Wednesday, October 21, 2009

Outwit, Outlast, Outplay: Surviving Retirement

It was bound to happen. Most of us have been predicting it for years. Retirement. That long awaited event which bridges the days of wealth accumulation with the moment of wealth draw down. All of your hard work, your scrimping and saving, your investing and financial wrangling all come down to this moment.

And as the first wave of Boomers begins to eyeball retirement, how it will be accomplished is not as certain as it was just five years ago. Optimism has been replaced by skepticism as folks look at depleted 401(k) balances and wonder if anything they had planned for, any retirement dream they had dreamed, will come true.

There are several things you have to consider as you stand at the foot of that bridge. Do you want to cross? Do you need to or worse, do you have to? Retirement, the time you have been waiting for, planning for, investing for may not be the dream scape you had once believed it would be.

In our thirties, if we looked far enough ahead and were wise enough to begin investing, envisioned retirement as a time of rest a relaxation, funded by wads of discretionary income generated from decades of smart money moves.

In your forties, you saw the end of the line a little clearer and realized that discretionary spending might not be the primary focus of those golden years but a benefit after essential spending was done. You are more mature and have a better grasp on what things costs, how much money it takes to maintain the lifestyle you are comfortable with and how hard you have to work to maintain it.

In your fifties, you have a better grasp of the bookend pressures that life often is. Your parents have needs, some of them financial that cannot go without consideration. Your children have needs that might be beyond the cost of college. They may have started a family, bought a house or simply moved back home. Each of these may have been an unplanned financial drain changing your estimations of where you had hoped to be.

All through this, you struggle to prioritize your investments, trying to justify your contributions to your 401(k) plans as budgetary pressures weigh in. And then, as if you needed it, the markets decide to add their own bit a pressure to your plan. These are all well expected events, something prudence and wisdom should have warned you about. Problem was, you were still busy living.

Now the time for retirement is within reach and you wonder how well you did. Did you outwit the markets? Was your investment strategy the right one? Will you have enough to survive?

If you began your retirement journey early enough (which most of us haven't), you have given your investments the opportunity to grow. But few of us have used our 401(k) plans long enough to achieve the results we had hoped we would. The 401(k) simply has not been around long enough (just over 25 years since its introduction) to consider this a career long investment.

Rather than thinking about how much longer you might have to work, think of your situation as "how much longer do I need to keep investing". To get the maximum from your retirement plan, you need thirty or more years of steady investments to achieve the kind of wealth accumulation that would allow you to begin to draw down (decumulate) those accounts.

We tend to, even after the market correction that damaged many balances, still be overly optimistic about how much we will need in retirement and how much those post-work accounts will earn. Optimism points to a steady return of 8% on those accounts or higher. Fixed income accounts, those primarily invested in bonds will need almost 6% year over year.

And then there is the income that these accounts will generate. Do you pick 4% a year, adjusting for inflation as the target number? A $250,000 account balance at retirement will provide about $15,000 a year and at that rate, will deplete your account in thirty years - and that is based on a very optimistic and we now know, uncertain 8% return. To achieve a $50,000 a year income, you must have a balance of $1.25 million at the time of retirement.

What if you are nowhere near that account balance? Aside from working longer and keeping your investments in a greater share of the equity markets than most suggest, the best way is to enter retirement with as few of the "essential" bills hanging over your head.

Will you retire with a mortgage? This was not something your parents had to contend with. As one of the single greatest drains on your working income, taking your mortgage into retirement is simply not feasible. Taxes and insurances will, without a doubt, increase faster than you anticipated. Upkeep on property (homes, cars) will add an additional drag on your plan.

Making that post retirement income work may require you to divest. Is this part of your plan? The more liabilities that you enter retirement with, the greater the pull on your assets. Rather than look at retirement as a "how much will I need", a change in focus to "how much does it cost me to live" might be a better way to look at the possibility.

If your balance sheet shows more than 25% of your current income going towards your liabilities, you do not have enough money to retire. While you should keep investing and contributing to your retirement accounts, you should also be drawing down the cost of your lifestyle to match those assets. This is something within your control.

The less debt you enter retirement with is perhaps a better determination of how much money you will need to survive this important game of strategy. It is not how much you need to retire, it is what will you need it for.

Paul Petillo is the Managing Editor of and fellow Boomer.

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