by: Marcella G.
We were doing all the right things to prepare for retirement, and then, in a matter of a few weeks, we lost the equivalent of the last seven years of retirement plan contributions. It’s so depressing. We’re not sure we’ll ever be able to afford to retire.
The worldwide economic meltdown has affected everyone, but none so severely as retired people and preretirees those who are within a decade or so of retirement. It’s no surprise that many preretirees have concluded that the combination of severe stock market losses and the prospect or reality of unemployment has seriously impeded their retirement plans. This article will show various ways in which a worried preretiree can move from despondency to renewed confidence that he can achieve the kind of retirement that he had envisioned.
While your immediate concern may be recouping the losses in your retirement nest egg, there are many other considerations that will influence the kind of retirement you will enjoy. They are discussed in this article. There is hope!
RECOUPING INVESTMENT LOSSES
The extent of your investment losses depends largely on the percentage of your money that has been invested in stocks. How you will fare in the future will also most likely depend on how you diversify your investments. Your most likely impulse to get out of stocks altogether will probably turn out to be the worst way to invest for retirement in the future.
While common wisdom suggests that the closer you get to retirement, the more conservatively you should invest, a more relevant consideration is how long you’re going to need the money to last. Whether you’re a year or a decade from retirement, you’ll need your retirement money to last for decades, during which time your cost of living will double, if not triple. It’s highly unlikely that retirement money that is invested solely in interest-earning securities will help you keep up with inflation throughout your retirement years unless you need to withdraw only a very low percentage from your retirement nest egg no more than 2 to 3 percent. Most retirees need to withdraw more, and that’s why they need the long-term growth potential of stocks for at least a portion of their retirement portfolio.
Part III covers the topic of investing, and the guidance given there applies just as much to preretirees as it does to people in other age groups.
While on the subject of investing, resist the temptation to lower the amount of money you’re contributing to your retirement savings plans. While reducing the amount you put away during a market slump may seem to make sense, by forgoing your contributions, you’re also forgoing current and future tax benefits. If you worry that the money you add will lose value, put
it into something that won’t lose value a money market fund or stable value fund, for example.
“INVESTING” IN DEBT REDUCTION
In a time of great investment uncertainty, there are some “investments” that pay guaranteed returns. Paying down credit card, home equity, and mortgage loans reduces future interest charges, and over the years this can save you thousands, if not tens of thousands, of dollars in interest. For example, paying an extra $500 on a 19 percent credit card balance will have a 19 percent return, since you avoid paying interest on that amount in the future. If you can get your debt under control to the extent that you have paid it down or even eliminated it by the time you retire, your retirement prospects will be very much improved.
When it comes to mortgages, a little bit extra can go a long way toward paying it off sooner. Here’s a case study of how adding to a mortgage payment can reduce the time it takes to pay it off. Celeste wants to retire in 10 years, and she has 15 years left on her $200,000 mortgage. She’s surprised to discover that paying an extra $375 per month toward her mortgage will pay it off in 10 years, rather than 15. While that’s a big bite out of her budget, if she can manage to make the extra payments, the amount of income she’ll need during her first few years of retirement will be considerably lower if the mortgage is paid off.
FIGURING OUT HOW MUCH IT’S GOING TO COST YOU TO RETIRE
You may be pleasantly surprised to find out that it won’t cost you as much to retire as you may think. Don’t put too much credence
in the usual rules of thumb that suggest you’ll need a retirement income that’s close to (some say in excess of) your preretirement income to live decently once you’re retired. Everyone’s situation is different, but many retirees have found that they can live quite well on 65 percent or less of their preretirement income. But it’s up to you to figure out your own situation. To get you started on this exercise, the following table lists expense items that will probably decline after you retire.
First, while you’re still going to have to save a bit of your income in your early years of retirement, your need for savings will pretty much go away. Work-related expenses will also be eliminated, and, after decades of kicking money into social security, you’ll be on the receiving end at last. Finally, your income taxes will decline, typically consuming about 10 percent less of your income. Of course, some expenses, notably medical costs, are likely to rise after you retire, but when you put pencil to paper, you’re likely to find that you can enjoy a good retirement on less money than the pundits would have you believe. By the way, two other big expense items may also be eliminated or reduced by the time you retire: college and other child-related
expenses, and the mortgage. If you’re fortunate enough to eliminate those expenses, you’re probably headed for an even more delectable retirement. If you’re still concerned about your retirement prospects, which the economic tsunami has definitely hurt, consider any of the following lifestyle changes that can turn a so-so retirement into a very prosperous retirement.
