5 Steps to a Secure Retirement

If you’re like many Americans whose retirement savings took a major hit during the market meltdown a few years ago, you’re probably wondering if you’ll ever be able to retire. The eye-popping stock market drop in early August and the downgrade of the U.S. credit rating no doubt add to your jitters. Or maybe investment performance isn’t your major worry. A spate of unemployment or depressed home values can make yesterday’s vision of retirement seem like an im­possible dream.

Don’t be discouraged: Recent statistics on recovering 401(k) and IRA balances suggest that many savers are already back on track. Plus, “Americans have proved themselves to be both resilient and resourceful,” says Jay Wintrob, president of SunAmerica Financial Group, which recently released its “Retirement Re-Set” study. More than 80% of respondents to the survey said they learned important lessons in the past several years. “They are course-correcting—intending to work longer, save more, spend less and adjust their lifestyle expectations,” Wintrob says.

Laraine Schigotzki is a classic example. With successful careers in commercial real estate, property management and corporate sales, Schigotzki, 46, was surprised when she became a victim of a faltering economy. “I never thought I’d get laid off, but now I look at it as a blessing,” she says. After losing her job in 2008, Schigotzki enrolled in a U.S. Department of Labor retraining program to become a licensed skin-care specialist and went on to become certified as a holistic health professional. In 2010, she opened To Your Health Holistic Spa and Wellness Center, in Brick, N.J., where she offers organic skin and body treatments, health and nutritional counseling, and yoga classes.

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Schigotzki’s retirement savings are on hold while she builds her business, and she knows she has a lot of catching up to do. But she’s banking on her new business, rather than relying on the stock market alone, to fund her retirement. “I am optimistic, and I’m not stressing about my future finances,” she says. “I am putting my heart and soul into this, and I know I’ll come out on top.”

Nancy and Al Guido hoped to retire to their hometown of Chicago after living in Dayton, Ohio, for 17 years. But the collapse of both their investments and their home’s value in 2008—a year before their planned retirement date—blew away their plans to buy a house in the Windy City. They didn’t let their initial disappointment stop them, however. They turned market forces into an advantage by shifting their home search to low-cost Alabama, where they scooped up a beautiful lakefront home near Birmingham at a bargain price. “We couldn’t have afforded this house a few years earlier,” says Al, 62.

The past few years have demonstrated that being flex­ible like the Guidos is an essential ingredient in retirement planning during these uncertain times. Follow our five-step guide to make the new normal work for you.

Step 1 | DO A REALITY CHECK

The main question on everyone’s mind is, Will I have enough money to retire? More than half of those who participate in an employer-based retirement plan say that they have never taken the time to estimate how much they need to save for retirement. If you don’t have a savings target in mind, it’s tough to determine whether you are on track, says financial planner Philip Lubinski, head of the Strategic Distribution Institute, in Denver. Figure out your target number and whether you’re saving enough to reach it by the time you want to retire. To help you do that, check out our interactive tool at kiplinger.com/links/retirementcalculator.

“Some may be assuming they are off-track, when in fact, they aren’t—or not as much as they think,” says Lubinski. The answer to the burning question of Will I have enough? is determined by several factors, including when you plan to retire, how much income you need from your savings, how many years you’ll need that income and the rate of return you can expect to achieve on your investments.

If you discover a shortfall between the amount you need to save and the amount your current account balance and continued savings will be worth by your target retirement date, then you’ll have to make some tough choices. You could save more, work longer, chase higher returns or plan to throttle back on your retirement lifestyle—something most people hope to avoid.

“Americans are recalibrating their retirement dreams,” says Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation, which promotes financial literacy. “They don’t want to buy a winery when they retire. They just want to keep living the life they’ve been living.” J. Graydon Coghlan, a financial planner in San Diego, has observed a similar rethinking of retirement goals among his clients. “Instead of buying a second home, I see a lot of people fixing up their existing home to make it their retirement dream house and then just renting a place for a week or two in the desert or the mountains,” says Coghlan.

Step 2 | PLAY CATCH-UP

It’s been a volatile decade for the stock market, but investment returns are not solely to blame for the size of your retirement account. The main driver of account balances over time is your contribution rate. Investment returns, while important, have a less significant impact over the long term. For guidelines on how you should allocate your retirement savings at various ages, see the graphs below.

Ideally, you should aim to contribute 15% of your gross earnings to your retirement savings—including any employer matching contributions. The goal is to replace about half of your current salary, adjusted for inflation, during a retirement that could last 30 years or more. You’ll probably replace another 30% or more of your current income with money from other sources, such as Social Security, a pension or part-time work, bringing you closer to 80% of pre­retirement income—generally the amount recommended to maintain a comfortable retirement.

