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Even in the best of times, retirement planning is an inexact science. Right now the challenges are mounting amid sagging real estate prices, a volatile stock market, declining certificate of deposit yields, rising inflation and a soft economy.
Those factors make it harder to estimate how much money you'll need to spend in retirement, and how much you'll have available in savings.
If you're within a decade or so of retirement, now's the time to do some serious planning.
For Jane Dilzer-Scott and Patrick Scott, that has meant a renewed emphasis on saving and investing. The Scottsdale couple try to save as much as they can while also paying down their home mortgage.
"We're accelerating to pay off the home in about three years," she said.
Saving became easier after the last of their three children finished college. They also might move to a smaller home in retirement to pare expenses.
"We'll definitely downsize," said Jane Dilzer-Scott, 60, who indicated she and her husband have no imminent plans to retire. "It might be outside the Phoenix metro area, but it will be in a warm climate."
For others, the soft economy and shaky financial markets have led to a decision to stay in the workforce a bit longer.
"I had been planning to retire at 65," said Bob Moore, a 64-year-old Cave Creek resident who works in interior design and decorating of upscale homes. "Now I'll probably keep working."
He and his wife Jan, a nurse, also are aggressively socking more money into their tax-sheltered retirement plans. Delaying retirement lets them invest more cash in this manner.
"We both enjoy our jobs," she said. "So if we have to work another four or five years, it's no big deal."
Delaying retirement is a critical step for people seeking to shore up their finances. It not only generates income longer but also delays withdrawals.
Also, deferring Social Security income can help because the monthly payments you'd receive in your late 60s or 70 are higher than what you'd get at the first chance to tap into benefits. (All covered workers can start taking benefits at age 62.) This matters for people worried about outliving their income later in life.
As a general rule, Gale Northrop, a Charles Schwab branch manager in Peoria, suggests delaying Social Security benefits if you have a history of longevity in your family - and if you're fairly optimistic about the solvency of the program.
Current retirees' pain
As for people already retired, many have been hurt by the credit crunch and slowing economy. The reason: yields have dropped on CDs and other saving instruments, while inflation keeps rising.
"My income goes down every time I renew a CD," said Jim Wind of Sun City West. "Interest rates have been going the wrong direction for me."
Wind, a former banker and real estate salesman who also drove a school bus part-time before retiring in earnest, blames the mortgage mess and Federal Reserve rate cuts.
"Interest rates should be a lot higher," he said. "Every time they cut rates, they're taking money out of our pockets."
Before retiring, Wind had part of his portfolio in the stock market. But he switched to CDs about five years ago. "I was at the age where I couldn't take a hit," Wind said. "I couldn't handle the volatility."
Investors must weigh a desire for stability against the danger of outliving their assets by staying too conservative.
"It's such an uneasy balance because if your time horizon is short, you can't rely on the stock market coming back quickly," Northrop said. "But most people also need some equity exposure to help them prepare for a long life expectancy."
Volatility = opportunity
For people still several years from retirement, volatility creates opportunities.
Dave Richards, 53, a corporate sales manager at Redburn Tire Co. in Phoenix, doesn't plan to retire for another 15 years or so. In the meantime, he is maximizing his contributions to his firm's 401(k) plan, holding a diversified mix of stock and bond mutual funds.
"At this stage, I can afford to gamble a little more than somebody nearing retirement," said Richards, who feels fairly optimistic about the economy and stock market in the near term.
Jack Prangley, a 55-year-old manager at Redburn, also invests in a diverse mix of assets within the firm's 401(k) plan.
"I try to look at it as a long-term situation," he said.
Prangley also is thinking about buying rental properties in coming months as a retirement-planning strategy.
"Arizona will have some great real estate opportunities in six to 12 months," he said.
Bruce Popadich, a 51-year-old information-technology worker who lives in Glendale, also feels comfortable putting more cash into stocks.
"Anyone looking long-term knows the market is cyclical and will turn around," he said.