We were doing all the right things to prepare for retirement, and then, in a matter of a few weeks, we lost the equivalent of the last seven years of retirement plan contributions. It’s so depressing. We’re not sure we’ll ever be able to afford to retire.
The worldwide economic meltdown has affected everyone, but none so severely as retired people and preretirees those who are within a decade or so of retirement. It’s no surprise that many preretirees have concluded that the combination of severe stock market losses and the prospect or reality of unemployment has seriously impeded their retirement plans. This article will show various ways in which a worried preretiree can move from despondency to renewed confidence that he can achieve the kind of retirement that he had envisioned.
While your immediate concern may be recouping the losses in your retirement nest egg, there are many other considerations that will influence the kind of retirement you will enjoy. They are discussed in this article. There is hope!
RECOUPING INVESTMENT LOSSES
The extent of your investment losses depends largely on the percentage of your money that has been invested in stocks. How you will fare in the future will also most likely depend on how you diversify your investments. Your most likely impulse to get out of stocks altogether will probably turn out to be the worst way to invest for retirement in the future.
While common wisdom suggests that the closer you get to retirement, the more conservatively you should invest, a more relevant consideration is how long you’re going to need the money to last. Whether you’re a year or a decade from retirement, you’ll need your retirement money to last for decades, during which time your cost of living will double, if not triple. It’s highly unlikely that retirement money that is invested solely in interest-earning securities will help you keep up with inflation throughout your retirement years unless you need to withdraw only a very low percentage from your retirement nest egg no more than 2 to 3 percent. Most retirees need to withdraw more, and that’s why they need the long-term growth potential of stocks for at least a portion of their retirement portfolio.
Part III covers the topic of investing, and the guidance given there applies just as much to preretirees as it does to people in other age groups.
While on the subject of investing, resist the temptation to lower the amount of money you’re contributing to your retirement savings plans. While reducing the amount you put away during a market slump may seem to make sense, by forgoing your contributions, you’re also forgoing current and future tax benefits. If you worry that the money you add will lose value, put
it into something that won’t lose value a money market fund or stable value fund, for example.
“INVESTING” IN DEBT REDUCTION
In a time of great investment uncertainty, there are some “investments” that pay guaranteed returns. Paying down credit card, home equity, and mortgage loans reduces future interest charges, and over the years this can save you thousands, if not tens of thousands, of dollars in interest. For example, paying an extra $500 on a 19 percent credit card balance will have a 19 percent return, since you avoid paying interest on that amount in the future. If you can get your debt under control to the extent that you have paid it down or even eliminated it by the time you retire, your retirement prospects will be very much improved.
When it comes to mortgages, a little bit extra can go a long way toward paying it off sooner. Here’s a case study of how adding to a mortgage payment can reduce the time it takes to pay it off. Celeste wants to retire in 10 years, and she has 15 years left on her $200,000 mortgage. She’s surprised to discover that paying an extra $375 per month toward her mortgage will pay it off in 10 years, rather than 15. While that’s a big bite out of her budget, if she can manage to make the extra payments, the amount of income she’ll need during her first few years of retirement will be considerably lower if the mortgage is paid off.
FIGURING OUT HOW MUCH IT’S GOING TO COST YOU TO RETIRE
You may be pleasantly surprised to find out that it won’t cost you as much to retire as you may think. Don’t put too much credence
in the usual rules of thumb that suggest you’ll need a retirement income that’s close to (some say in excess of) your preretirement income to live decently once you’re retired. Everyone’s situation is different, but many retirees have found that they can live quite well on 65 percent or less of their preretirement income. But it’s up to you to figure out your own situation. To get you started on this exercise, the following table lists expense items that will probably decline after you retire.
First, while you’re still going to have to save a bit of your income in your early years of retirement, your need for savings will pretty much go away. Work-related expenses will also be eliminated, and, after decades of kicking money into social security, you’ll be on the receiving end at last. Finally, your income taxes will decline, typically consuming about 10 percent less of your income. Of course, some expenses, notably medical costs, are likely to rise after you retire, but when you put pencil to paper, you’re likely to find that you can enjoy a good retirement on less money than the pundits would have you believe. By the way, two other big expense items may also be eliminated or reduced by the time you retire: college and other child-related
expenses, and the mortgage. If you’re fortunate enough to eliminate those expenses, you’re probably headed for an even more delectable retirement. If you’re still concerned about your retirement prospects, which the economic tsunami has definitely hurt, consider any of the following lifestyle changes that can turn a so-so retirement into a very prosperous retirement.