A tactical approach to retirement (part 2)

Posted by on February 9, 2011 @ 8:43 am in retirement

In my January 25 post, I looked at two tactical retirement issues: improving savings rates and evaluating portfolio risk levels. In this post, I’ll wrap up with three additional ideas.

3. Deferring retirement. For anyone actually planning to retire in the coming year or so, I suggest one simple strategy: Defer the date by at least one year. And if you’re considering retiring at age 62 because that’s when Social Security becomes available, consider a different strategy: Do everything you can to wait at least three or four more years, until age 65 or 66, when “normal” benefits kick in.

It comes down to simple math. Delaying retirement means more—more savings, the possibility of more investment returns, and the chance for greater retirement wealth. Many investors can recite the lesson of starting early in their savings plan and wax at length about the “benefits of compounding.” We sometimes forget that starting to withdraw from one’s savings too early is a kind of “reverse compounding” that accelerates the liquidation of assets. Waiting to retire can put off the corrosive effects of reverse compounding.

Deferring retirement doesn’t simply mean continuing to work full-time at the same job. It’s possible to “phase” or “downshift” into retirement. In other words, rather than exit the workforce completely, you reduce the number of hours you work. Hence, you’re taking a “phased” approach to leaving your job or “downshifting” from full-time to part-time. Some companies and jobs make this easier; in other cases, you may have to end your current full-time job and shift to some other line of work and a new employer.

4. Calculating the number. For those of you age 50 or older who aren’t yet retired, certainly one of your critical tasks for the coming year is to do a retirement-needs calculation. Using any of the calculators or worksheets available online (such as vanguard.com’s Retirement expenses worksheet and Retirement income worksheet), figure out whether you’re “on track” for the retirement you envision.

National surveys report that only about half of working-age Americans have tried to calculate how much money they’ll need for retirement.* (And my guess is that it’s the same people year after year.) So if you haven’t yet done so, it’s time to figure out your “number” and whether you’re on track to reach it.

5. Financial inventory. Finally, all of my suggestions in this and the prior blog are not possible without a decent financial inventory, which consists of two pages of information:

• A savings plan—a list of the amounts you saved last year and plan to save in 2011, with the totals divided by your income.

• Your current balance sheet, listing all assets for retirement divvied up by whether they’re invested in stocks, bonds, cash equivalents (money market funds, CDs, etc.), or other assets.

If you’re a more advanced saver/investor, you might also include a five-year cash-flow forecast and a detailed asset allocation plan. Either way, what’s important is that you get started.

* Employee Benefit Research Institute, 2010 Retirement Confidence Survey.

Note: All investments are subject to risks.

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