Eight Ways to Protect Your Nest Egg

You work hard to build a secure retirement for yourself -- don't let unexpected costs and market turns eat away your savings. We show you how to make sure the money is there when you need it.

By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance

November 10, 2004

Saving for retirement has been compared to climbing Mt. Everest -- it's a huge undertaking on the way up, but can actually be more treacherous on the way down. Withdrawing too much money during the early years or retiring during a down market could have a huge impact on your quality of life in retirement. And any unexpected expenses -- such as a nursing home stay -- could quickly drain your entire savings.

But there are several steps you can take now to protect your savings:

1. Make sure you're saving enough

Estimate your expenses in retirement and then see if you are saving enough.

A study by T. Rowe Price found that a 30-year-old would need to save 11% of his income per year to amass a lump sum that provides 70% of his current income level in retirement (adjusted for inflation). The number rises to 21% if he waits until age 40 to start saving. But if that 40-year-old had already saved an amount equal to his annual salary, he'd only need to set aside another 14% per year. If you want your investments to provide more than 70% of your current income in retirement -- which you probably will if you don't have a pension -- you'll need to increase those figures.

Double-check your estimates. Try a Monte Carlo simulation, which runs through thousands of investment scenarios and assesses the likelihood that you'll reach your retirement goals. Financial Engines offers a personalized retirement forecast, plus an investing newsletter, and advice for $39.95 per quarter or $149.95 per year. Many employers and brokerage firms provide free access to Financial Engines (or provide similar simulators).

2. Lower your housing expenses

See if you could benefit from refinancing your mortgage, even if you've refinanced a few years ago. Instead of paying less money each month, though, keep paying the same amount towards your mortgage -- the extra payments will lower your total interest expenses and help you pay off your house sooner. Not having a mortgage payment can make a huge difference in your post-retirement finances.

3. Pay off credit-card debt

Get out of the habit of carrying a balance on your credit cards and pay them off as soon as possible. The money that you are spending on interest charges and fees could be used to boost your retirement savings, or your income once you're in retirement.

Start by tracking down each card's interest rate. Check the small print on a recent statement or call the card issuer to find out.

Next, see if you qualify for a lower rate or a card that will let you pay off transferred balances at 0% (search for credit cards).

For example, Chase's CashBuilder or Ultimate Rewards Platinum MasterCards charge 0% on balance transfers for one year. Be sure to also compare a new card's interest rate (what you'll pay after the introductory period) with what you are currently paying. If you miss a payment or can't pay your balances off in a year, you don't want to be stuck with a higher rate.

Then, pay off the balance as quickly as possible. If you're grappling with more than one card, focus first on the account with the highest interest rate. Once you pay off that card, use the money to pay off the next-highest rate card, and so on until you are debt-free.

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