The Great Retirement Rethink

You may have to lower your expectations—and work longer

For Americans planning for retirement, the past decade has been dreadful. Standard & Poor’s 500-stock index has lost an annualized 0.4 percent since 2000, compared with its average annual gain of 9.7 percent since 1926, according to data compiled by Bloomberg and Morningstar’s Ibbotson Associates. With bond yields near record lows, investors are finding that their fixed-income holdings are throwing off much less cash. No wonder only 23 percent of working Americans say they are very confident they will have enough money to cover basic living expenses in retirement, compared with 42 percent last year, according to a survey released in October by Sun Life Financial.

There’s no easy way to make up the lost ground. Indeed, the best way to rescue your retirement may be to delay it, according to Christine Fahlund, senior financial planner at T. Rowe Price. For those who are able to keep working, the benefits are clear: You will be adding to your savings, rather than drawing on them, and you may benefit from market gains as well. Moreover, the money you accumulate will need to support you for fewer years. Here’s an example: A 55-year-old is earning $100,000, saving 15 percent of that for retirement, and has accumulated a $450,000 nest egg. A five-year delay in retirement to age 70 could add about $10,000 a year to that person’s income in retirement, according to T. Rowe Price’s calculations. It’s an option that more people are seeing as necessary. In the Sun Life survey, 61 percent of working Americans said they will need to work at least three years longer than they’d planned, compared with 43 percent in 2008.

Even if you stop working, consider waiting to draw Social Security benefits. Your monthly payment may increase by 8 percent each year you postpone taking benefits from the year you’re eligible for full benefits through age 70. “Every single person should be taking a look at the feasibility of delaying Social Security,” says Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards. “Where else are you going to find 8 percent returns right now?”

Fahlund warns against seeking higher returns by making big changes in your asset mix. If you have a $450,000 portfolio, boosting your allocation of stocks to 80 percent from 40 percent in your final 10 working years may increase your retirement income by only about $700 a year, according to simulations run by T. Rowe Price. “The principles of portfolio construction haven’t changed,” says Maria Bruno, senior analyst at Vanguard’s Investment Counseling & Research Group.

Yet some things have changed. Recent market volatility has shown that the long-used rule of thumb that retirees may withdraw up to 4 percent of their nest eggs each year may be too high for those who want to be certain of never outliving their money, says Gregg S. Fisher, president of Gerstein Fisher, an investment adviser in New York. “You might consider a 3 percent withdrawal as a safer number, or moderate your spending when market returns are bad,” he says. With the outlook for investment returns so murky, some advisers recommend annuities as a way to make sure you don’t outlive your money. While there are many varieties, Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., points to “longevity annuities.” In a typical case, you would buy one at age 60 and agree to have it start making payments when you reach 80, extending for the rest of your life. Because of the length of time before payouts start, and because some purchasers will die before collecting anything, longevity annuities offer relatively rich income streams compared with immediate annuities, says Evensky, who adds that the contracts can be complicated, so be sure you understand costs and terms. Also, the payments reflect current interest rates, so he suggests waiting until rates climb before buying.

If you find the prospect of reduced expectations and a longer working life depressing, Fahlund suggests a different approach: Rather than straining to make large catch-up contributions to savings plans during your final working years, you could keep working but stop saving for retirement, spending the spare cash on leisure and other things that improve your quality of life now. “It seems heresy to say, ‘Maybe, don’t contribute anymore,’” she says. “But the idea is contributions made very late in the preretirement period don’t really have time to compound and make a big difference.” Even if you stop putting money away, you’ll still get the gains from letting your savings compound and delaying Social Security. “All of that is gravy,” she says.


    The bottom line: Extending your working life for five years beyond what you’d planned could add $10,000 to your annual income in retirement.

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