Yes, You Can Still Retire

Here are the real roadblocks to a comfortable retirement and how to get around them.

by Jean Chatzky
Photograph: Illustration: Yuko Shimizu

I fondly remember checking the balances in my retirement accounts during the summer of 2007. I’d surf from my 401(k) to my IRAs, amazed that I’d made thousands since the week before by doing absolutely nothing. I’d spend the money in my head, wondering, Is 60 too early to retire? Is 55?

Then October rolled around, the markets plummeted, and as fast as that, a collective $2.7 trillion disappeared from the retirement accounts in this country, including mine. Unemployment soared, and it wasn’t long before I—like women everywhere—was asking myself different questions. Can I still retire comfortably? Can I retire at all?

Surprisingly, the market is not what’s likely to stop you. When economists at Dartmouth College and Texas Tech University analyzed the assets of people in their fifties, they reached an unexpected conclusion: The roller-coaster ride of 2007–08 will probably delay this group’s retirement for only one and a half months on average; 10 percent will be forced to delay for a year or more. And this was determined before March’s big rebound.

But that doesn’t necessarily mean you’re on track. Here are the other obstacles that could stand in your way and how to overcome them.
 

Roadblock 1: You don’t have exact financial goals

Truthfully, it is impossible to predict your precise retirement needs. Sure, family history can help you guess how long you’re going to live, and you can use economists’ assumptions to make calculations about inflation and the rate of return on your portfolio. But there are so many variables (what will a pound of organic arugula cost in 2032, anyway?) that even experts such as Jack VanDerhei of the Employee Benefit Research Institute (EBRI) say there is no “correct” amount of money every woman should have for retirement.

The key is to get a realistic range, and the place to start is with a retirement calculator—or four. (I like the ones at T. Rowe Price, CNNMoney, the Motley Fool and choosetosave.org.) Because the math they employ varies, I suggest using several calculators until you see enough consistency to ensure that you’re in the right zone. These calculators will ask you to make certain assumptions. For return on your portfolio, use 8 percent if you’re in your forties or fifties and 6 percent if you’re 60 or older. (You’ll be taking on less investment risk as you age, so you’ll see a smaller return.) For inflation, use 3 percent. When it comes to how much you’ll need to spend—or the percentage of your preretirement income you’ll need to replace—use at least 100 percent. If you plan to travel the world or if you have a troubling family or personal medical history, go with 120 percent. You’ll also need to know how much you can expect from Social Security (go to ssa.gov to get your most recent benefits estimate).

Less than half of all workers have ever tried to calculate how much money they’ll need in retirement. And that is an enormous problem: Unless you know where the bar is, you’ll never be able to jump over it. So do yourself a favor and take a few hours this weekend to just get it done. Then write a note to yourself to repeat the exercise every year or two, because not only might the balances in your accounts shift but your plans might as well.
 

Roadblock 2: You’re not saving nearly enough

Now that you have your goal, it may be clear that you’re not socking away enough money to get there. You are not alone. “The overarching problem is not that the market went down,” says financial adviser Frank Armstrong, author of Save Your Retirement. “It’s that people haven’t saved enough.” This is truest for workers whose employers don’t sponsor plans, says EBRI’s VanDerhei. Women, too, have a particular problem. Even when we work full time, we’re the ones who take months or years off to care for children or aging parents. During those sabbaticals we typically don’t save for retirement, which is one reason the balances of 401(k)s owned by women ages 50 to 59 average only 54 percent of the balances of 401(k)s belonging to men of the same age.

So how do you make up the necessary ground? First, stash the full $16,500 you’re allowed every year into your 401(k), 403(b) or other work-based retirement account. If you’re 50 or older, you’re eligible to make an additional $5,500 in catch-up contributions; do that, too. And because even $22,000 a year may not be sufficient when you’re aiming for seven figures, look at supplementing these accounts with a nondeductible IRA contribution ($5,000 if you’re under 50, $6,000 if you’re 50 or over). If you can do more, put money in a nonretirement brokerage account.

Also, max out your contribution to a health savings account if you have one; these accounts are available to people enrolled in a high-deductible health plan. In 2010 the limits are $3,050 for singles and $6,150 for families, with an extra $1,000 for people over 55 not on Medicare. HSAs are really retirement accounts in disguise, because once you retire, you can use the money for things beyond health care. (Don’t confuse HSAs with FSAs, or flexible spending accounts, which are funded with your pretax contributions to pay for unreimbursed health care or day care ­expenses—over-the-counter drugs, co-payments, glasses and the like. FSA dollars are use-it-or-lose-it each year.)

