If retirement is planned within the next few years, the market downturn starting in late 2007 has significantly reduced many retirement nest eggs. While the original retirement plans may still be possible, changes are likely needed given investment losses. Options to consider include boosting retirement contributions, delaying retirement to allow more time for savings to accumulate, reducing retirement expenses, and managing assets in a tax-efficient manner. A financial advisor can help develop strategies to work towards retirement goals with the current financial realities in mind.
1. Retirement realities If retirement is in your plans during the next two-to-three years, it is clear that the dramatic market downturn that started in late 2007 could not have come at a worse time. Like many in this situation, you may have found that your retirement nest egg is worth less than it once was, maybe a lot less. Can you still salvage your original plans for retirement? It is possible, but it may take a bit more work to determine how you can make it happen. Some changes to your initial retirement strategy may be in order to recover some of the losses in your retirement savings. One lesson of todayโs market environment is that the closer you get to your dreams/goals (whether for retirement, college or any other major goal) it may be wise to reduce the portion of your portfolio invested in the stock market. Todayโs reality may be reduced retirement savings compared to what you might have expected a few years ago. You also may want to consider other steps that will allow you to maintain your plans for retirement, possibly with some minor modifications. Consider the following options, or combine some of the strategies together. Boost your ongoing retirement plan contributions One solution to combat low investment returns is to start saving more money. For example, if you were investing $250 per month in an IRA and at one time estimated you could earn 10 percent per year, you might consider that to be an unrealistic return expectation in todayโs environment. If you adjust your return assumption to a more attainable 7 percent per year, you would need to make monthly contributions of $300 to accumulate a comparable amount of savings after ten years. If your expectations for investment returns are more conservative given recent market performance, making larger contributions can help overcome some of the difference. Revisit the timing of your retirement One reality for many individuals is that your retirement may need to be delayed and you may need to work longer. This can be beneficial by allowing you to continue earning income and accumulate additional retirement savings before you actually retire. Alternatively, you can consider taking on part-time employment or consulting work to help supplement your income to decrease the amount of money you need from your retirement savings. Reconsider the cost of your retirement What were your plans for retirement? Did they involve significant expenses for a new retirement home or vacations on a regular basis? Did you envision a life of relative luxury in retirement? It might be necessary to scale back your plans if your retirement portfolio has been losing ground in recent years. If you canโt make up your losses by the time you leave the workforce, it is important to revisit your retirement income and what you can afford to withdraw from your savings. Avoid taking too much money out of your savings in the early years of retirement and risking a potential shortfall as you grow older. Some ways to cut your monthly expenses include: refinancing your mortgage (if you have not paid off the loan on a house), downsizing your home and cutting back on extravagances such as high priced vacations or daily lattes at Starbucks. Become a tax-efficient investor and spender Managing your retirement assets in a tax-efficient way can make a significant difference. For example, many retirees forget that withdrawals from their workplace retirement savings are almost always taxable, at their ordinary income tax rate. But if you have dollars saved in a taxable account (investments that are not in a tax-deferred savings vehicle), those should be tapped first when you retire. There is likely to be little or no tax on withdrawals. At the same time, dollars in tax-advantaged accounts (like IRAs or your workplace plan) can continue to grow in value with no current tax impact. This should help you stretch the value of your nest egg, especially when nest eggs are decreasing in size. A financial planner can help you work toward your retirement goals. Daniel J. Lensing, CPRCยฎ Financial Advisor Business Financial Advisor Ameriprise Finanical Services, inc. 14755 No. Outer 40, Suite 500 Chesterfield, MO 63017 Tel: 636-534-2097 This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial. Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC. ยฉ 2009 Ameriprise Financial, Inc. All rights reserved. File # 84848 6/09
