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5 steps to rescue your retirement

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By Janice Revell, Money Magazine senior writer

3. Keep the paycheck... and have a plan B

"I'll just work a few more years." That's the common solution many boomers are counting on to make up for the downturn in their portfolios. But how much longer will you really have to work to make up for the hit that your investments have taken? And what's your fallback position in case your current job doesn't last as long as you need it to?

Work longer if you can... Keeping your full-time job for a few extra years isn't a silver bullet, but it's pretty darn close. For starters, you'll be able to postpone drawing Social Security, setting yourself up for a much larger monthly check when you eventually retire. Working longer also gives your portfolio more time to grow. At the same time, you'll be shortening your retirement span and the period over which you have to support yourself with those savings. Combine all of these factors and the results are powerful: A 62-year-old who keeps working until age 65 will experience a 25% boost in annual retirement income (see the graph on previous page).

...But you can lighten up. What if staying in your current job isn't an option? If you're in your forties or fifties now, there's a good chance you'll be with a different employer by the time you hit retirement age - or possibly well before then. In 2006, 43% of full-time workers ages 65 to 69 weren't working for the company that had employed them in their early fifties, the Urban Institute reports. About a quarter of those workers had changed jobs owing to layoffs - and that was before the current recession.

So to stay employed longer, you may have to change jobs, which could involve taking a pay cut or shifting to a part-time position - the typical worker 45 and older experiences a 12% drop in salary after a layoff. Fortunately, earning less or working fewer hours once you reach the career home stretch probably won't put a dent in your retirement rescue efforts, as long as you earn enough that you don't need to start collecting Social Security or dipping into your retirement savings.

Say, for instance, that you end up switching jobs at 62, making only half as much as you did before and you keep working until 65. You'd end up with only about 5% less in annual retirement income than if you'd kept your full-time position until 65, as long as you're able to cover your living expenses. The reason: The benefit of delaying Social Security and not tapping into retirement accounts far outstrips the value of any extra savings you could accumulate between ages 62 and 65. "The income you get from working part time may seem like a pittance, but it can actually have a profound effect on your retirement lifestyle," says Fahlund.

Keep your eyes open. With the pace of layoffs expected to accelerate this year, you may need to find that new job sooner rather than later. But landing a position in the midst of recession is a lot tougher for fiftysomethings than for thirtysomethings. Start laying the groundwork now by reconnecting with some of the names in your Rolodex; the vast majority of openings are still filled by knowing people who know people who know people. Use sites like LinkedIn to expand your contacts. Join a professional networking group; attend their get-togethers; and scour their job lists, which often advertise positions before they are public knowledge.

Also be alert to new opportunities and ways to transfer your current skills to new employers or industries. Put together a list of companies where you'd like to work; then research them to find out what it would take to get in the door. If you need to beef up your credentials in a certain area, volunteer for a project at work that will help you gain the skills you need. Not possible? Think about joining a nonprofit board that will provide similar hands-on experience.

4. Tap your home equity

Housing prices have fallen 23% since 2006 and economists are forecasting another 15% drop before the market bottoms. As a result, you've probably written off your home as a source of funds in retirement. Not so fast, bub.

You can still retire on the house. Or at least, the house can help. Even if home prices slump for a few more years, the sharp rise in values over the past couple of decades means that your home equity will still likely account for a third to half of your net worth by the time you retire, the National Economic Bureau reports. That can be a significant backstop if your savings plan comes up short.

You might choose to cash out your equity by selling your home and moving to a less expensive area. Or you might opt for a reverse mortgage, which lets homeowners age 62 and older draw down their home equity without repaying it for as long as they live in the house. Last year, new federal regulations raised the limits on government-backed reverse mortgages up to $417,000 (the maximum is likely to be raised soon to $625,000 in areas of the country with high housing costs). For example, a 65-year-old with a fully paid house worth $400,000 could tap about $237,000 of that equity.

But up-front costs for a reverse mortgage can exceed 10% of the loan. So if you need to borrow only a small amount or you might be moving in a few years, an ordinary home-equity line of credit would probably be a better option. Although you would have to make monthly payments, tapping a HELOC is a useful short-term strategy for generating retirement income while the financial markets are in turmoil. "It can save you from having to sell your stocks when they're down," says Cordaro.

Aim to be mortgage-free. Of course, this strategy works only if you've got equity to tap. That's why you should aim to pay off your mortgage if possible by the time you retire. If you're already maxing out your retirement savings and you have an adequate emergency fund, consider boosting the amount you pay every month on your mortgage.

Think of it as an alternative kind of fixed-income investment, in which your return is the interest rate on the loan. Say you have a mortgage with a 6% fixed rate; if you deduct your interest payments on your taxes, you'll earn 4.3% by prepaying the loan if you're in the 28% bracket. That's a risk-free return of 4.3% - nearly 1.5 percentage points better than the recent rate on 10-year Treasuries. If your mortgage rate is higher, your effective return on the accelerated mortgage payments will be higher as well.

5. Rethink your expectations

Let's be honest: Given the magnitude of the financial collapse, you may end up falling short of your savings goal by the time you quit working no matter what you do. Luckily, small changes in the way you manage your withdrawals in the early years of retirement can go a long way toward closing any gaps that are left.

Make minor sacrifices early on. Planners generally recommend that you limit your initial withdrawal from your retirement account to about 4% of your portfolio's value. Then, in subsequent years, you would boost your withdrawals to keep up with inflation.

The problem is that if you happen to retire just as the stock market is tanking, your odds of running out of money skyrocket with this withdrawal plan. There's an easy fix: Simply forgoing the inflation adjustment in the first five years of your retirement can cut your risk of running out of money in half. These days, of course, that's hardly a huge sacrifice since inflation is barely above 0% a year. But even at the long-run average rate of about 3%, you wouldn't be giving up much - about $900 in the first year on a $750,000 portfolio and about $3,700 by year five.

Tap your nest egg wisely. By the time you stop working for good, your money will likely be spread among several different kinds of accounts, including tax-deferred plans like 401(k)s, traditional and Roth IRAs, taxable brokerage accounts and ordinary bank accounts. How much money you decide to take from each one, and when, will have a big impact on how well you live.

If your portfolio still hasn't recovered by the time you stop working, refrain from cashing in any stock for as long as possible to give those shares more time to recover. Instead, start withdrawals from your bank accounts and other cash investments. By this point, ideally you'll have at least two years' living expenses set aside in cash for this type of situation. Not so ideally situated? Then tap your taxable brokerage accounts, which will allow your 401(k) and IRAs to continue compounding tax deferred.

Add up all the moves and, despite the travails of the past year, the odds are great that you'll still be able to retire in comfort, and maybe even in style.  To top of page

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