July 11, 2008
Can You Still Afford to Retire?
By Kathy Chu
The economic downturn has thrown an extra problem at older Baby Boomers who had planned to retire over the next few years: They now have less money at their disposal than they had projected.
Retirement portfolios are shrinking. Home equity is plunging. And Social Security faces an uncertain future. This trifecta of grim news means that all but the wealthiest Baby Boomers may have to review -- and possibly rethink -- whether their retirement target dates are still realistic.
The bottom line is this: Unless you're flush with cash, if you don't need to retire, don't. The stock market is tanking, eating away at your hard-earned nest egg. If you tap into your portfolio now, you'll deplete it further.
You'll also have to brace for the risk of poor market performance in the first few years after you retire. Meager returns during the first five years of retirement can significantly raise the chance that you'll outlive your money, especially if you're withdrawing more than the portfolio is earning each year, according to an analysis by T. Rowe Price, an investment firm.
"Anyone will tell you that you are better off not starting to draw down on your portfolio when the market is already heading into a bad period," says Norman Boone of Mosaic Financial Partners, a financial planning firm.
In the meantime, if you still have a few years before you'll stop working, here's how to make sure your timetable for retirement is still on track.
Take stock of your situation
Even though the S&P 500-stock index has plunged 20% since October, investors with diversified portfolios of stocks and bonds haven't faced nearly as severe losses. For most diversified investors, stock-market losses alone won't be enough to derail their retirement plans, says Joel Larsen, a financial planner in Davis, Calif.
"If one downturn in the market is enough to upset your plans," Larsen says, "then you weren't ready to retire" in the first place.
Still, the current toxic combination of investment losses and plunging real estate values may stall retirement plans for many.
Jeff Taylor, founder of Eons, a social-networking website that caters to Baby Boomers, says he's seeing a growing number of online discussions by Boomers who are considering postponing retirement. More people are also writing on the Eons site about how they've been forced to return to work after retirement because of higher-than-expected living costs, falling investment portfolios and home values, Taylor adds.
In January, Mary Todd, 52, retired from her job as a computer analyst with the intention of selling her house and using that money to travel throughout the USA. But her plans stalled as the economy began sputtering. To shore up her portfolio, Todd went back to work for 30 hours a week as a seamstress. She's also renting out her house, instead of selling it, until the real estate market recovers.
"My intention wasn't to sew clothes in retirement," Todd says. "My intention was to sell my house and take the money, travel and find out where I wanted to live."
Re-estimate retirement needs
Financial planners have long championed a rule of thumb: People will need 70% to 80% of their pre-retirement income to live comfortably in retirement. But rising health care and living costs have led many planners to raise that percentage to near or even above 100% of pre-retirement pay.
"The fact of the matter is that you're going to spend more, because you have more time on your hands," says Don Weigandt, managing director for JPMorgan Private Bank.
Larsen, the planner in Davis, Calif., recommends writing a few paragraphs about what you imagine your lifestyle will be like in retirement. This will help you decide whether to expect to spend more or less money in retirement compared with when you were working.
But be flexible about your spending. That boat you wanted to buy the minute you retired may not be wise if the market is down, because you'd be pulling money out of your portfolio when it's already hurting.
And no matter how well you plan, there will always be unforeseen costs. When Josephine and Richard Dervan retired last year, they kept their New Jersey home even though they planned to live most of the time in Florida. As energy costs soared, they had to rethink having two homes.
"Gas is going up, electricity is going up," says Josephine Dervan, 61. "We paid $200 for energy bills for an unoccupied house in February. We realized this is a lot of money and decided to sell the (New Jersey) house."
Shore up investment portfolio
If you plan to retire in a few years, consider keeping a few years' worth of expenses in short-term liquid investments such as bonds, says Harold Evensky, a financial planner in Miami.
That way, the planner says, if you must retire while the stock market is falling, you won't need to tap into your depressed portfolio. Plus, by the time you start to withdraw from your portfolio, the market might have turned around, boosting your investment values.
To bolster your chances of success, also stay invested in stocks. Investors closing in on retirement might be tempted -- especially in this weak market -- to slash their exposure to stocks. But doing so would be a mistake, says Christine Fahlund, a financial planner at T. Rowe Price, because over the long run, stocks give investors their best chance of earning returns that outpace inflation.
Maintain your asset allocation, Fahlund says, as long as it still fits your risk tolerance and investment goals.
Plot withdrawal strategy
To minimize your chances of running out of money, planners suggest withdrawing 3% to 5% of your portfolio a year, with yearly increases for inflation. But what if, by the time you retire, the market is still in bear territory? In that case, you should consider cutting back on your withdrawal amount, Fahlund says, or not adjusting the withdrawals for inflation until the market recovers.
Retirement calculators such as the one available on T. Rowe Price's website can help investors figure out how much they can safely withdraw per year in retirement. Other tools, such as the ESPlanner developed by Laurence Kotlikoff, an economics professor at Boston University, factor in Social Security payouts to calculate how much you need to save and can spend each year to maintain a high standard of living in retirement.
Delaying Social Security for a few years can help you offset the sacrifices to your lifestyle you'd have to make if you end up with a smaller-than-expected retirement portfolio. That's because the longer you postpone Social Security payments -- until age 70 -- the bigger your monthly check.
If Boomers feel they have to return to work part time so they can afford to wait to take Social Security payments, they should consider doing so, Fahlund says.
That said, delaying payouts makes sense only for those who expect to live for many years into retirement and who'd benefit from receiving a higher amount beginning at a later age rather than a lower amount starting at age 62.
"You should be savvy about when to take Social Security," Kotlikoff says, "because this is the cheapest way to get an inflation-adjusted pension." (c) Copyright 2008 USA TODAY, a division of Gannett Co. Inc. <>>