Retirement planning can be a complex process. Here is some information to help you make retirement plans from the Washington-based American savings Education Council (ASEC):
According to the 2000 Retirement Confidence Survey, 54 percent of American workers have done a retirement savings need analysis. Research shows that people who do a retirement calculation have a higher amount of retirement savings than those who do not. A good resource for retirement planning is the Ballpark Estimate worksheet on the ASEC Web site www.asec.org.
Average life expectancy is increasing and needs to be factored into retirement plans. While 25% of Americans don't live to age 65, those that do stand a good chance of living two more decades. Half of all men and women will live to ages 81 and 86, respectively.
A major concern of retirees is not outliving their money. One study found that retirees with a 3% withdrawal rate would not spend all of their money during their lifetime. However, if the withdrawal rate increases to 4% or 5%, there is a high probability of outliving your money unless you have a well-diversified portfolio.
Successful retirement investing requires portfolio diversification and a long-term perspective. One way to do this is to avoid market timing and make regular deposits at regular intervals (e.g., $100 every month), a strategy called dollar-cost-averaging.
Stock prices have gotten more volatile in recent years, necessitating increased portfolio diversification to compensate. The good news is that employer plans increasingly include more investment options: an average of 5 to 7 in small company 401(k) plans and 14 to 35 for large companies. The bad news is that almost 40% of workers choose just one or two options, often low-yield money market funds and guaranteed investment contracts.
"You have to be in to win." Just a few good days in the market can make a huge difference in an investor's return. If an investor missed the top 10 trading days of 1998, 1999, and 2000 (i.e., the 30 best trading days over these three years), their return would have been minus (-) 41.7%. However, if they stayed fully invested over this time, their return would have been 41.4%, a gap of more than 80%. The fundamental rules of successful investing have not changed over time: balance risk and reward, diversify, and invest for the long term.
Many people say, "I can always go back to work" if they run short of money in retirement. Research shows, however, that 40% of workers retire earlier than planned, often due to a health problem or disability. Most people rely more on Social Security after age 80, than at earlier ages because other income sources are not indexed for inflation and because post-retirement employment often ends.
Retirees should divide their assets over specific time periods. At least five years of expenses should be placed in liquid products (e.g., money market fund) with no principal risk. The next 6 to 10 years can be placed in short-term fixed income securities or balanced mutual funds. Money that will not be spent for 11 to 15 years (or longer) should be placed in stocks or growth mutual funds to hedge inflation.
The decision to take Social Security at age 62 or 65 depends on many factors including one's feelings about work and health status. Workers should be aware that their decision not only affects them, but also their spouse, and make provisions for an adequate income for both.