Could there be a worse time to retire?
The stock market makes heart-stopping swings almost daily. Rates are falling on interest-bearing accounts, the usual haven for retirees. And economists debate whether the economy is headed into a recession - or already stuck in one.
"It's worse than you think," says Ed Slott, author of Your Complete Retirement Planning Road Map. "The housing market has dropped. A lot of people thought, 'I have wealth in my house and I'll cash that in.' That's not even there."
This can be a scary time for those on the cusp of retirement, especially the first wave of baby boomers who turn 62 this year. But this doesn't mean you can't retire.
It does mean you need a plan that can see you through the tough times. Not just today, but all the other rough patches you're bound to encounter during a retirement that may last 30 years or so.
"You can't know what the future will hold, which is why you have to put a retirement strategy in place that will have a good chance of success, even if something like this happens," says Stuart Ritter, a financial planner with T. Rowe Price Associates.
How do you develop such a strategy? If ever there was a time to consult a financial adviser, this is it. Even do-it-yourselfers should seek out a trusted professional - emphasis on trusted - for a retirement checkup at least three to five years before quitting their jobs.
As Colorado financial planner Amy Noel says, "If you make mistakes now, you don't get a chance to correct them."
Everyone's situation is different, and the advantage of a professional planner is having someone create a strategy that fits your unique situation. Still, plans designed to weather the bad times, like now, have two key components: modest withdrawals from nest eggs and investments in stocks to keep apace with corrosive inflation.
Consider:
Cracking a nest egg. How much you pull out of savings and investments each year can determine whether your money lasts in retirement or you end up scouring the want ads at 70.
T. Rowe Price ran thousands of computer simulations to figure the ideal withdrawal rate so your money stands a good chance of lasting until age 95.
"It's designed so that if you're hit by a bear market in your retirement, you'll be OK," Ritter says.
The recommended withdrawal amount in the first year of retirement is 3.5 percent for those 60 to 64 and 4 percent for those 65 to 69, Ritter says. Each year thereafter you can increase the dollar amount of your withdrawal by 3 percent to keep up with inflation.
For example, if you have a $1 million nest egg at 65, you can take out $40,000 in the first year of retirement, Ritter says. The next year, you can withdraw 3 percent more or $41,200. And so on.
(This is the recommended withdrawal from your investments and savings. It assumes this pool accounts for 65 percent of your annual retirement income, with 25 percent coming from Social Security and 10 percent coming from other sources, like pensions or wages.)
Don't abandon stocks. It used to be retirees would sell their stocks and live on the interest off their bonds. That was when retirement lasted only several years. Now your savings might have to stretch a few decades, and stocks provide the growth you need.
Financial planners say new clients usually come with portfolios that have too much in stock or not enough. How do you figure the right amount?
Price has a formula for this, too. It's similar to the calculation the company uses for its target-date retirement funds that automatically become more conservative as an investor ages.
The formula: Subtract your age from 110 and multiply that by 1.25, Ritter says. The answer tells you roughly the percentage of your portfolio that should be invested in stocks.
Diversity essential
For a 65-year-old, that would be about 55 percent in stocks, Ritter says. The rest of the portfolio would be 35 percent bonds and 10 percent cash.
Stocks must be widely diversified, including foreign and U.S. stocks. Columbia financial planner J. Michael Martin says the stock portfolios he creates for retirees also include gold and mutual funds that perform in the opposite direction of the market.
Postponing retirement. Maybe the numbers just don't work for you. For instance, the only way you can maintain your lifestyle is withdrawing 10 percent of your portfolio each year.
In that case you face two choices: Spend less now and in retirement. Or work an extra year or two and "save a substantial amount of what you earn - 40 or 50 or 60 percent of that," says Ellen Rinaldi, a principal with the Vanguard Group.
Charles West, a special education teacher living in Linthicum Heights, turns 62 in March. If you asked him six months ago, he would have told you that he was going to retire close to 65. Now he figures he will stay on the job longer.
He ticks off a list of reasons: Rising energy bills. Higher property taxes. Growing health insurance costs.
Replace a car
"Every time I go to Home Depot it costs just a little bit more," West says. He needs a new car soon. And the two largest holdings in his stock portfolio have taken a hit in the past year.
If it were just one thing, he says, he wouldn't have to delay retirement. But so many things all at once is too much. Luckily, West adds, he's healthy and still finds his work rewarding.
We can only hope that's the case with others who find they must put retirement on hold.
Questions? Comments? Or to share a tip with readers, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com