Older workers typically begin to get serious about their retirement exit strategy during their final few years on the job. But the sooner you start, the more time you'll have to explore your options and, if necessary, get your plans on track. Think of it as planning a long, expensive vacation for which every detail matters, rather than deciding at the last minute to take a weekend trip. "Deciding to retire without having substantially completed specific tasks can put a successful transition and a satisfying retirement at risk," says Sandra Timmermann, director of the MetLife Mature Market Institute.
Unfortunately, most Americans never tackle those crucial chores while they still have time to boost current savings or trim future costs. Tom Kmak, head of Fiduciary Benchmarks, a firm that helps employers improve their 401(k) plans, sums up the situation for many preretirees with a quote from Alice in Wonderland: "If you don't know where you are going, any road will get you there." The problem with such an approach, says Kmak, is that you may not like where you end up.
Consider the following guidelines a GPS that will lead you to a secure retirement.
Gary Duhamel of Alpine, Cal., started mapping his exit strategy about ten years ago. "I wanted to make sure I had investigated every option available to me," says Duhamel, now 60. A supervisor at an electrical contracting company, he attended retirement-planning seminars, interviewed several financial planners and asked a lot of questions about how they would manage his money before choosing J. Graydon Coghlan, head of the Coghlan Financial Group, in San Diego.
Initially, Duhamel shifted a portion of his savings to Coghlan's firm. But once he grew comfortable with Coghlan's tactical investment style rather than a more passive buy-and-hold strategy, Duhamel allowed Coghlan to manage the rest of his money. Coghlan's fees range from 1% to 1.5% of assets, depending on the size of the account and investment style.
When Duhamel passed the magic milestone of 59 1/2 years old -- after which you can withdraw retirement money without penalty -- he took an in-service distribution from his 401(k), transferring the balance to an IRA. Coghlan manages the IRA while Duhamel continues to shovel the maximum ($22,000 in 2010) into his 401(k); he relies on Coghlan to advise him on how to allocate his 401(k) investments to complement his other assets.
Coghlan encourages clients to take advantage of in-service distributions when their plan rules allow it (not all do). "It enables you to diversify your investments beyond the limited choices in your 401(k), increases your potential for investment returns and allows you to build a relationship with an adviser before you retire," says Coghlan. "I've done everything I could possibly do to get ready," says Duhamel, who hopes to retire in two years -- when he'll qualify for Social Security benefits and can collect a company pension. "Now it's up to the market."
Meanwhile, Duhamel's wife, Donna, a former elementary school teacher who retired three years ago, says retirement is everything she had hoped it would be. She takes classes and dancing lessons, tends her rose garden, walks her dog, Bella, and makes travel plans.
Test-drive your budget
Joy Kenefick and Marcia Tillotson, a financial-consulting team in Charlotte, N.C., base their approach to retirement on cash-flow analysis. "Some people have no idea what their lifestyle costs them," says Tillotson. "Generally, those people are not prepared for retirement."
A good way to get a handle on your expenses is to look in the rearview mirror by going over a year's worth of bank records and credit-card receipts, says Tillotson. If you don't keep good records, you can start fresh by tracking your expenses, but it could take a while to develop an accurate estimate of your routine costs.
The debt-averse duo, who work for Wells Fargo Advisors, urge clients to pay off their mortgage before retiring and build up a cash reserve to tap for emergencies. They also encourage clients within two years of retirement to test-drive their future budget. For example, if you expect to live on 85% of your pre-retirement salary, cut your spending by 15% now and save the rest, preferably by maxing out your retirement savings. A working couple can stash up to $44,000 a year into their 401(k) plans.
The forced savings boosts your nest egg, reduces your taxable income and helps you stick to a budget. If you need extra money, the financial team says it's better to tap your cash reserves than cut back on your 401(k) contributions. And they bet you'll think twice about dipping into savings to cover want-tos rather than have-tos.
Sprint to the finish line
At age 59, Wayne Russell finally found someone to review his retirement savings and tell him whether he was on track to retire in five years. Russell, the senior plant supervisor of Maola Milk and Ice Cream Co., in New Bern, N.C., didn't have to look far. When the Principal Financial Group took over the administration of his employer's 401(k) plan, it offered one-on-one consultations with all participants.
After the meeting, Russell felt more confident that his retirement goals were attainable. A Vietnam War veteran who describes himself as gun-shy when it comes to investment risk, he also reviewed his asset allocations and upped his 401(k) contribution from 6% of his salary to 10% as a result of the advice session. "If I had been able to meet with somebody five to ten years ago, I would have invested more," he says.
A majority of Americans say that they are behind in saving for retirement, according to a new survey by TD Ameritrade, and many of them blame their savings deficit on getting a late start. But late bloomers, take heart: There is still time to build a respectable nest egg for retirement. It may not be easy, but it is possible.
Consider this extreme example: Say you're 55 years old and you've saved zilch so far for retirement. You don't have to be a Wal-Mart greeter well into your eighties. Let's assume you earn $80,000 a year and your company offers a 50% match in your 401(k), up to 6% of pay. If you contribute just enough to your plan to capture your employer match, you could accumulate about $130,000 by age 65. (That assumes your investments grow by 6% annually and your salary grows by 3% a year, which would raise the dollar amount of both your contribution and your employer match in future years.) Or, if you contributed the maximum $22,000 a year (including catch-up contributions for workers 50 and older) for each of the next ten years, you could accumulate nearly $400,000 by the time you turn 65.
Of course, saving a whopping 28% of your salary would be tough, concedes Christine Fahlund, senior financial planner for T. Rowe Price, who created this example for us. "But the potential results are significant enough that it may be worth making such a strong commitment to saving," she says.
And for those of you who have been saving for decades but still feel you need to plump up your nest egg before you call it quits, Fahlund recommends working a little longer. But, she says, take time along the way to treat yourself to vacations, work on your hobbies, shop for a sailboat or pursue whatever is your passion. "We are redefining the transition period," she says. "You're working, but you're also playing as you continue to make good money and enjoy employer benefits."
To help you assess whether you should delay retirement, download MetLife's new Retirement Readiness Index and the accompanying Retirement Readiness Workbook at www.maturemarketinstitute.com. Your answers to 15 tasks outlined in the free workbook -- from assessing the adequacy of your retirement benefits to deciding what you'll do with your newfound time -- will indicate whether you're ready.