He and his wife, Sandee, 46, felt it was time to get serious even though retirement is still years off for them.
"Having goals and a plan are really key," he said. "We're not wealthy. We're working people looking to maintain a comfortable lifestyle."
The Popadiches hired Jacob Gold, a Phoenix certified financial planner, to help them prepare. He has placed them in a diversified portfolio that includes bonds and cash for stability and stocks for growth. They've stayed put with their basic investment allocation despite recent fluctuations.
"Over the last six months, some of the toughest decisions have been not to make any decisions," said Gold, who also works with the Moores and Scotts. "It's really important to stay the course."
401(k) nest egg
For many workers nearing retirement, workplace 401(k) programs represent a nice pot of money. That makes them a tempting place to look for cash as credit conditions tighten.
The issue of whether or not to take a 401(k) loan is one of several key decisions being thrust upon workers as they're forced to assume more control over their retirement plans. Fewer employers offer company-managed pensions, so employees must make more of their own decisions.
The various 401(k)-style retirement plans can be a great way to accumulate wealth. The programs feature tax-sheltered growth and employer-provided matching funds in most cases. They're also convenient, allowing workers to sock away cash through payroll deduction.
The average 401(k) balance is around $58,000, but people nearing retirement tend to have much more. Long-tenured employees in their 60s have $181,000 on average, according to Investment Company Institute statistics as of 2005.
More companies are trying to make their programs better. Many are boosting their education efforts and enrolling workers automatically.
In a survey by Hewitt Associates, 50 percent of employers said they plan to help workers better understand their benefits. Roughly two-thirds plan more 401(k) communication focusing on the long-term benefits of diversification, stock-market exposure and more.
"In an ideal plan, employees are educated and know where they're going," said Alan Norris, a certified financial planner at Independent Financial Group hired to provide advice to the employees at Redburn Tire Co. of Phoenix.
Norris said the company's executives are committed to seeing worker participation in the plan rise. Later this year, they'll unveil automatic 401(k) enrollment, which experts generally welcome as a policy that helps overcome employee inertia over investing.
"I'd like to see all employees participate because it means they're saving money," said Dave Richards, the firm's corporate sales manager.
Historically, investors haven't taken out many loans against 401(k) accounts. Only 19 percent of participants did so in 2005, according to the ICI, and loan amounts tend to be small. Still, Norris and others have noticed an uptick in the number of workers at various firms taking out loans against their accounts lately.
He calls that understandable in a sluggish economy with tighter credit. But he also emphasizzed it's important for workers to pay back their loans and get back into an investing mode.
Thinking about health care
Health care can really alter the dynamics of retirement.
A study by Fidelity Investments estimates a 65-year-old couple retiring in 2008 will need roughly $225,000 to cover both spouses' medical costs over the rest of their lives.
The study assumes the newly retiring couple lacks employer-provided retiree health-care coverage. It also assumes the husband will live another 17 years and the wife, 20 years.
Fidelity says a typical retiring couple can expect medical outlays such as co-payments, co-insurance, deductibles and out-of-pocket prescription drug costs. Fidelity's estimate doesn't include over-the-counter medications, most dental services and long-term care.
"With health-care costs continuing to outpace wage increases and companies trimming retiree health benefits, financing health care has to be central to retirement planning," said Brad Kimler, a Fidelity executive vice president.
"Given current economic conditions, this is especially true for those planning to retire in the next few years or before they qualify for full Social Security or Medicare benefits."
Fidelity suggests starting to save for retiree health costs as soon as possible, using options such as health savings accounts, if offered by your employer. These tax-sheltered accounts couple high-deductible health insurance with an investment plan.
Fidelity also suggests that you create a retirement plan, become a smarter consumer of health services and find out if any employer-sponsored help is available.
Retirement planning is critical to supplement Social Security benefits and pay for some health costs. A 65-year-old person earning $60,000 and retiring this year will need to spend about half of his or her Social Security benefits for health costs over his or her remaining lifespan, according to Fidelity.
