Recent market declines have put a crimp in many people’s plans; 72 percent of those we polled said they were worried. Revisit your projections to see whether retiring when you planned to is still a viable option.
Review your expected retirement income from your investments, a pension if you have one, and Social Security. Look at your anticipated retirement expenses, especially if you can’t or don’t want to delay retirement.
If the figures show you’ll come up short, scale back expenses until your investments recover or put off big costs, such as a new car or travel, for a year or two. If that doesn’t close the gap, you might need to continue working. If you do, you’ll have more time to contribute to your retirement plans. And your Social Security benefits will increase if you defer taking them, up to age 70.
If you can’t keep working full-time, consider asking your employer about a “phased retirement,” where you work, say, three days a week instead of five.
Make sure your employer-sponsored retiree benefits (especially health coverage) are still what you’ve been anticipating. Employers have been cutting back in that area, and the current chaos may spur more of them to do so. And don’t forget to sign up for Medicare at age 65, even if you won’t retire by that time. The Social Security Administration recommends applying three months before your birthday.
If you’re at least five years from retirement, there’s probably time for your investments to right themselves.
Resist the urge to take money out of your 401(k) or to stop making contributions to it. Research by the Consumer Reports Money Lab has shown that dollar-cost averaging—investing at given intervals—pays off well in times of crisis.
Check whether the wild market swings have thrown off your asset allocation—the specific mix of stocks and bonds that make sense for your financial goals and risk tolerance. If so, rebalance it by selling shares in assets that are overweighted and buying those that are below optimal levels.
Focus on low-cost investments. In good times and bad, high fees and trading commissions whittle away at your money. Index mutual funds typically have lower expenses than actively managed ones.
Financial planners generally agree that you can safely withdraw about 4 percent of your savings a year. Anything more increases your risk of outliving your money. You also need to be concerned about inflation, which can erode safe, income-producing investments. In the fall, the Consumer Price Index was 5.4 percent; that rate as an annual average would make a dollar today worth about 57 cents by 2018.
Try to avoid selling stocks or mutual funds to raise cash for living expenses when prices are low. If your investments aren’t producing enough income for you to live on, consider cutting back on expenses. Harold Evensky, of Evensky & Katz, financial planners in Coral Gables, Fla., suggests keeping two years’ worth of living expenses in cash.
For inflation protection, put some of your fixed-income investments in Treasury Inflation-Protected Securities, or TIPS, which have a fixed rate of interest and an adjustment pegged to the Consumer Price Index. They’re sold in mutual funds or in $100 increments by the Treasury. Learn about TIPS at www.treasurydirect.gov.
If you’re among the 25 percent of U.S. workers who have a traditional defined-benefit pension, you’ve been counting on getting a set income stream or lump-sum benefit when you retire, regardless of stock market ups and downs.
But stock market declines can reduce a pension plan’s assets below what’s necessary to properly fund payouts to retirees. When that happens, federal regulations require employers to rebuild those assets. That liability could prompt more employers to freeze pension plans at current benefit levels or make other changes that could reduce payouts. Hardest hit would be workers within 10 years of retirement.
If the economy gets bad enough and your employer goes bust, the federal Pension Benefit Guaranty Corp. will take over your pension if you’re among the 44 million workers in 30,330 pension plans covered by that agency. Protection is capped at $51,750 per year if you retire at age 65 and your plan was terminated in 2008.
Find out your expected benefit and calculate the shortfall from any changes; increase your savings to make up the deficit. Check how well your pension is funded at www.pensionrights.org.
We believe so, but there’s no denying that the Social Security system has problems to contend with. By the year 2041 payroll taxes will be sufficient to cover only 78 percent of promised benefits, according to the most recent report from the program’s trustees. Fixing that may require raising taxes, reducing benefits, delaying the age retirees become eligible, or some combination of these.
If you’re close to retirement age, you may not see any changes or need to act. But if your retirement is still years away, consider what you’d do if your benefits turned out to be smaller than expected or you didn’t become eligible until later. That could argue for saving and investing more aggressively or planning to work longer if you can.