By Steve Santiago
Most people probably don't expect to outlast their financial assets in retirement. But between the shortage of traditional pensions, paltry savings levels and ever-expanding life spans, many Americans could see their money dry up before retirement ends.
Nearly three out of five middle-class retirees will likely run out of money if they maintain their preretirement lifestyles and don't reduce spending by at least 24 percent, according to a 2008 study by Ernst & Young.
Curbing spending will undoubtedly help your money last longer, but it's not the only factor in the equation.
You can also stretch your retirement income by proactively managing your investment accounts and savings, which means understanding how they produce income over time and what risks they carry.
Be realistic about whether you can afford the lifestyle you want in retirement. And stay healthy. Out-of-pocket medical expenses can eat away at your assets or income significantly as you get older.
Do a cash flow analysis
A comfortable retirement is largely a function of wants, needs and how much money stands between the two.
Surprisingly, less than half of workers -- 47 percent -- say they or their spouse have tried to calculate how much money they will need for a comfortable retirement, according to the Employee Benefit Research Institute's 2008 Retirement Confidence Survey.
As a rule of thumb, some experts say that you can expect to live on 80 percent of your preretirement income. But if you want to live more extravagantly, you'll need more. So your first step is to figure out how much money you'll need each month to pay your expenses.
"The purpose of doing a cash flow analysis is to give you that baseline of how much money you need," says Julie Jason, author of "The AARP Retirement Survival Guide."
"If you don't have a baseline there's no way you can make rational decisions."
For example, suppose you receive $5,000 per month between your 401(k) plan and Social Security, but your expenditures amount to $6,000 a month.
You'll need to either cut back or come up with another $1,000 per month for that spending plan to work. If you must tap investment assets for the difference, you'd better make sure you have enough to last you for many years at that level.
Jason cautions that a baseline cash flow analysis is just that -- a baseline. There needs to be some flexibility built in to take into account the prevailing economic backdrop as well as life changes that spring up. Plus you'll have to factor in inflation.
"You're always assessing and reassessing," she says. "I think that's the most important message about doing cash flow analysis."
Most people will probably tell you that they would like to retire earlier, not later. But people are retiring later due to economic and other factors.
The median retirement age for retirees increased from age 59 in 1991 to age 62 by 2003, according to a 2009 survey by the Employee Benefit Research Institute.
The upside of working into retirement is that you have more time to build up your retirement accounts and take advantage of company-sponsored medical plans. But be mindful of how collecting a paycheck may affect other things.
If you have less than $200,000 in savings, you may want to consider postponing retirement for awhile because it's likely that you won't be able to generate enough income to cover inflation for a 30-year retirement even with 6 percent after-tax returns each year, Jason writes in her book.
Rebalance your portfolio
Experts recommend that your investment accounts be reviewed periodically for increased return potential, and if necessary, your portfolio should be rebalanced. Rebalancing can help you match your investments with your original goals or accommodate your changing needs.
If you're comfortable with more risk, this could be a good time to increase the long-term return potential of your portfolio by investing in a higher percentage of equities.
The downside, of course, is that increased return potential comes with the risk of more volatility, so you need to have a handle on how much risk you are willing to accept.
When you rebalance your portfolio to match its original asset allocation, you are in effect buying low and selling high. For example, if you originally had a 60 percent stake in equities and 40 percent in bonds, but now you're at 50-50 due to the recent stock market malaise, you in effect are buying stocks while they're cheap if you rebalance to the 60-40 ratio. Be mindful of the tax ramifications if you buy and sell within a taxable account, however.
Risk-averse investors may look for safe havens like CDs, annuities or guaranteed income products during times of financial upheaval, but buyer beware.
"The devil is in the details," says Dan Deighan, who heads Deighan Financial Advisors in Melbourne, Fla.
"Any time you're looking for a guarantee, you have to ask yourself 'Who's the guarantor?''' he says.
"What do their financial statements look like? What are the conditions under which the guarantee is established? What could happen that would cause the guarantor to not be able to perform? And, of course, what is the safety net that exists for that?"
If you're not sure what to invest in, consider hiring a trusted financial adviser for help.
"There's no question that you have to tap into somebody that really truly understands this stuff and isn't selling and pitching it because of the commission," Deighan says.
"The way to protect yourself is to get some objective advice."
Catch up on your 401(k)
Most Americans rely on defined-contribution retirement plans such as a 401(k) to save for retirement, but most of us don't seem to be saving enough.
Bankrate's story, "Figuring retirement needs in a shaky economy," offers clues on how big your nest egg must be to generate enough cash flow, depending on your annual income needs.
The average worker contributes about 7.5 percent of his or her salary toward a 401(k) or 403(b) retirement plan, according to the most recent data from EBRI.
If you're 35 years old and make $40,000 per year, you will have approximately $342,300 saved after 30 years, assuming a 6 percent annual return, a 7.5 percent contribution rate, a 3 percent annual salary increase and no employer match.
