Retirement: When time isn't on your side

If you're within a few years of retirement, hanging tough in today's market may not be good enough.

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By Dan Kadlec, Money Magazine contributing writer

Dan Kadlec is co-author of The Power Years, a guide for boomers. E-mail him at

(Money Magazine) -- Remember the last time you left the house late for an event and figured you could make up for it by driving a little faster?

But you were late anyway. It's tough to make up lost time. Leaving 15 minutes late for a drive that ordinarily takes an hour at 55 miles per hour would require you to fly along at 73 mph to arrive on time. In most parts that's just reckless.

A similar kind of math applies to your retirement savings, and lately you've been losing big chunks of time just when you can least afford it.

Now is when we boomers have the most skin in the game, and with only a few years of peak earning power left, we'd really benefit from a market surge. Instead, we're getting market sag. Stocks have been in turmoil all year.

Of course, a few months or even a year or two of poor returns shouldn't be enough to derail anyone's long-term plan. But this mess has actually been with us for close to a decade. Over the past eight years, the stock market has been producing just a fifth of its historical rate of return.

Meanwhile, for the first time in 25 years, rising inflation is a genuine threat that could keep stocks growing slowly for many years into the future. Then too, you can no longer count on further big gains in your home's value to bail you out once you're ready to retire.

Yet hope is not lost. Here are some strategies for coping with today's turbulent financial markets:

Get some perspective

You may not think you have time to ride out the market's troubles, but you probably do. Even if you're within five years of retirement, your time horizon isn't five years. It's probably 20, 30 or more. After all, you're not going to liquidate your entire portfolio on Day One; odds are you will be holding some stocks for the rest of your life.

"We typically do not see a lot of drawdown of assets right away," says Francis Kinniry, a principal in the Vanguard Investment Strategy Group. "People tend to live off the income from their savings and from other sources."

Plus, even if your investments don't do as well as the historical averages, they're still likely to grow over 10 years or longer. But don't kid yourself: There is a big difference between earning 6% a year and the 10% to 12% that we've enjoyed for much of our adulthood.

Over 10 years, stocks worth $100,000 would grow to $259,374 at 10% but to just $179,085 at 6%. This means, of course, that you'll need to find new ways to make up the gap.

You can still drive 55

That may be why nearly a quarter of affluent boomers in a recent Bell Investment Advisors survey said they intended to change their investment strategy in response to current economic conditions and more than half cited higher returns as a goal for the next five years.

The latter suggests they intend to ratchet up risk by increasing investments in equities. But in fact, only one in five planned to buy more stock, while nearly 70% favored putting more money in fixed-income investments.

Both are bad ideas. Pumping up your commitment to bonds and cash practically guarantees inferior returns in the long run, if history is any guide. But this is no time to put the pedal to the metal in your portfolio either. When you reach for bigger short-term returns through aggressive investments, you risk setting yourself back even further.

Maintaining a mix of 50% stocks, 40% bonds and 10% cash, in good times and bad, is a decent target for most boomers. You can refine that with our asset allocation calculator. Whatever you do, stay diversified and keep practicing sound, time-tested strategies like dollar-cost averaging and yearly rebalancing.

Focus on what you can control

You can't influence the market or decide when you turn 62 or 65. But you can choose how much to save and spend, and whether to downsize your lifestyle. Small adjustments add up.

"There's no turning back the clock," says Gary Williams, a financial planner at Williams Asset Management in Columbia, Md. "It always comes down to basics."

So contribute enough to your 401(k) to get the full company match; better yet, fund it to the max, including taking advantage of the $5,000 "catch-up" provision for those over age 50.

Concerned about how to come up with the extra cash? Find additional resources by saving - not spending - the full amount of any raise, bonus or tax refund or, this year, the federal stimulus check.

Get in the habit of squeezing more out of your savings and investment returns wherever you can. Trimming your mutual fund expenses is guaranteed to boost your returns without additional risk, notes Dallas financial planner Clark Randall.

Shifting to an index fund that charges as little as 0.2% from an actively managed stock fund that charges 1.2%, for instance, gives you a full percentage point more in return, all else being equal. Money-market yields are hovering around 2%, but you can get 3% at an online bank like ING Direct.

In your cash accounts, aim to build a safety net big enough to get you through at least the first year of retirement without your having to sell stocks. Short of illness, nothing ravages your plans in retirement like the double whammy of drawing down your stock funds in a declining market.

Work a little longer

With just a few years to go before you retire, you may not be able to completely offset the effects of recent subpar returns, no matter what eleventh-hour adjustments you make to your portfolio. That's why one in 10 boomers in the Bell survey say they are postponing their exit from the work force.

If there is a silver bullet, working longer is it. Say you have $1 million in a tax-deferred account, split evenly between stocks and bonds, when you retire at age 65. If you withdraw 4% plus an inflation adjustment every year, in 30 years you will likely still have $636,200 left after taxes.

But if the market happens to tank early in that withdrawal period, the outlook gets riskier - there's a one-in-four chance that you'll run out of money before year 30.

If you work just one year longer, though, the projections are far better, and by working three years longer you'd typically end up with $1.2 million after 30 years and have just a one-in-20 chance of running out of money. I'll take those odds any day.

Thinking of retiring early? Money Magazine is looking to speak with people who would like to leave the workforce in the next few years but don't yet know what they'll do for health insurance (before they get to Medicare age). If that sounds like you, send your name, age, occupation, a brief description of your retirement savings and a photo to To top of page

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