retirement

How to Cope With a Deflated IRA

A military pension helps, but don't give up on stocks.

Our ReadersWho: Robert and Judy Parsons, both 67Where: Edenton, N.C.

Question: What should retirees do in this volatile market?

Robert Parsons retired in 1985 after 26 years as a Navy air-traffic controller, then spent several years in law enforcement before he developed a bad back and retired for good. After watching the value of his IRA shrink from $130,000 to $98,000 in just a few weeks this fall, he's wondering what he should do now to protect his nest egg. His investments may eventually recover, but, asks Parsons, "Do we have time for that?"

Time is of the essence if you're in your sixties. But you could live 20 or 30 more years, so it's no time to panic and abandon the fundamentals. You need cash for your immediate needs, but you also need growth via the stock market over the long term, says Stuart Ritter, a certified financial planner with T. Rowe Price. "You are not going to use all of your money in the next two years." Even if you're 65 or older, Ritter recommends keeping about 55% of your retirement savings in a diversified portfolio of stocks and stock mutual funds.

The Parsonses' investments are well diversified, but they need enough money on hand to cover their current expenses and any emergencies. Marc Schindler, a certified financial planner in Bellaire, Tex., recommends keeping as much as two years' worth of expenses in cash, such as in a money-market account or short-term CD.

You won't need that much if, like the Parsonses, you have sources of guaranteed income (the couple have Robert's military pension and their Social Security checks). In fact, they don't plan to tap their IRA until they start taking required minimum distributions at age 70. And because Robert is a retired member of the military, Tricare for Life helps fill the gaps in Medicare and lowers the couple's out-of-pocket costs.

Retirees who aren't as fortunate can bolster their depleted savings by withdrawing less money than they had originally planned. One common guideline recommends withdrawing 4% of your savings in the first year of retirement, then bumping up your withdrawals by about 3% of the original balance every year to keep pace with inflation. But in a down market you'll do better if you base your 4% withdrawals on the reduced value of your nest egg, rather than the original balance, and temporarily discontinue those 3% increases.

You won't need to spend as much of your retirement savings if you boost your income. And combining part-time work with a hobby -- such as working at a golf course, garden center or veterinary clinic -- might also get you an employee discount.

In addition, working at an extra job for a few years after retirement could help you delay taking Social Security. And for each year after your normal retirement age that you hold off, your benefits will be increased by 8% for the rest of your life.

If you qualify for $1,600 a month at age 66, for example, delaying the start of benefits until you're 70 would bump up your benefit by about $500 a month (see the Retirement Estimator at www.socialsecurity.gov). All future cost-of-living increases would add to that higher base.

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