3 ways to stretch your retirement dollar

Worried about running out of cash? Here's how you can make your nest egg last longer.

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By Walter Updegrave, Money Magazine senior editor

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: I worked for the same company for more than 27 years and then was laid off eight months ago. Although at age 57 I have lots of experience, my employment prospects look bleak. My 401(k) has gone down the drain the past two years and is currently worth about $320,000. As I approach retirement, I wonder: Will this be enough to live on? --David, Los Angeles, Calif.

Answer: The answer depends a lot on how soon you see yourself actually retiring and how much money you think you'll need to live on.

But let's face it, at this point, unless your expenses are pretty low, I don't think you can count on anything close to a cushy retirement on a nest egg of $320,000.

Consider: You're not eligible for Social Security until age 62 at the earliest and Medicare at 65. And collecting at the earliest opportunity may shortchange you later in life.

So unless you've got other income sources you haven't mentioned to me, retiring now means you'll have no other money to live on besides your 401(k) for at least the next five years.

Now, that might not be a problem if your 401(k) had to last you only five years. But unless Social Security alone will be enough to keep you close to your current standard of living -- which is doubtful -- you're going to have to rely on your 401(k) throughout retirement. At your age, that probably translates to a good 30 or more years.

Although there's no official standard for what constitutes a "safe" withdrawal rate -- i.e., the percentage of your savings you can pull out each year in inflation-adjusted dollars with a high assurance your nest egg won't expire before you do -- most advisers recommend you initially pull out no more than 4% of the value of your nest egg and then increase that amount for inflation if you want your dough to last at least 30 years. This 4% rule is far from perfect, but it's a reasonable starting point for estimating how much you can afford to withdraw each year.

Which, as I'm sure you've sussed out by now, isn't very much. A 4% draw would give you a grand income of $12,800 in real, or inflation-adjusted, terms each year before taxes.

Of course, you could pull out more initially on the theory that you can cut back a bit when you start getting Social Security. But that raises the risk that you'll shorten your portfolio's life, especially if you also experience subpar investment returns.

Besides, if you retire anytime soon, the most you'll ever get as far as retirement income is concerned is the combination of whatever you can reasonably draw each year from however much is left in your 401(k), plus whatever you'll receive from Social Security based on your earnings record to date. You can get an estimate of that figure by going to Social Security's Retirement Estimator.

But I think you can probably do a lot better.

1. Keep looking for work

Yes, I know that finding a job might seem like a mission impossible what with the unemployment rate topping 10% for the first time in nearly 27 years. And while virtually no one expects a quick turnaround in the labor market -- we'll probably see the unemployment rate creep up more before it heads down -- the economy has begun to grow, which means that at some point companies should begin hiring.

One bright spot in last week's employment report is that employers added nearly 34,000 temporary jobs. That's a positive sign as employers often add temporary workers before hiring permanent ones.

Even if you're not able to find the exact position you want, checking out sites that cater to mature workers, such as RetirementJobs.com, RetiredBrains.com and the Work section of AARP's site, may help you find a job that can help you get by until things improve.

Speaking of getting by, you'll also want to contact your state's unemployment insurance office to see if you might still qualify for benefits now that lawmakers have extended unemployment payments by as much as 20 weeks.

2. Avoid tapping your 401(k)

I can't stress this enough. The earlier you start drawing from that stash, the earlier you're likely to run through it. That may not seem like a big deal now. But the last thing you need late in life is a pervading sense of financial anxiety. So rein in discretionary spending, defer whatever expenditures you can and turn to other sources of income if you have them. But try to keep your hands off your 401(k).

That said, if you think you will have to dip into it, it's important that you leave that money in your 401(k) as opposed to rolling it into an IRA. Why? Although there are exceptions, withdrawals from an IRA before age 59 1/2 are subject not only to income tax but also a 10% early withdrawal penalty. That penalty doesn't apply to withdrawals from your company's 401(k) plan after you leave your company, provided you're at least 55 when you do.

3. Work longer

Assuming you do find a job, stay in it as long as you can -- or at least don't bail as soon as you hit age 62 and collect Social Security. Sticking it out a few more years has several advantages. The money you already have in your 401(k) has more time to grow, you have a chance to add new savings and your portfolio doesn't have to last as long if you retire a few years later.

Working more years can also substantially boost the size of your Social Security benefit. And having a job may give you health care benefits until you reach Medicare age, or at least the money to buy health coverage. (Even if a health-care package does eventually make it into law, presumably someone in your position will still have to pay something for coverage.)

So as dispiriting as it may be, keep plugging away at that job search and try to avoid raiding your retirement stash. This economy will eventually turn and the job market will improve. When that happens, you'll have a better chance to rebuild the value of your 401(k), and improve your retirement prospects as well.

Want a Money makeover? If you're a married couple in your 40s with a household income of $100,000 or more, send your name, age, income and biggest financial goals and challenges to drosato@moneymail.com  To top of page

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