If you need to draw $3,000 a month from your account and earn 4 percent, that money will last just under 12 years, not factoring in inflation, taxes or emergencies.
With any luck, your retirement will last longer than 12 years. One solution is to beef up your savings. If you're over age 50, the IRS allows catch-up contributions to your 401(k) account as well as other retirement vehicles.
For example, you can contribute up to $5,500 over the regular limit of $16,500 in 2009, for a total of $22,000.
Depending on your age and your account balance, catch-up contributions could add a much needed boost to your retirement account, especially if returns are good while you accumulate the money.
Using the same example, above, let's say you started saving at age 35 at that 7.5 percent deferral rate. If you get 3 percent raises each year, by age 50 you would be earning $62,320 and you would have accumulated $86,560 in your 401(k) account.
If you take advantage of catch-up contributions for the next 15 years, your savings would be worth $719,517 at age 65, assuming the same 6 percent return and a steady annual contribution of $22,000. (The actual savings amount could be higher because these catch-up contributions are scheduled to increase slightly from time to time.)
Of course, this kind of heavy-duty, deadline-oriented savings style would demand a deferral bump-up from 7.5 percent of your salary to about 35 percent -- at least initially. As you get raises, though, the deferral rate would decrease.
The numbers look even better if your employer provides matching contributions.
"I think the catch-up provisions for not only 401(k)s but IRAs and other types of plans are a great opportunity to save more on current income tax as well as sock away more money toward the future," says Craig Skeels, a Certified Financial Planner and managing director of Apex Wealth Management Group in Oxnard, Calif.
"The trade-off that people have to realize is once they do retire and start withdrawing money from these plans, it's subject to income tax. And one of our concerns with the current environment is that tax rates, unfortunately, are probably going up in the future."
Skeels says you can buffer the negative tax consequences of 401(k) accounts by balancing them with tax-free investments like Roth IRA accounts.
With Roths, you pay taxes on the front end and withdraw your money and any gains tax-free -- an advantage if taxes go up in the future as many experts predict. And in 2009, if you're 50 or older, you can invest $6,000 (instead of $5,000 for the younger cohort) in either a traditional or a Roth IRA -- or a combination of the two, as long as total contributions don't exceed the $6,000 limit.
Put off collecting Social Security
Social Security benefits are based on your lifetime earnings, using a formula that factors in the 35 years in which you earned the most money.
If you're making a good salary and can keep working longer, it would likely be to your advantage to wait before collecting benefits because higher lifetime earnings may result in higher benefits when you retire. Also, the longer you wait to collect, the larger the payout.
You can start receiving Social Security benefits as young as age 62. Or you could wait until full retirement age, which depending on your year of birth, ranges from age 65 to 67. If you give in to immediate gratification and start collecting at age 62, your benefits will be reduced by 20 to 30 percent than if you wait until full retirement age, depending on your year of birth.
If you wait until age 70, your check could be nearly twice what it would be at age 62. But since you won't be getting a bigger check after age 70, it doesn't pay to delay beyond then. Social Security's Web site offers a plethora of calculators, including a quick calculator that enables you to do a five-minute analysis.
Social Security rules can be confusing so you may have to visit a regional office for specific advice.
"In order to really understand how to maximize Social Security you have to go to them," Jason says.
"Do a little work online upfront first to get a feel for what the answer is and then make an appointment and go in."
Downsize in retirement
Downsizing in retirement is no longer for folks on the fringes. It's becoming the new chic.
Seventy percent of people aged 50 to 59 who intend to move for retirement will do so because they are looking for more affordable housing, according to a 2005 Harris Interactive study on baby boomers.
"I've had people come in to consult with me and it turns out that their home is really too expensive to maintain throughout retirement. But they have emotional attachments, so they've got to make choices on what's more important," Skeels says.
If parting with the family home brings too much sorrow, there are other ways to downsize in retirement, including cutting spending, taking cheaper vacations and investing in fuel-efficient cars.
Again, downsizing effectively requires having a good grasp of your income and spending needs.
You may not have to downsize if you have enough saved to carry you through retirement. But if you don't, you'll need to make some adjustments.
"Let's say $50,000 is all you've got and you need to live on $10,000 per year. You know you've got a problem," Jason says. "You know you have to either lower your expenses or you have to increase the retirement fund."
Strive for good health
By eating healthy and exercising, you can cut down on out-of-pocket medical expenses substantially.
Retired elderly couples will need about $250,000 in savings to pay for basic medical care over the rest of their lifetimes, according to the National Coalition on Health Care.
For the 77 million baby boomers expected to retire over the next few years, that's an enormous amount of money to have to set aside just for that purpose, especially given the lackluster returns on 401(k)-type investments lately.
The good news is that many of the most common conditions, including cardiovascular disease, diabetes and orthopedic ailments, are often preventable or manageable with proper diet and exercise.
In the end, a gym membership may provide a much greater return on your investment if it keeps you healthy and out of the hospital.