The New Retirement Realities: What To Do And How To Cope

Quoted in
Value Options/Achieve Solutions (1.15.09)
The New Retirement Realities: What To Do And How To Cope
By Tom Gray

America has just closed out a year that will long be remembered with a shudder by investors. Trillions of dollars in wealth vanished in 2008, and the losses will take years, or even decades, to recoup. Retirement assets have been hit hard. As of Dec. 2, 2008, according to the Urban Institute, retirement accounts such as IRAs and 401(k)s had lost 32 percent of their value, since Sept. 30, 2007.

What do such numbers mean for you? The answer depends on several factors, including your age, your investment mix, how soon you plan to retire and the expected sources of your retirement income:

– If you’re depending mostly on an employer-paid pension rather than a 401(k) or other defined-contribution plan, you may feel little pain.
– If you’re still decades from retirement, you can relax and focus on today’s opportunities for long-term investment.
– If you’re already retired and on a secure fixed income, you might actually benefit from the falling prices that tend to go with a slow economy.

But what if you’re one of those baby boomers who were looking forward to ending the daily commute in 3 or 4 years but suddenly see the value of your nest egg cut by about a third? And what if that nest egg were to be the prime source of retirement income? In that case, you need to grit your teeth, face the financial truth and change your plans.

Work longer, scale back, or both

There are 2 ways to cut the cost of retirement. One is to lower your retirement spending plans. The other is to delay retirement—to accumulate more funds and to shorten the time when you will be drawing on them. If your 401(k) has taken a 30 percent hit, you may have to choose both options.

Even if your assets have survived the year in reasonably good shape, it’s a good idea to subject your retirement planning to a reality check. “Generally, I see people underestimating their need [for money] or overestimating their retirement lifestyle,” says financial planner Clint Edgington. They tend not to realize how expensive their plans are for world travel and other retirement dreams, and they often plan to draw down their capital far too fast. “For example,” says Edgington, “someone might come in with $1 million and think they can take out $70,000 year”—far too much to be sustainable over the long term.

If you don’t want to give up too much on the lifestyle front and are willing to wait a few more years, staying on the job longer offers plenty of benefits:

– It brings in more money, typically at a time when your earning power is still high.
– It also cuts costs, not only by reducing the retirement phase of your life but also by giving you the full benefit of Social Security and Medicare:
– If you start getting Social Security payments at 62, your monthly check can be several hundred dollars smaller than it would be if you wait until full retirement age or until age 70.
– With Medicare not kicking in until you reach 65, the value of waiting could be huge, with employer-paid insurance to tide you over until you attain that age.

Work also has benefits that go beyond money. Quitting too early can be bad for your psyche as well as your pocketbook. “We’re made to make money,“ says Lauren Zander, a business consultant and life coach. “It brings out a creativity and ingenuity in us. It makes us use our minds.” Not all jobs are pleasant or stimulating, but if you like yours and are able to continue, ask yourself if rushing out the door makes sense, financially or emotionally.

Let the Joneses win

The straightforward way to cut the cost of retirement is to spend less. There are plenty of ways to do this, such as:

– selling a big home and moving to a smaller one
– taking shorter and fewer trips
– eating out less

Edgington suggests one strategy for retirees or near-retirees that have something big planned, like a trip overseas. Shift it more into the future, he says, and focus on activities that will make the experience ultimately more enjoyable. If a European tour is the ultimate goal, spend some time learning European languages and culture.

An emotional adjustment may also be needed as you scale down. Much of our spending is driven not by a simple need for a certain standard of living but by social factors. Keeping up with the Joneses is an age-old desire, though it may have less power when the economy is slow and even the usual big spenders don’t seem to be doing all that well. You may also have to stop trying to keep up with close friends, and this can be touchier.

Mike Sullivan, director of education for the credit-counseling organization Take Charge America, says current or soon-to-be retirees may have to adjust their social activities even if longtime friends still can spend freely. “The best way to deal with this is through communication,” Sullivan says. Let friends know there are certain things that you can and can’t do. Let them know that you won’t be available when they want to go on a European cruise, but to keep you in mind for some local wine tasting.

Can you afford to retire now? Take a test drive to see

If you want to know whether you could live on your current resources—your retirement savings, your projected Social Security income and any employer-paid pensions—Sullivan suggests these steps:

– Calculate what you could expect to receive each month at your expected retirement age, after taxes, from all sources combined (making sure you don’t draw down so much of your savings that you outlive your capital).
– Take 10 percent away as a cushion against rising costs and other contingencies.
– Take the remaining 90 percent and make it your current monthly budget.
– See if you can live within that budget for a year.

If you succeed, you will know that you can make retirement work, even if it’s not as lavish as you might have hoped. If nothing else, you probably will save more than you otherwise would have done. That, too, should make your retirement easier.