planner with StoneCastle Consulting in Windsor, Conn. Daring investors may even be able to scoop up a few bargains now. Young people have an opportunity to buy into the market at rock-bottom prices, with the assumption that the market will go up—eventually. The only investing risk you shouldn't take while you're in your 20s and 30s is failing to start saving for retirement. The long-term payout for you if you start and cultivate a retirement account beginning in your 20s can be dramatic. An investor who contributes $5,000 to an IRA every year beginning at age 25 could potentially accumulate $1.6 million by age 70, according to Fidelity calculations that assume an annual rate of return of 7 percent. Avoiding fees and expenses as much as possible will help get you to your retirement goal faster. And any company contributions from your employer are, of course, a bonus.
Within 10 Years of Retirement
Baby boomers rapidly approaching age 65 have earned the right to be skeptical about their retirement prospects. Alex Mathieson, 59, a regional manager in Fort Lauderdale, Fla., saw his 401(k) lose 40 percent of its value last year. "I haven't locked in the loss. I am still 100 percent in stocks," he says. "But I don't have any more of the faith in the markets that I once had." Many financial advisers recommend moving at least some of your nest egg out of equities as you age. A quarter of people between 56 and 65 have over 90 percent of their overall 401(k) portfolio in equities, says Jack Vanderhei, research director of the Employee Benefit Research Institute. It should be 50 percent.
Other investors choose the opposite extreme and pull all of their money out of the stock market at retirement. But both too much and too little risk in your portfolio can derail retirement plans. You need to find a level of risk in your portfolio that you can live with that also helps you build wealth for retirement. Investors seeking a conservative bond that offers inflation protection may want to consider treasury inflation-protected securities, TIPS, which carry a low, fixed rate of interest but adjust your principal every six months based on the consumer price index. More aggressive investors might prefer municipal bonds, which have a slightly higher yield while still providing a measure of safety. "Going 100 percent into CDs will guarantee failure," says Michael Kresh, a certified financial planner in Islandia, N.Y., and the author of You Can Afford to Retire.
As painful as it sounds, working longer will help restore your nest egg faster than almost any other strategy. "The typical person in their 50s needs to work about a year and a half longer to recover," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "Then there is enough time to save more and for the markets to bounce back." Employees ages 50 and older are eligible to contribute up to $22,000 to their traditional tax-deferred 401(k) in 2009, $5,500 more than younger workers. Delaying retirement also allows you to put off claiming Social Security. Payouts increase by about 7 to 8 percent for each year you delay claiming between ages 62 and 70.
A typical retiree will need enough income to last for 30 years or more. The ultimate goal of retirement planning is to avoid running out of money. To make your nest egg last as long as possible, some financial advisers in recent years recommended that retirees maintain a significant exposure to stocks. The higher returns that equities have historically provided were thought to help ensure that retirees don't outlive their assets. But investors who followed this advice are now suffering the steepest losses. Still, avoiding the stock market completely means your nest egg may not stay ahead of inflation or meet your financial needs. "Someone 60 years old still has a long-term time horizon, and you must have some money in the market," says Guy.
Drawing down your assets by 4 percent annually is generally considered a prudent way to make your retirement stash last the rest of your life. Using this strategy, an ambitious retirement saver who managed to accumulate $1 million would typically be able to spend approximately $40,000 a year throughout retirement. If that $1 million nest egg shrank to $600,000 this year, 4 percent of the current balance is just $24,000 this year. Healthy retirees likely to live a long life could deplete their portfolios too quickly if they withdrew significantly more than 4 percent.
To bridge the gap, retirees should keep between two and five years' worth of living expenses out of the stock market in completely safe investments like CDs. Seniors who can get by without tapping their retirement assets won't be required to make withdrawals from their withered IRAs, 401(k)'s, and 403(b)'s this year. The Worker, Retiree, and Employer Recovery Act, passed in December, temporarily suspends an excise tax levied on seniors over age 70½ who fail to take a required minimum distribution from their retirement accounts in 2009.
Cutting expenses as much as possible will also help. Hedy Vahabzadeh, 56, a secretary, and her husband, Hossein, 63, a retired controller, downsized from a $400,000 house in Sparta, N.J., to a $169,000 home with a pool in Jersey Village, Texas. "Especially in this market, we don't want to touch the 401(k)," says Hedy. The frugal couple will put off buying new cars longer than usual to cut costs, and their daughter, 33, and 5-year-old grandson also live in the same house to cut living expenses for the entire family. Says Hedy: "In this economy, I think that there's going to be more households like us with more than one generation in one house."