No matter where you’re stashing your savings, put those contributions on auto­pilot. Auto-investing is the key to success, because it’s easier. The balances in the retirement accounts of workers whose companies automatically enroll them in retirement savings plans add up to nearly 10 times their final incomes when the workers reach 65, according to researchers’ simulations. The balances in accounts of people not auto-enrolled? Just 2.4 times their final incomes. If you can’t automate at work, do it via your financial institution. Another tip: Bank your raises. Each time you get a salary bump, increase the money you’re stashing away by the same amount. Windfalls, bonuses, tax refunds and birthday money also go right into IRAs.
 

Roadblock 3: You’re tempted to raid your retirement stash too soon

One way to make your retirement accounts last longer is to avoid tapping into them until well after your official retirement date. Each year that you produce enough income to live on without touching your nest egg means another year that your retirement stash can grow tax deferred—until you reach age 70½ and start making mandatory withdrawals, in the case of a traditional IRA or 401(k). That doesn’t necessarily mean staying in the job you have now. Armstrong cites clients who “retired,” then joined the Peace Corps for several years. They didn’t make a lot of money, but they didn’t have to tap their retirement capital, they ultimately received more Social Security because they delayed taking it, and they had several fewer years of postretirement life to pay for.

If you don’t feel qualified to nab a desirable nonretirement gig, it’s better to retool now than 10 years down the road. “Constantly update your résumé, your skills, your appearance,” says Jeri Sedlar, coauthor of Don’t Retire, Rewire! Think about what the next opportunity might be and how you could transition into it. “Community colleges often offer certification programs that are less costly or time consuming than going back for an additional degree,” Sedlar points out.
 

Roadblock 4: You don’t know how to make your nest egg last

I was recently on a panel with superstar economist Burton Malkiel of Princeton University, author of A Random Walk Down Wall Street, among other books. We were asked about financial mistakes we’d made over the years. Malkiel talked about not rebalancing amid the bubble of 2000 when too much of his portfolio was in technology, particularly in Cisco—which, despite being “the backbone of the Internet,” as Malkiel put it, cratered by 90 percent. His point: No one knows what the market is going to do. My point: Even superstar economists blow it sometimes.

But if your goal is to have 60 percent of your assets in stocks and 40 percent in bonds, you’ll want to bring those percentages back in line every January, he suggests. “That’s not easy,” he says. “It means selling your winners and buying more of your losers.” This is your protection for when the markets turn—and they always do.

Another challenge is achieving adequate diversification. The advice used to be to purchase in complementary sets: Buy small-cap stocks and large-cap stocks, growth and value, domestic and international. Why? Because these asset groups tended to move in ­opposition—when one was down, the other was up, and whatever happened, you were protected. But as the economy has become more global, those relationships have changed. One market isn’t as likely to go down when another goes up anymore. That’s not to say they are all moving in the same direction; it’s just that the relationships are more complicated than they once were.

You can’t simply hedge your bets by buying this way anymore—say, by purchasing European stocks to balance U.S. stocks. Malkiel’s advice (which I plan to take) is to buy globally in the form of a low-cost world index fund, which will provide greater diversity. Vanguard just launched one that is 24 percent emerging markets, 46 percent Europe, 24 percent Pacific and 6 percent North America. You can access this fund through Vanguard directly as well as through many other brokerage firms. The other alternative (there aren’t many of these yet) is iShares MSCI ACWI Index Fund, an all-world exchange-traded fund, which trades like a stock.

Finally, if you’re inclined to take a hands-on approach to managing your money, I’ve always believed there is enough information available from the Internet and other media sources for you to tackle it. But if you feel overwhelmed trying to figure out your financial life, by all means get some help. You can find objective financial advice at the National Association of Personal Financial Advisors (napfa.org; advisers bill by the hour, by retainer or by assets under management) or garrettplanningnetwork.com (where you’ll find consultants who bill by the hour). Remember, this isn’t a vacation you’re planning for, it isn’t buying your first house, it isn’t even four years of college—it’s the last 30 or 40 or 50 years of your life. If financial advice isn’t worth paying for now, then I don’t know when it will be.

Originally published in the July/August 2010 issue of More. Read more of Jean Chatzky's columns here.

First Published Wed, 2010-05-26 09:46

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