Planning for Retirement Now

You may have taken a hit, but you can rebound if you follow some key tips

By Richard Eisenberg

After the body blow your retirement savings took in 2008, you're entitled to be skittish about putting more money away for your future. Exactly how badly you were hurt depends on which investments you held — Treasury bonds actually rose 14 percent, and although the stock market overall tumbled 37 percent, the average diversified 401(k) balance lost 24 percent, quite a bit less. Fortunately, stocks have come back nicely so far, so "the atmosphere of pure terror has passed," says Frank Armstrong, a certified financial planner in Coconut Grove, Fla., and the author of Save Your Retirement (FT Press) and The Retirement Challenge: Will You Sink or Swim? (FT Press). So now is the time to take a deep breath and get your retirement plan back in working order.

Put Yourself First

Minneapolis financial planner Ross Levin says that after a year like 2008, it's wise to adopt the "oxygen-mask" strategy for your finances. Flight attendants always tell you that in the event of an emergency, you should put your own oxygen mask on first, and then help your children or grandchildren with theirs. The same goes for your investments. "Before deciding what you will do to help your grandkids, you need to first be secure about your own retirement," Levin says. "You don't want to have them take care of you."

To see whether your plan is on course, spend time with an online retirement savings calculator. You'll learn how much you're likely to have at retirement depending on when you stop working, and how much your investments might earn.

If last year's losses have you looking at a shortfall, don't overreact. "One mistake a lot of people make is getting too aggressive to compensate for their losses," Levin says. Betting your retirement on risky small-company stocks, for example, is a dangerous strategy. "The other mistake," Levin says, "is becoming too conservative." Dumping your entire portfolio into a one-percent money-market account is a guarantee against long-term growth.

One rule that 2008 taught investors: Be sure you're diversified enough. That means not having more than 20 percent of your investable assets in any one stock or mutual fund, and spreading your money among stocks, bonds, cash, and possibly real-estate investment trusts (REITs) and commodity funds. The Asset Allocator tool at sink-swim.com can show you how to divide your holdings based on your age and risk tolerance.

Generally speaking, if you're still 20 years from retirement, tilt your portfolio toward stocks. This is actually a great time to do it: Stocks are on sale, and index funds, such as ones holding the S&P 500, offer broad diversification at a low cost.

Is retirement five to 15 years away? Increase your bond holdings annually, lowering exposure to stocks to roughly 50 percent when you're five years from retirement.

Save More, Painlessly

It's easier to boost retirement savings by using automatic savings plans such as tax-sheltered 401(k)s and mutual-fund autopilot programs that extract a set amount of money from your bank account each month. If you have a 401(k), try to increase your contribution percentage this year and next. The maximum annual contribution is generally $16,500. If you're 50 or older, take advantage of the "catch-up" bonus which lets you put away up to $22,000 a year. (There's a similar catch-up bonus for IRAs, letting people 50 or older invest $6,000 a year, rather than the standard $5,000.)

Make Your Nest Egg Last

After the crash of 2008, it's become even more important to ensure that your nest egg will last your lifetime. Anthony Webb, an economist at the Center for Retirement Research at Boston College, has been studying alternative ways to draw down retirement savings and concludes that annuitizing your portfolio is your best bet for supplementing Social Security and a pension.

In other words, get an insurer to convert your retirement holdings into monthly, inflation-protected payments for the rest of your life. "Think of it as buying insurance against your living a long while," he says. A $1 million 401(k), for example, could transform into an annuity of $50,000 a year. Work with the insurance agent to run numbers with different types of annuities; for example, you will get higher monthly payments if you give up inflation protection.

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