Once upon a time, there lived an industrious and clever people who worked tirelessly in hopes of achieving the great relaxation that legend told would come before life’s end to those who toil. They called this sacred time Retirement, and working folk both young and old saved their pennies to reach that contented state. But one by one, they entered life’s waning years to find Retirement more difficult to attain than expected. Could it be that Retirement was little more than a legend?
Never have there been more opportunities and advantages to saving for retirement, yet today’s economic conditions have made a financially secure retirement far from a certainty for most.
Investors in nearly all stages of life have seen their assets take a beating, prompting some to wonder, might a secure retirement be little more than a fairy-tale proposition?
Even before the current economic crisis, American workers were both more prepared for retirement and less confident about it than they have been in years. The Employee Benefit Research Institute, which surveys retirement confidence annually, found earlier this year that just 18 percent of workers were “very confident” in having enough for a comfortable retirement, down from 27 percent in 2007 and the lowest since EBRI’s 1993 survey. At the same time, nearly three-quarters say they or their spouse have saved for retirement, the highest since 2000.
So how can the typical investor weather the current economic storm and make the elusive goal of retirement riches a reality? We turned to four local financial pros to get their advice.
Investor profile | A professional 20-something couple to whom retirement seems like another lifetime, too distant to warrant worries today. They’ve signed on to their employers’ 401(k) plans, but place financial focus on their student loans, credit card debt and near-term plans to buy a house.
Retirement tip | “One of the biggest mistakes young couples make is they wait until the end of the month [to save]. They make it the last dollar they save rather than the first dollar they save.” — Bob Coode, Skoda Minotti
Moral of the story | Slow and steady wins the retirement race.
He might’ve made a great Olympic sprinter, but the hare from Aesop’s “The Tortoise and the Hare” would have been a lousy retirement planner.
The hare ran his race in great spurts of speed punctuated by long restful breaks, and in the end lost to his fabled competitor, the tortoise, who progressed slowly and steadily to victory.
It’s good advice for young investors just starting to save for retirement, say the experts, especially in today’s financial climate.
“The way you build massive amounts of wealth in 401(k) plans is putting a little bit of money in every single month for the rest of your working career,” says Tim Clepper, senior vice president of Robert W. Baird & Co. in Cleveland. “Get a base, start with that base, and then make a commitment to increasing that base every single year.”
While they watch their parents’ generation sweat it out over massive losses in their retirement accounts this year, these 20-something investors have the gift of time on their side.
“In investing, time is your ally,” says Bill Hawke, a principal partner of Cedar Brook Financial Partners in Cleveland. “Time smoothes out volatility.”
Indeed, the current economic crisis may even work in a younger investor’s favor, according to Edward DeTomaso, also of Cedar Brook Financial Partners.
“It’s actually good for them because they’re buying less expensive shares at this point,” he says. “So in theory, it works to their advantage.”
Focus on the basics in these early years, say the experts, such as:
Create a detailed budget, something too few 20-somethings have. “We require that of our clients,” says Bob Coode of Skoda Minotti in Mayfield Village. “We have to have an analysis of what’s coming in and what’s going out before we go anywhere [with a financial plan].” Having a budget is an essential first step to allocating discretionary income to savings or other priorities.
Contribute to your company’s 401(k), at least up to the level your company will match. “If your company’s matching 50 cents on the dollar up to 6 percent, that 50-cent match is a guaranteed return on your investment,” says Hawke. “That’s free money.” Clepper also recommends younger investors funnel retirement savings into their company’s Roth 401(k), if available. These plans allow investors to contribute after-tax dollars, so that distributions in retirement will be tax-free. Investors can contribute up to $15,500 a year into a Roth 401(k), but Clepper says even an extra $3,000 saved this way each year can make a big difference come retirement. Plus, “at that young of an age, you can afford to be pretty aggressive in your 401(k) selections,” says Hawke. “You can be in as much as 100 percent equity in your 20s.”
Set goals for near-term expenditures like paying off debt or buying a house. Higher-rate credit card debt should take priority over student loan debt, say these experts, with accounts created to save for vacations, a home purchase or those must-have Cavs season tickets.
But most importantly, young investors who want to endure the slow and steady race to retirement must make saving a habit.
“It’s really not a question of how much [at this age], it’s a question of creating the habit,” says Coode, who recommends using tools to make saving automatic so it’s less tempting to raid your nest egg. “One of the biggest mistakes young couples make is ... they make it the last dollar they save rather than the first dollar they save.”
Investor profile | This mid-career, two-income family has taken a great fall. Their retirement and college savings accounts have lost more than a third of their value this year, while college looms right around the corner for their teen- and tween-age kids. What should get priority — college or retirement?
