George S. May Business Blog

Tips to make retiring easier

Don’t withdraw – This dismal economy definitely makes it more tempting get a little relief by borrowing from your retirement savings. If you can get by without doing it, then don’t. Catching up with those early withdrawals will be difficult. As Beth Almeida, executive director of the National Institute on Retirement Security puts it: “When the money is out of your retirement account, you rob yourself of compounded investment returns. And if you don’t pay the loan back, you’ll have to pay Uncle Sam taxes on the loan and a whopping 10 percent penalty.”

Wait to claim Social Security – You can sign up for Social Security beginning at 62. But if you are healthy and expect to live a while longer, waiting until 70 will produce a bigger payout. Your Social Security benefit increases by 7 percent until your full retirement age and by 8 percent afterwards, says Laurence Kotlikoff, a Boston University economics professor and author. That’s a far better return than most people are getting in the stock market right now. “You can potentially spend more now because you will have this higher income coming in when you are older,” Kotlikoff says.

Work Longer – That will give your retirement accounts time to recover before you begin to draw them down. You can tuck more cash into your accounts, let your account accrue returns and work its way up to where it was a year ago, while shortening the length of the retirement you will have to finance. How long will you have to work to recoup market losses? For those who have worked for 20 to 29 years and leave their 401(k) invested in a mix of stocks and bonds, it will take, on average, one year, nine months of work to resuscitate their 401(k)’s.

Don’t risk more than you feel comfortable – The key to weathering this financial crisis is to find a level of risk in your portfolio that you can live with that also helps you build wealth for retirement. If you have gotten out of stocks, get back into stocks gradually. Get back to a more reasonably diversified portfolio — about 50% in stocks to mitigate future losses. This includes evaluating your target-date-fund. Ask your plan administrator how much of your fund is invested in the stock market at various ages. If that’s not a level of risk you can live with, pick a different fund.

Understand your 401(k) fees – If you invest $5K yearly in a 401(k) over a 35-year period and pay 1.5% of the account balance in fees, you will be left with $345,000 at retirement. Cut the costs to 0.5% of the account balance, and you’ll have $78,000 more.

Get your 401(k) match – More and more companies are cutting this program off, so if it’s available at your work, get it while you can. The most common 401(k) match is 50 cents per dollar up to the first 6 percent of pay. So for instance, if an employee who makes $50,000 per year was able to save $3,000, they would get an extra $1,500 added to their savings.

Contribute more- Without a traditional pension, the only paths to a secure retirement are to save more, cut expenses, or both. That’s not easy to do when immediate expenses are demanding a portion of your paycheck before it even clears the bank. If you do manage to get a raise next year, consider diverting it to your retirement account.

Rebalance – If you were invested 50% in stocks and 50% in bonds at the beginning of the year, your portfolio almost certainly doesn’t have those proportions anymore, because you have probably taken big losses in stocks. “The temptation this year is going to be to stay where you are or get rid of stocks. Most people today should probably buy stocks,” says Andrew Biggs, a resident scholar at the American Enterprise Institute. “Whatever ratio people have, people should think about where they want to be and be proactive about getting their portfolio back where it should be.”

Pay Off Your Mortgage – The benchmark interest rate on a 30-year fixed-rate mortgage has dipped as low as 5.17%. If you’re getting a significantly higher return in the stock market (very doubtful right now), it might make sense to keep your mortgage going into retirement. But if you’re not an investment wizard or don’t want to take the risk, start prepaying your mortgage principal as you approach retirement. “You get an absolutely safe return by paying off your mortgage,” Kotlikoff says. “If you have a 7% mortgage and 3% deflation right now, that means that you are paying 10% on your mortgage. Every dollar you pay now is giving you a 10% real return.”

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