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Getting Back on Track: How to Salvage Retirement Plans

Working a few years longer, saving more money and spending less later could go a long way toward offsetting losses.


So much for retiring early.

David Bakeman, 61, had planned to begin a leisurely retirement at the end of the year. But a few months back, he invested a significant portion of his cash reserves in the stock market--just in time to participate in the biggest market meltdown in more than a decade.

"It doesn't look like I'm going to retire at all, ever," Bakeman said melodramatically. "My comfort level went out the window."

In reality, Bakeman probably will delay his retirement just three years or so, until he's 65. By then, he hopes to have repaired enough of the damage from his rash market foray that he can enjoy his golden years in comfort.

Count Bakeman among the millions of Americans being forced to adjust their retirement plans to reflect today's diminished investment returns. Investors who thought the heady stock market gains of the late 1990s were the norm are relearning the old lesson that stock prices can go down as well as up.

That realization is particularly painful for investors such as Bakeman who are nearing the end of their working years and thought the soaring market would allow them to retire in comfort--or even take off a few years early.

The bad news is that there's no guarantee the stock market is near bottom. And even when it finally turns around, a repeat of the 20%-to-30% annual returns of the late '90s isn't likely, many experts say.

How do you cope if retirement is approaching? There are three main strategies you can follow to get your plans back on track. For many people, the solution will be some combination of these:

* Delay the Date: Of all the options, delaying your retirement for a few years is by far the most powerful.

"It works from two ends," said Katharine A. McGee, a fee-only financial planner in Davenport, Iowa. "You [can] continue to add to your 401(k), IRA and other personal savings, but you are also shortening the amount of time that you need to pull money out of the pot."

After all, the idea of retirement savings is to have enough money to supplement other post-employment income, such as Social Security and a workplace pension, if you have one. If you figure you'll live to 90, and you retire at 60, you have to plan on financing 30 years of retirement costs. Quit work when you're 65, and the time frame shrinks to 25 years.

As a bonus, your money has more time to generate investment returns while you keep working.

Consider Max, who retires at 60 with a $250,000 nest egg. Assuming the money earns a 5% annual return, Max can withdraw $1,342 a month and not run out of savings until his 90th birthday.

But if he delays retirement until 65, the $250,000 nest egg will have become $320,839. Now, Max will draw monthly payments for 25 years, again assuming a 90-year life span. The monthly withdrawal can be $1,875 a month, or nearly 40% more.

What's more, if Max saved an additional $1,000 a month while working from age 60 to 65, his savings would have grown to $388,845 and his monthly withdrawal rate then could be $2,273--69% more than if he'd quit working at 60.

Of course, it's easy to argue for working longer. For many people, physical and health issues can make the choice much tougher. And in a slowing economy, job security and availability become bigger issues.

Still, if you can delay retirement, there are other good financial reasons to do so: Working longer affects your Social Security benefits as well as payments from workplace defined-benefit pension plans.

If you start receiving Social Security benefits at age 62 instead of 65, your monthly payment is reduced by more than 20% from your so-called primary insurance amount. For example, retiring three years early reduces a full benefit of $1,500 a month to $1,174.50, said Social Security spokeswoman Leslie Walker.

Even that understates the effect of early retirement, because wages tend to rise with inflation and experience--and Social Security payments are based on a worker's 35 highest-earning years. Thus, the average primary insurance amount rises several percentage points between ages 62 and 65, Walker noted.

The same holds true for defined-benefit pensions--the type that pay a set monthly stipend for life. Although such plans are less popular now, about 40 million American workers still are covered by them. And the plans generally pay higher benefits to workers with more years of service.

* Save More Now: Can't stand the thought of working until you're 65? Try saving more during your last years in the labor force.

This is often more feasible than it sounds. By one's late 50s and early 60s, other financial obligations--such as sending kids to college and paying for weddings--are probably in the past, says Ellen Hoffman, author of "The Retirement Catch-Up Guide."

This strategy helps in two ways: It increases the amount of money you'll have to retire on, and it conditions you to live more frugally, also a useful skill in retirement.

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