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How To Patch Your Retirement Nest Egg If It Needs Help

By: Investor's Business Daily
Posted: 3/22/2013 6:22:00 PM
Referenced Stocks:

Special Report: Race To Retirement

Six years ago Ann Marie Foley was still licking her wounds from the market's plunge after the tech bubble burst in 2000.

Her and husband Eric's retirement accounts had tumbled 40%.

With both in their mid-40s, the San Francisco-area couple found it crucial to repair their nest eggs.

They used information gleaned from their brokerage firm, friends who are advisers and financial media to make several key changes.

Ann Marie boosted the size of her 401(k) contributions. She introduced bonds to her portfolio to reduce stock-market risk.

They replaced single-country exchange traded funds in Eric's portfolio with broader, global ETFs to reduce country-specific risk.

They also backed son Ben's decision to attend junior college. Courses cost less and take only two years, and he can live at home. "He's independent and wants to pay for college on his own," said Ann Marie, a corporate financial compliance officer, who does her personal investing through Scottrade. "But Eric and I liked the financial implications (of his decision) for our retirement."

When the stock market tanked again in 2008-09, the Foleys took another hit. But they were glad they'd taken steps to partially insulate their portfolio from the full shock.

Their nest egg is still about 5% short of its peak despite the market's rally since then.

The Foleys aren't alone. Almost anyone who's in retirement, approaching it or planning for it has to figure out what steps to take to make up for a lot of lost time.

Steps include scaling back your retirement spending, taking a home equity loan, finding cheaper colleges for your kids and fine-tuning your investments in stocks and other assets -- which may mean investing more aggressively. "Not all steps are suitable for everyone. But you may be able to take more than one of them," said Judith Ward, a T. Rowe Price financial planner.

"But if your risk tolerance has not changed, be careful about ramping up your portfolio risk," said Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research.

The main choices:

• Save more. "It's never too late," Spiegelman said.

Socking away more money helps -- especially in a rising market. Suppose you are 50 years old and plan to retire at 66. You earn $80,000 a year. You've been investing $500 a month for retirement.

Following a moderate-growth investment strategy, your nest egg already has $250,000 in it. Once you retire, you plan to cut spending so you'll only need 70% of your pre-retirement income. And you want your nest egg to last until you reach 90 years of age.

By age 66 your retirement balance would more than double to about $512,000, according to E-Trade's calculator. The trouble : You'll run out of money by age 87.

In this situation, you'll need about $651,000. You'll have to double your contributions to $1,000 a month to accomplish your goals.

What if your retirement-balance shortfall is smaller? "Increasing your contribution by just a percentage point or two can make a difference," Spiegelman said.

• Delay retirement. This has multiple benefits. First, the longer you work, the longer you can keep contributing to retirement plans, building your cash cache bigger. At the same time, you get upfront tax deductions for contributions to accounts that provide such tax breaks.

Look at our 50-year-old saver again. If he retires at age 66, his nest egg is $121,000 short. He runs out of money by age 87.

But by delaying retirement just one year, he cuts that shortfall in half. If he waits until age 68, his nest egg will last until he is 92. If he waits until 69, his retirement kitty is big enough to support him until he's 97.

The second advantage: The longer you delay retirement, the fewer years you'll need to rely on your nest egg. "You can afford to have a slightly smaller nest egg," Spiegelman said.

Third, putting off retirement likely means postponing the start of Social Security benefits.

If you were born in 1943 to 1954, the age at which you become eligible for full-retirement benefits is 66. For every year beyond that until age 70 that you wait to begin, your benefits increase 8%.

The difference between early benefits at age 62 and those at 70? For a husband and wife who live until 88 and 92 respectively, cumulative lost benefits could total well over $100,000.

And benefits can rise more if by working you boost the lifetime earnings your benefits are based on.

• Downsize the house. A smaller home -- perhaps in a new, warmer locale -- can mean trimming or ending monthly mortgage payments. And it can reduce utility bills.

But check the cost of retirement housing, and make sure you would save money on an ongoing basis after any new condo fees and taxes.

• Tap into your home's equity. You may be able to raise cash by taking on a home equity loan at today's low interest rates. But make sure you will be able to afford monthly payments.

Reverse mortgages pose a similar risk. Be sure you'll be able to afford property taxes, insurance and upkeep after you've used up the lump sum payout.

Remember that the loan balance continues to rise and erode any equity you still have. A reverse mortgage is also shaky if you plan to leave your home to heirs.

• Fine-tune your plan. The starting point for all of your strategizing is to make a budget to see if your retirement income will exceed your spending plans.

Nearly every big fund family and online brokerage offers Web tools for budgeting and picking investments or at least asset classes for reaching your goals.

If you don't want to form your own strategy, get professional advice. You can find advisers who charge by the hour, by the plan, based on your assets or on a commission basis.

Your retirement plan may offer advice for free. Some fund families, brokerages and fund supermarkets offer advisers, waiving or slashing fees in some circumstances.