Rethink your retirement plans

Posted: Aug 22, 2006 12:01 AM
Rethink your retirement plans

Just about every news cycle seems to bring the release of yet another study that clearly illustrates how investors are in denial about retirement. The Employee Benefit Research Institute, for instance, conducted a recent survey that concluded that one out of every four workers is "very confident" about the prospects of paying his or her retirement tab.

There would be nothing odd about that statistic unless you knew that 22 percent of these folks aren't setting aside anything for retirement. Another 40 percent have saved up less than $50,000. Now that's quite a disconnect.

For many people, getting serious about retirement planning ranks with clearing out the garage to make room for the SUV. Many of us would rather park in the driveway forever than get motivated to haul all our stuff to the curb or to Goodwill.

I suspect, however, that some people would become more focused on retirement if they could consult a cheat sheet. I don't think one exists, but I've tossed in a few suggestions for what you should consider doing.


For years, the financial industry has been nagging people to reserve 10 percent of their salaries for retirement. If you can stash away 10 percent for many years, you should be set. That, at least, was the line everybody kept parroting. Maybe, however, the experts were a bit too sanguine.

T. Rowe Price, the mutual fund firm, is now suggesting that investors crank it up a notch and save at least 15 percent of their pretax salary. Why the switch? Christine Fahlund, a senior financial planner at the firm, said T. Rowe Price was seeing many people who had to postpone retirement, even though they had faithfully followed the 10 percent rule.

According to the fund family's calculations, if you squirrel away at least 15 percent, you should be able to replace 50 percent or more of your salary, adjusted for inflation, during your retirement. With any luck, Social Security and a pension will fill in the rest of the gap.

Late-blooming savers, however, will have to somehow figure out a way to sink 25 percent or more into their retirement accounts. (Don't blame me for this downer, I'm just the messenger.)


When Americans retire, they often believe they can no longer risk investing in the stock market. Instead they bunker down in a financial bomb shelter, which they've built with certificates of deposit, money markets, bonds and other safe investments.

What skittish investors don't realize, however, is that this preoccupation with safety can be the riskiest move they make. Research has repeatedly shown that ultraconservative portfolios run the risk of imploding over long periods of time. One landmark study, for instance, examined what would happen if an investor withdrew 6 percent a year from an all-bond portfolio. The research paper concluded that the investor faced only a 27 percent chance of having anything left after 30 years.

Stocks, however, can provide the elixir to keep a portfolio alive. No one is advocating that you turn your life savings into a kamikaze portfolio. But many experts advocate that retirees devote 40 percent to 50 percent of their holdings to stocks - preferably in low-cost mutual funds.

If stocks scare you, consider some research done by Jeffrey Voudrie, CFP, the president of Legacy Planning Group Inc., in Johnson City, Tenn., and the creator of a consumer Web site, To reassure skittish investors, Voudrie examined historical investment returns to see how easily a simple portfolio of stocks and bonds could absorb the market's occasional slide tackles.

In his example, an investor kept 60 percent of his money in 10-year government bonds and the rest in an index mutual fund that tracks the Standard & Poor's 500 Index for 10 years. He examined the performance results for 529 rolling 10-year periods going all the way back to 1950. In each of the 529 investment periods, a portfolio would not have earned less than 3 percent. In 80 percent of the periods, the returns were greater than 6 percent.


If Voudrie's research doesn't seem compelling, maybe the specter of runaway inflation will spook you. While investors worry about the market's occasional tantrums, they rarely fret about whether inflation will nickel and dime their nest eggs to death. That's probably because inflation is a silent portfolio killer. Yet even an innocuous-looking inflation rate can flatten the cushion of an otherwise solid budget.

When inflation is running at 3 percent, for example, the value of $100 will plummet to $76 in just 10 years. If you wait two decades, the value of that $100 is worth no more than $56. Luckily, Social Security checks are indexed for inflation, but pensions usually aren't.


When 401(k) statements arrive in the mail, plenty of people treat them as if they were letter bombs. They don't want to rip open the envelopes because the account balances will make them wince.

One antidote for a retirement portfolio that triggers tears is pretty obvious: Keep working.

T. Rowe Price ran some numbers that illustrated how working longer can provide an impressive pop to your retirement income.

The analysts assumed that a hypothetical 64-year-old worker earned $100,000 and had socked away $500,000. If he retired at age 65, he'd be able to safely pull out $23,547.

Now let's see what happens if he postpones his retirement. While remaining on the job, he'd contribute 15 percent to his retirement account with an assumed investment return of 6 percent. If he retired a year later, his initial withdrawal could increase to $26,674, which would boost his retirement income by 13 percent.

Postpone retirement two years and the worker could withdraw $30,185, which is a 28 percent hike. Meanwhile, if the employee waited until reaching age 70 to retire, he could pull out $49,226 the first year, which presents a 109 percent increase.

It's certainly something to think about.