Stress-test your retirement

In anxious times, one way to feel more secure about your nest egg is to plan ahead.

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By Walter Updegrave, Money Magazine senior editor

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).
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(Money Magazine) -- The economy is in shambles, and the stock market is in the tank. If you're entering the waning years of your career - or if you've already retired - that's more than enough to suck the joy out of retirement. If you let it.

I don't want to be Pollyannaish and claim you can undo the damage caused by the recession and bear market, but one way to improve the odds of having a satisfying retirement is to gain control of your finances. And the simplest way to do that is to answer these two questions now:

How much income can I expect in retirement?

When MFS Investment Management polled 500 affluent retirees last October, only slightly more than half felt comfortable about their finances. That's hardly a revelation. But the survey also showed that those who had a retirement income plan in place were 34% more likely to feel financially comfortable than retirees without a plan.

The upshot: By taking the time now to create a strategy for turning savings into income, you'll be less likely to panic in a downturn.

Begin by figuring out how much you can safely tap from your savings each year, making sure your money will last at least into your early nineties. Test out withdrawal scenarios by going to the Retirement Income Calculator at troweprice.com.

The MFS survey also found that retirees with pensions were 32% more likely to be extremely or very satisfied with their retirement than those without one. While check-a-month pensions are hard to come by, you can create something similar on your own by investing a portion of your assets in an immediate annuity.

What if I'm forced to retire early?

One of the biggest dangers you'll face is being pushed into retirement sooner than expected. You may not be able to avoid getting pink-slipped in this economy. But by preparing for that scenario, you can mitigate the financial and emotional shock.

Start by going to an online calculator such as our Retirement Planner. See whether your projected savings plus Social Security and pensions will be enough to maintain your standard of living in the event you're forced to retire earlier than planned. If you're falling short, try to bridge the gap by boosting savings in your 401(k), or if you're already maxing out, through an IRA.

Also, while you're still working, check out retirementjobs.com and retiredbrains.com to view the sort of jobs that may be available should you get laid off. As the chart shows, saving more and making plans to stay in the workforce - even at much lower pay - after a layoff can restore your retirement income.

Finally, don't forget to factor in health-care costs if you were to lose your job before Medicare kicks in at 65.

At some point, the economy and the markets will pull out of this funk. But until that happens, the best way to improve your chances of having a secure and satisfying retirement later is to plan now.

Want a Money Makeover? E-mail us at makeover@moneymail.com. To top of page

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