11/8/2011 2:50 PM ET|
Don’t join the Ostrich Generation
Amid the choppy markets, too many soon-to-be retirees have avoided making key decisions. Here's what to do -- right now.
Stocks are volatile, the economy is stagnant, and corporate pensions and Social Security seem less viable by the day. One might expect such a dismal confluence of events to jolt aspiring retirees into financial-planning overdrive, furiously making budgets, cutting spending and salting away every spare nickel.
Yet many Americans are responding to the market and economic malaise by putting their heads in the proverbial sand. Half of U.S. workers who are at least 45 years old haven't even tried to calculate how much they will need to save to live comfortably in retirement, according to a March study by the Employee Benefit Research Institute.
Others are shelving retirement dreams because they are paralyzed by fear. According to EBRI, 20% of employees say they intend to retire later than they had planned, for reasons ranging from the slowing economy to worries over the future of Social Security.
Even wealthier people are nervous. Two-thirds of "affluent investors" with at least $250,000 in investable assets surveyed in June were concerned that their retirement stash won't last throughout their lifetimes, up from 57% in December, according to Bank of America Merrill Lynch.
"People are frozen because they don't know which way to go," says Jeannette Bajalia, the president of Petros Estate & Retirement Planning in St. Augustine, Fla. "Anytime there's ambiguity, it immobilizes them."
The good news is that there are ways to fix derailed retirement plans. Among the essential tasks: talking honestly with your spouse, planning realistically for health-care expenses and rethinking your retirement age and Social Security assumptions.
The first step is to look beyond the current market realities -- volatile stocks, low-yielding bonds and slow economic growth -- and find the fortitude to continue taking measured risks.
Many investors are too rattled to invest in anything except cash these days. "There's a level of conservatism in couples in their 50s and 60s unlike anything I've seen," says Greg Sarian, a certified financial planner at Merrill Lynch for 19 years in Wayne, Pa. "Even if they already had a defensive investment posture, there's been more pullback."
Yet giving up potential growth on money meant to last the rest of your life can be risky as well. Say a couple with $2 million in savings, panicked over increasing market volatility, moves a portfolio of stocks, bonds and cash investments entirely to certificates of deposit and short-term Treasurys earning 0.5% a year and never shifts it back. Assuming they withdraw $120,000 in their first year of retirement and 3% more each year thereafter, they could run dry in about 14 years, says Michael Martin, the president and chief investment officer of Financial Advantage in Columbia, Md.
For clients approaching retirement, Martin's firm puts 28% into equities, including 22% in individual stocks and 6% in three emerging-market mutual funds. A larger portion -- 36% -- goes into six bond funds with a combined duration of less than three years and a 4% yield. An additional 16% is in cash reserves, 13% in "hard assets" (10.5% in gold and 2.5% in timberland) and 7% in a tactical fund that jumps into asset classes as conditions warrant.
This conservative allocation appeals to retirees who make portfolio withdrawals for living expenses, because their investments have some growth potential, but it also spreads risk enough to make it more likely that their nest eggs can last, Martin says.
- Calculator: Are you saving enough for retirement?
So far this year, the portfolio has brought a 3% return, he says, compared with the average money-market and savings account return of 0.15%, according to Bankrate.com.
VIDEO ON MSN MONEY
Please. My husband is a truckdriver for a small sand and gravel company and I am a secretary. When we married 26 years ago, we were 35, and had five children between us and NO MONEY.
Somehow we have raised those kids (Had another together.) owned three differant homes and SAVED MONEY FOR RETIREMENT.
No, we will not be traveling to Europe or even Mexico, but we will be able to live in that retirement trailer park with the pool and rec center.
We have had no new cars, only used, and lived on a tight budget. Vacations have been to stay with relatives and children or camping.
Our name is not Kennedy, or Rockefeller or Gates, so we have planned for the BEST RETIREMENT WITHIN OUR REACH. We will have a few camper vacations and visits with the grandkids.
PLEASE people! You can ALL do the best you can and be happy!
Is it realistic to spend $120K per year after retirement? I guess one can spend few millions a year or a day, but using this example maybe a bit out of line considering the one retired most likely do not have a mortgage (with $2 MM in savings) and the kids are gone. I thing between $50-$60K per year would be more reasonable after retirement (assuming the retired spend their money wisely). With $60K per year and $2 MM in savings, that would last them around 34 years. Further assume that you retired at 60 and the average life span is around 82 or so. The $2 MM in saving will last till you die.
Keeping the money in a cash account may cause you to miss any growth opportunity in the market, but it will save you money or your retirement when the market goes down. Another plus on cash is certainty. You know how much you need and you can actually set goal to achieve them. When you have the money in the market... who knows.
And SS is/will be fine. It needs only minor tweaking as happened int he '80s.
The fear-mongers ( who want to end SS because it helps working people) have convinced the young that it won't be around, but that's only true if they convince too many people to drink the kool-ade.
It's moron wednesday again on here. I'm investing for long term and yes I've lost some recently but I'm looking down the road 5 years and more... after Obama's second term when the republicans have had to work with him and change the economy for all of America not just the top 1%, and the Bush Tax cuts have been abolished making America THRIVE once again!
Republicans get off your lazy butts and gety to work! Where are the jobs Mr. Cantor?
these articles are a waste of time, so many people have spent their lives just making a living, putting food on the table, paying the bills and after this is done whats left to add to a retirement account?
With all the houes the government has in its inventory, it should start giving them away for $10,000 per 1,000 square feet, free and clear, after that the government can start giving away cars from government motors (GM) that we paid for, again for like $1,000......then we get blocks of cheese
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