Make sure you make the most of your company’s retirement plan. According to a recent survey by Fidelity Investments, more than half of 401(k) participants say they would not be saving for retirement at all if it weren’t for their company retirement plan. But economic conditions still present a challenge, with 54% reporting that they would contribute more to their 401(k) plan if they could. If you can’t max out your contributions immediately, contribute at least as much as needed to capture your employer’s matching contribution if you have one and work toward saving more in the future. In 2011, you can contribute up to $16,500 to a 401(k) or similar defined-contribution plan, such as 403(b) plans used by schools and hospitals, 457 plans available to state and local workers, and the Thrift Savings Plan available to the military and federal employees. Workers 50 and older can make additional catch-up contributions of up to $5,500, for a total of $22,000 in 2011.

If you don’t have access to a retirement plan at work—or even if you do but you want to stash more money away—you can contribute up to $5,000 to an IRA in 2011, or $6,000 if you are 50 or older. You can choose a traditional IRA, which offers an upfront tax deduction for workers who meet the income requirements. Or you can choose a Roth IRA, which has no upfront tax deduction but provides tax-free income in retirement. Self-employed business owners can contribute up to $49,000, depending on income, to a SEP IRA for 2011, or up to $54,500, including catch-up contributions, to a solo 401(k).

Step 3 | WORK LONGER

The number of Americans age 55 and older in the workforce is now at an all-time high. Judith Randall, 72, of Chicago, is one of them. She describes her seasonal job as a guide on the city’s river cruises and bus tours as “the best part-time job in the world.” The retired legal secretary puts all her research skills to work, uncovering fascinating facts to share with her audiences. But the bottom line is that she needs the money. She relies on her earnings to supplement Social Security in order to pay her bills, and she squirrels away her tips for the winter, when there’s no work. “I didn’t save enough when I was working as a legal secretary,” she says. “I have to work as long as I can.”

Unfortunately, working longer may not be an option for some. More than 40% of current retirees stopped working earlier than they had planned, largely for reasons beyond their control, such as a layoff or health problem. And with more than two million people age 55 and older unemployed, the prospects of finding full-time work in their field are dim.

“More and more baby-boomers over age 50 are realizing that when they lose their corporate job, the only way that they can continue to do the work they were doing is to run their own business,” says Jeff Williams, founder of Bizstarters.com. He offers a free “Boomer Biz Starter Kit” on his Web site, which includes an idea-generator guide to show how to use work and life experience to find good business ideas and how to evaluate the financial prospects of those ideas.

Step 4 | CREATE RETIREMENT INCOME

One of the greatest challenges in retirement is figuring out how to convert a pile of savings accumulated over a lifetime into a monthly stream of income that you can’t outlive. The Government Accountability Office made headlines recently when it recommended that middle-income Americans—particularly those without a traditional pension—consider using up to half of their savings to buy an income annuity as a way to avoid the risk of outliving their money.

The drumbeat for guaranteed retirement income has been building during the past few years. When asked which is more attractive, a financial product providing a 4% return that is guaranteed not to lose value or one with an 8% return that is subject to market risk and loss of principal, 76% of respondents chose the guarantee, according to Allianz Life Insurance Co. “This new study confirms that a ‘new normal’ mindset has dug deep roots in the minds of boomers,” says Allianz Life president Gary Bhojwani.

Capitalizing on the demand for secure income, New York Life Insurance Co. has launched a new product. Guaranteed Future Income Annuity enables individuals to create a personal pension by investing a minimum of $10,000 initially and setting a future date to begin receiving guaranteed income payments for the rest of their life.

“The concept of a pension is certainly not new, but paying for it with cash rather than years of service is,” says Chris Blunt, executive vice-president of retirement income security for New York Life. Blunt, 49, bought the first contract, investing $100,000 with the guarantee that he will receive $980 per month—nearly a 12% payout—starting at age 65 for the rest of his life, with annual inflation adjustments.

Unlike immediate annuities, which are typically sold to retirees in their seventies, this deferred annuity is targeted to preretirees in their fifties and early sixties who don’t have a pension or whose pension was frozen and won’t provide sufficient income in retirement, Blunt says.

Other insurers are also making it easier for consumers to figure out how an annuity might fit into their retirement-income puzzle. Anyone can use Fidelity’s Income Strategy Evaluator to help decide how to allocate his or her portfolio to stocks, bonds and cash. The tool also shows how buying one or more annuities can create guaranteed income and provide protection from inflation and market volatility. MetLife recently unveiled its own version, the Retirement Income Selector.

Step 5 | DELAY SOCIAL SECURITY

Among the most crucial financial choices retirees must make is when to begin claiming Social Security benefits. The majority claim benefits before their normal retirement age, passing up an additional 25% or more in monthly inflation-adjusted benefits for the rest of their lives. That can be a costly mistake—particularly for some married couples, who can increase their lifetime retirement income by $100,000 or more just by choosing the right time and method for each spouse to claim benefits.

The GAO’s report on retirement income found that it is more cost-effective to delay collecting Social Security benefits until normal retirement age than to collect them early with the intention of buying an annuity later on to make up the difference. Delaying benefits until normal retirement age—66 for anyone born from 1943 through 1954 and grad­ually rising to 67 for those born in 1960 and later—means you can continue to work without forfeiting any benefits to the earnings cap limit. You can also employ some clever claiming strategies to maximize your benefits.