NEW YORK (CNN/Money) -
The leading edge of the baby boomer generation, the largest cohort in American history, will start to turn age 59 ｽ on July 1. For the first time, these Americans will be permitted to withdraw from their 401(k) and IRA accounts without incurring a 10 percent penalty.
But Bob Carlson, editor of the newsletter, "Retirement Watch" and author of the book "The New Rules of Retirement," said people should not view this as an "opportunity to empty out their retirement accounts."
Instead, it's time to evaluate the progress they've made in building a successful retirement plan. They should visualize what level of lifestyle they want in retirement and then try to estimate what it will cost.
Drew Denning, a vice president in the retirement income management team of the Principal Financial Group, said Boomers should use the upcoming milestone as "the perfect time to assess their entire financial situation."
People typically underestimate how much income they'll need in retirement.
According to the EBRI/ASEC/Greenwald Retirement Confidence Survey for 2005, 64 percent of workers expect to be able to live on between 50 percent and 85 percent of their pre-retirement income. Most retirees, however, report that they need at least 85 percent.
One problem is that many workers don't know how much some of their employee benefits cost until they actually have to pay for them.
Take health insurance. Denning says, "Premiums may go to $700 or $800 a month after retirement; people may have been paying only $100 or less when they were working."
Most future retirees will have to depend on private resources for a large portion of their income.
In 1974, 56 percent of retirement income derived from defined benefit plans and Social Security.
In 2030, according to Denning, only 24 percent will come from those sources.
"I tell people to think of it this way: 76 percent of your income will not be guaranteed," said Denning.
In essence, unlike their parents, who had employer-funded pensions, Boomers "will need to make investment decisions to create their own 'paycheck' in retirement," according to Craig Brimhall, vice president of the Retirement Wealth Strategies at American Express.
Add to that another big key to retirement planning -- flexibility.
Flexibilty is so important because increases in longevity have stretched the length of time Americans have in retirement. "Our advice is to plan carefully because your investments may have to last for decades," said Brimhall. In the 1960s, the average retirement lasted just five years. Most now project out to 20 or 30 years.
Maintaining flexibility is not easy. Jeff Van Keulen of American Express said a well-diversified portfolio that includes fixed-income investments of various maturites, a strategy called laddering, helps, but his company is not recommending keeping as high a percentage of the portfolio in bonds as had been recommended in the past.
"When you're planning on a time horizon of 30 years you need a significant exposure to stocks to keep up," he said.
Among the most common tips from financial planners are:
- Maintain a long-term strategy. Try to keep savings in investments. Tax-deferred, compound growth can keep you ahead of cost of living increases.
- Withdraw only 4 percent to 5 percent a year. Taking too much out of your portfolio, especially early in retirement, can heighten your risk of running out later. Learn more about drawing down from your 401(k).
- Keep some assets liquid. And invest the rest for growth. Rebalance every 6 to 12 months by cashing in from your best performing assets.
- Work your investments hard. Going too conservative carries the risk of falling behind price increases. Instead, try to maintain a well-balanced, diversified portfolio with a significant percentage of it in equities.
- Have a cushion. Try to keep something in reserve for unexpected expenses.
- Consider an annuity. Annuities provide a guarenteed income stream for life. Use annuity tincome to pay for household expenses. It's like establishing your own defined-benefit plan. Learn more about annuity solutions.
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