Retire When You Want

Our five-step plan will get you there.

By Mary Beth Franklin, Senior Editor

From Kiplinger's Personal Finance magazine, February 2010

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And the world keeps on spinning. Despite being mauled by the worst bear market since the Great Depression, most American workers continue to save for the future by investing via 401(k) accounts and similar employer-based retirement plans. And the majority of those workers made no changes to their investments during the financial crisis, according to a recent study by Vanguard. Is it because they were confident about their investments -- or too gripped by fear to make a move?

John Ameriks, head of Vanguard's Investment Counseling and Research group, says the study shows that despite the market's volatility, investors still believe stocks are important to have in their portfolios. But other financial professionals worry that such behavior is a sign that inertia remains the primary force in retirement planning. Without significant changes in the way Americans spend, save and invest their money, many won't be able to afford the retirement they want.

In its annual Retirement Fitness Survey, Wells Fargo found that two-thirds of preretirees age 50 and older expect to need more than twice as much money for retirement as they have already saved, yet only 23% have increased the amount they're putting aside compared with a year ago. Plus, a majority of them confess to having no formal plan for retirement saving or spending. "For people in the last ten to 15 years of their working careers, failure to have a thorough retirement plan in place is like driving blindfolded," says Lynne Ford, head of Wells Fargo Retail Retirement.

A few years ago, when the stock market was still soaring to dizzying heights, many people became obsessed with "the number" -- their individual nest-egg goal that would assure a comfortable retirement. Now the focus is shifting to a different, more important number: how much retirement income your savings will provide.

It's a humbling concept when you realize that you need about $1 million to generate just $40,000 a year of income (assuming you stick to a widely accepted rule of thumb that says you should limit your withdrawals to 4% of your savings during your first year in retirement). Throw in the average Social Security benefit of about $20,500 a year for a married couple, and you're up to a little more than $60,000 a year, not counting pensions, part-time work and other sources of retirement income.

After the stock-market debacle, the old joke about how to make a million dollars -- "Start with $2 million" -- hit uncomfortably close to home. Face it, though: Accumulating the magic million was always a stretch. So how do you realize your retirement goals? You take a number of steps, including saving more, reducing your debt, seeking financial advice and possibly working longer.

Perhaps the silver lining of the economic turmoil is the realization that we need to evolve from a nation of accidental investors to stewards of our wealth, committed to saving for both short-term needs and long-term goals. "If you have a plan, take it out, dust it off and check your assumptions," says Ford. "If you don't have a plan, now is the time to make one."

And take some tips from survivors of the meltdown who managed to get their retirement plans back on track.

Cut spending

The aha moment for Kim Thompson came when she sat down for a one-on-one session with a 401(k) counselor that her employer -- Sunny Delight Beverages, in Cincinnati -- provided. Thompson realized how little retirement income she could expect based on her current savings. "When the counselor pulled up my saving profile and showed me what I'd have to live on each month in retirement, I thought, There is no way."

Single and in her forties, Thompson likes to shop, travel and drive a nice car. But after that meeting, she says, "I had to search within myself and ask, Am I willing to sacrifice today for my retirement?" The answer was yes. When the counselor showed her how boosting her 401(k) contributions from 8% to 12% of salary would not make a huge difference in her take-home pay, but could fatten her future retirement income by $20,000 a year, she upped her 401(k) contribution.

But Thompson didn't stop there. She signed up to increase her contributions automatically by 1% a year for the next three years until she reaches the optimum 15%-of-salary contribution rate recommended by many financial experts. And she worked with the counselor to select a more aggressive investment mix to help her achieve her nest-egg goal. "When I came out of that meeting, I felt so good. It was empowering," says Thompson. "Now I feel like I'm on track."

Plus, Thompson is now maximizing the assets in her closet instead of browsing the sales racks. And she has vowed to keep her current car when it's paid off rather than buy a new one. "Being single, I'm on my own," she says. "It's up to me, not anyone else, to get my retirement house in order."

Seek Advice

When it comes to saving for retirement, Eric and Andrea Andrews are of one mind -- and have one investment plan. "Our retirement goals are pretty straightforward: We want to save enough money to enjoy a nice retirement and to have the same standard of living as we have now," says Eric, 38.

Married for 13 years, the Andrewses have both worked for Sprint in Kansas City for nearly a decade. Eric is a corporate lawyer and Andrea, 37, is a staff consultant. Heeding advice from Eric's dad to save early and often, each of them contributes 10% of gross salary to Sprint's 401(k) plan. They'd like to do more, but they are also saving for college for their two young daughters, Molly, 6, and Eliza, 3.

Although the Andrewses have a diversified investment menu through their 401(k) plan, they wanted more guidance than their employer's plan offered. "I felt as if I were stumbling around in the dark," says Eric. So about five years ago, they signed up with Smart401k, a firm that helps employees decide how to choose and manage the investments in their employer-sponsored retirement plans. Smart401k reviewed their savings goals, risk tolerance and investment choices, and made recommendations on how to invest.

Because the Andrewses work for the same company and share the same investment choices and retirement goals, they have one account with Smart401k (for which they pay $200 a year), but each of them follows the investment recommendations. "It's worth the cost," says Eric, particularly during the market meltdown, when the firm urged investors to stay the course. Although the Andrewses lost nearly 40% of their retirement savings in 2008, their balances bounced back to precrash levels by the end of 2009, thanks to the market rebound and their continued contributions. With the extra mutual fund shares they scooped up at bargain prices, and with decades to go before retirement, they are well positioned for future gains.

"One of the benefits of the downturn is that it's a great opportunity to assess where you are and what changes you need to make," says Scott Holsopple, president of Smart401k. Rebalancing your investments periodically to get back to your original asset mix forces you to sell some winners and increase your stakes in underperforming investments -- a great way to follow investing's golden rule of buying low and selling high.

Consider a Roth

The Andrewses are comfortable with their retirement planning. But to hedge their bets against potential future tax hikes, they each split their 401(k) contributions equally between their traditional 401(k) and a Roth 401(k) option. The traditional account reduces their tax bill now, and their Roth contributions will guarantee that a portion of their future retirement income will be tax-free.

A Roth 401(k) has no income-eligibility limits, but not all employees have access to this type of account. If you don't, you have other ways to secure future tax-free income. Even if you participate in a retirement-savings plan at work, you can contribute to a Roth IRA if you meet the income-eligibility limits. Or, starting this year, you can convert some or all of your traditional IRA money to a Roth, regardless of income.