Do you have enough to retire?
Not sure where to invest or if you have enough to retire? Maybe it's time to come up with a game plan.
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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). |
NEW YORK (Money) -- Question: My wife and I hope to retire in five to seven years, but our retirement accounts got clobbered recently. We now have approximately $180,000 in cash that we need a game plan for. Can you help? --Pat C., York, Pennsylvania
Answer: You're not alone. Unfortunately, there are a lot of people in your position - that is, people nearing the end of their careers who have suddenly seen the value of their nest egg plummet.
But your instinct to come up with a game plan is absolutely right on. And, in fact, the sooner you start, the more likely you'll be able to make adjustments that can improve your retirement prospects.
Before we begin talking specifics, however, you should know that you're dealing with more than an investing issue. In light of the events of the past year, you really have to re-assess your retirement readiness overall.
Your starting point is to gauge whether your current plan to retire in five to seven years still makes sense given the recent setbacks in the financial markets. Whether you're still on track will depend on a number of factors: how much your retirement balances have dropped, how strongly and quickly the markets recover, how much income you'll need in retirement and what resources, aside from your savings, you'll have to draw on.
So the first thing you want to do is get an idea of where you stand now. The two main questions you must answer: How much income will you need to live the type of lifestyle you envision in retirement? And how much income can you reasonably expect from Social Security, a pension (if any), and withdrawals from the savings you'll likely have at retirement?
Early in the retirement-planning process, many people simply assume they'll require a certain percentage of pre-retirement salary, usually 70% to 90%. But it can be dangerous to rely on such a rule of thumb when you're within a decade or so of retirement.
Instead, when you're this close to calling it a career, you want to create a retirement spending budget. It doesn't have to be accurate down to the penny, and you can always revise it. But it should be an attempt to arrive at a realistic estimate of how much you'll need once you retire.
You can do this with a pencil and pad, but you'll arrive at a more accurate estimate - and have an easier time making revisions - if you use budgeting software or an online tool. For example, the budgeting worksheet that's part of Fidelity's Retirement Income Planner has room for 49 different expense items, and it also allows you to factor in different inflation rates for different expenses if you wish.
Next, see how much income you can reasonably count on. To see what sort of Social Security benefit you might get, you can check out Social Security's Retirement Estimator.
If you've got a traditional check-a-month pension coming, your HR department should be able to give you a figure. For a sense of how much you might withdraw from your retirement savings each year, you can go to a tool like T. Rowe Price's Retirement Income Calculator.
If you enter the information about your various sources of income and then plug in your expected annual expenses, this calculator will estimate your chances of collecting the amount of income you need to cover your outlays. It will also recommend a level of spending that has an 80% chance of lasting until age 95.
If the amount of income your resources can likely generate is less than the amount you would like, you have a couple of choices. If the gap isn't too large, you may be able to pare your spending a bit or increase income by seeking part-time work.
If the shortfall is large, you can always postpone retirement a few years. That tactic has several advantages. It will give your nest egg more time to recover, allow you more time to save and, by collecting at a more advanced age, give you a larger Social Security benefit.
Now let's talk about how to invest that $180,000. Unless your income needs in retirement are very modest or you have lots of other resources, I doubt that keeping your stash in cash is going to throw off enough income for you.
That said, I can't give you a list of investments or recommend an exact asset mix. The right mix of stocks and bonds as well as the specific mutual funds that are right for you depends on too many factors: how much income you've got to generate, how much risk you're willing to take, whether or not you have a pension, etc.
But when you rev up tools like the two I've mentioned, you typically must plug in an asset mix to generate projections. So by trying several different mixes, you can compare the results and see which gives you the best shot at getting the income you require.
Remember, though, these tools give estimates, not ironclad guarantees. So I'd avoid going with an extreme investment allocation - i.e., nearly all cash or nearly all stock. As a general rule, people in their early 60s should probably have somewhere between 50% and 60% of their retirement savings in stocks, although, again that's a general range.
If you go through this process, you should come away with a decent sense of whether your plan to retire in five to seven years is still viable and, if so, how to boost the odds of achieving this goal. If this analysis suggests your retirement target date is unrealistic, then at least you'll be able to see how different ways of revising your plans affect your retirement prospects.
One final note: This sort of assessment isn't something you do once and then forget about until you're ready to leave your job. Ideally, you should re-run the numbers every year or so to make sure you're making progress toward retirement.
So give yourself the kind of retirement check-up I've outlined here as soon as possible. Because unless you do, you won't really know whether your plan to retire in five to seven years is still realistic, nor will you know what game plan you should follow to tilt the odds of achieving that goal in your favor.
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