Retirement tip | “Do not raid your retirement account to pay for education. You can’t borrow for retirement ... but you can get student loans for your children and help them pay those loans back.” —Bill Hawke, Cedar Brook Financial Partners
Moral of the story |All the king’s horses and all the king’s men may not be able to put you back together again ... but the rebounding market can, eventually.
Like Humpty Dumpty, this family likely had a comfy perch up on that wall just a year ago, making great strides toward saving for retirement and college tuition.
Now that nest egg has gone splat, with their plans for the future oozing out on the sidewalk. Can anything put this family’s financial plan back together again?
“They’re getting hit hard for a number of reasons,” says Coode. “Their incomes are now up, and they’ve put some money away but have some risk in the market when it fluctuates. They’re eating up a whole lot of their income supporting their house and education and their children.”
With likely 20 years to go until retirement, this couple has some time to allow the rebounding market to repair their retirement investment losses. But what about the more immediate financial need — three kids headed to college within the next half-dozen years and tuition savings plans that have been hit equally hard?
Here’s what the experts recommend:
Keep your hands out of the retirement cookie jar. “Do not raid your retirement account to pay for education,” warns Hawke. New rules allowing IRA funds to be used for education penalty-free may make such a move tempting, but he recommends borrowing for education before moving retirement savings. Why? Such a withdrawal will raise your family’s income, hurting your child’s chances of earning financial aid. Withdrawals from a 401(k) are even worse: Tuition is not a valid reason for a “hardship withdrawal,” so you’ll pay a penalty and lock in your losses by pulling money out of that account. Instead, DeTomaso recommends diverting extra savings for the oldest child into a lower-risk fund, leaving the remainder of college savings in place. “The longer we can leave the existing investments parked where they are, the better opportunity we have for recovery from the down market,” he says.
Stay in the market. No matter how grim the picture in your investment accounts, the experts agree that these mid-career investors should stay in the market to allow time to heal their wounds. It’s also an excellent time to boost savings in a 529 plan, the experts’ preferred college savings method (which grow tax-deferred and can be withdrawn tax-free for educational purposes). “Now, the shirts are on sale,” says Coode, referring to investing in an economic downturn. “You’re buying at an excellent value relative to where the market was a year ago.”
Re-evaluate your allocations. Schedule a review of your investment portfolio at least once a year, just as you would an annual physical, recommends Coode. Too often, he sees investors make the mistake of leaving investment accounts to grow cobwebby with neglect instead of making necessary adjustments as the years go by. “So many of your 401(k) plans and 529 plans today have age-weighted options or automatic rebalancing options, so as (investors) age, it goes from more aggressive to more conservative.” For a mid-career 40-something investor like this one, Hawke recommends a growth portfolio that’s a mix of about 80 percent stocks and 20 percent bonds.
As hard as this fall has been for the mid-career investor, the experts are trying to help them see this as an opportunity to invest at bargain-basement prices then ride out the storm to recovery.
“In 2008, you’re buying at equity values of 1996 or 1997, a 10-year discount,” says Clepper. “That’s pretty powerful.”
Little Red Riding Hood
Investor profile | Retirement’s right around the corner for this 60-something couple ... or so they thought. Their every-t-crossed retirement plan is now fraught with uncertainties: Will they have to work longer? How much longer? Can they recover quickly enough to stay on plan? They’re well on their way to Grandma’s house, but what will be waiting when they arrive?
Top tip | “While you’re still working, put as much money into your plan as you can. You really have to supercharge your savings in these last years.” — Tim Clepper, Robert W. Baird & Co.
Moral of the story | Your path to retirement may be different from what you planned when you started your journey.
It was supposed to be a leisurely trip to Grandma’s house to deliver some treats to her sickbed. But the clever wolf had Little Red Riding Hood heading toward a starkly different destination than she had expected.
Likewise, pre-retirees who’ve been planning and saving their entire working lives are finding that the seemingly short path to retirement has suddenly become treacherous and uncertain.
Can they still retire on schedule? Will they have to work longer? How much of their current lifestyle can they retain? Will retirement be more like being welcomed by Grandma or like being swallowed by a wolf? To answer these questions, say the experts, it helps to know some history. Hawke shows anxious clients a timeline of the stock market’s rises and falls since the Great Depression and insists that despite popular notions, this time likely isn’t different from prior recessions.
“In five years, they will have recovered under normal post-recession markets. They’re going to have recovered all of their losses, plus more,” he says. “So I would say that it’s appropriate they’re anxious, but it’s not impossible that they could still do these things [they’ve planned for retirement].”
Yet the experts agree that the current crisis is far from over — “as we go into recession, we’re only seven innings into a nine-inning game,” says Clepper — and it’ll take some planning to stay on track for retirement. They advise:
Pick one: more work, more savings or less lifestyle. Adjusting a retirement plan at this stage of the game, says Coode, requires either working longer, setting aside more money now or adjusting their expected standard of living. Of the three, Coode sees more people choosing to work longer rather than boost savings or cut back on lifestyle. But he recommends getting back to Budgeting 101 and socking away extra cash now. “They need to accelerate the program in a hurry,” he says. “Pay off the rest of the mortgage, pay off that credit card debt, set up a systematic savings plan and stretch. If you think you can put away $1,000 a month, put away $1,500 a month and see how it feels.”
Focus on the core. Hawke works with clients to categorize expected retirement expenses, starting with “core” costs such as food, clothing, shelter, utilities and health insurance, ensuring that investments to fund these needs have guaranteed returns. “This won’t be the last market decline that we ever experience,” says Hawke. “When the market goes down, you need to make sure, at a bare minimum, that you have all of your core expenses substantially guaranteed.” His recommended portfolio for a pre-retiree couple like this one is a mix of about 60 percent equities and 40 percent bonds.
Be prepared for long-term care needs that could further drain retirement savings.“Long-term care insurance can be quite inexpensive if you purchase in your mid-50s or early 60s,” says Hawke. “With both people living longer, it can have a devastating impact if one spouse needs home care or nursing care.”
And so off to Grandmother’s house we go, but with careful steps and a firm eye on the destination.
“While you’re still working, put as much money into your plan as you can. You really have to supercharge your savings in these last years,” says Clepper. “Now more than ever, it’s important you don’t make mistakes.”
The Little Pigs
Investor profile | They planned. They saved. They retired, sufficiently confident in a retirement plan built like a brick house. But does this retired couple have enough saved to endure all the huffing and puffing of the current economic crisis and the gradual recovery to come?
Top tip | “For the time being, reduce the amount of your distributions. Taking less money out and spending less is like saving money.” — Bob Coode, Skoda Minotti
Moral of the story | Your house may be built of bricks, but it still needs careful maintenance.
Brick by careful brick is how many current retirees have built their retirement assets, quite possibly watching as others’ portfolios built of straw or sticks succumbed under the market’s huffing and puffing.
But as the country has sunk into the worst economic crisis since the Great Depression, even those retirees who built their plans of brick are seeing their foundations begin to chip.
“Their fears are well-founded,” says Coode. “Their balance sheet may have shrunk by 20 or 30 percent, and in this environment, there’s nowhere to hide.”
Those anxieties aren’t limited by net worth, either. “People can be worth $30 [million] or $40 million, and they’re still requesting reassurance that ‘Are we gonna be OK? Is this all gonna work out?’ ” says Hawke.
First step, say the experts, is not to panic or make rash decisions. “For the next six months, don’t sell, don’t move out of your house, don’t even look for six months,” says Clepper. “There’s a good chance the recession isn’t that deep, but panic is pushing it down to staggeringly low levels. The market won’t sustain these low levels.”
Other advice for recent retirees from these experts:
Think short term. “For the time being, reduce the amount of money you’re taking out of your retirement accounts,” suggests Coode. “Taking less money out and spending less is like saving money.” He also recommends identifying areas of your portfolio that have not been hit as hard and creating enough cash to get through the next 12 to 18 months as the market rebounds. “You want to try to create enough cash that you don’t have to liquidate out of equity or bond positions over the next 18 months,” he says. “Leave everything else sitting there, watch the allocation, and rebalance.” Clepper recommends that retirees consider investing in variable annuities with living benefits to ensure a guaranteed income stream independent of market activity.
Take one step at a time. Hawke takes an approach to the retirement distribution phase that segments his clients’ investments based on time increments of five years, allowing them to focus on different goals and investments for each time period. “We go from ultra conservative [in the first five years] to more aggressive, because the more time you have, the more aggressive you can be,” says Hawke. “By segmenting your income needs, you know during each period that check is going to be in the mailbox.”
Get some help. You may have spent your career eschewing the advice of retirement planners, choosing instead to manage your own portfolio of investments. But these experts agree that if there’s ever a time to call in a professional, it’s during the distribution phase of a retirement plan. “You don’t have time to make up for mistakes. You don’t have time to accumulate any more. You don’t have time to suffer big losses,” says Hawke. “The accumulation phase got you to the 50-yard line. It’s the income distribution phase that will bring you the rest of the 50 yards.”
Even if you’re like the smart little piggie who built his house of bricks, it’s still essential to keep that house well-maintained to last through this crisis and potential future downturns.
Doing so can make retiring rich an achievable goal rather than a fairy tale.
“Absolutely, they can still do it,” says DeTomaso. “It may require modification. It may require a little more time. It certainly will require them to sit down with someone and rethink where they are and where they want to go, but clearly they can still do these things.”