A Final Word to THose Nearing Retirement

Posted: May 07, 2009 12:01 AM
A Final Word to THose Nearing Retirement

It has been several years since I first starting bringing you The Truth About Money. During that time, I've provided financial advice during booms and busts, and answered your questions while steering you away from those who don't have your best interests at heart.

With the market losses of the past few months, it's an especially scary time for retirees and those planning to retire within a few years. If that's you, here's vital information -- but be forewarned: You might not like what I have to say.

For retirees who are already withdrawing from their investment accounts: You need to reduce your withdrawals as much as possible. Ideally, you should withdraw no more than 4 percent from your portfolio annually. And I'm referring to 4 percent of the current value, not 4 percent of the value last year before the market tanked. If you are withdrawing more than 4 percent, you risk outliving your money.

If you're going to withdraw less money, you must reduce your spending. In addition to the usual measures, consider refinancing your mortgage -- your pension, Social Security and investment income could help you qualify for a new one. Also examine your insurance policies; raising your deductibles could save you quite a bit.

If you've cut costs and you're still coming up short, then you need to increase your income. That means you should get a job. It doesn't have to be the 40-hour-a-week job you had before you retired. Even a part-time job makes a difference.

Meanwhile, build up your cash reserves. If you have 12 months or more of spending in cash reserves, you won't have to dip into your investments when account values are low. If you're not sure whether you should sell some of your investments to build up your cash reserves, consult a financial planner. Every case is different.

Now let's talk about those who aren't yet withdrawing from their investment accounts, but plan to within the next few years. First, you need to determine when you will begin withdrawals. Between now and then, you must continuously add money to your investments. The more you stockpile, the better off you will be when you start withdrawals.

Also, consider delaying your retirement for a year or two. Delaying for one year can make your money last an additional four to six years in retirement! That's because working one extra year lets you add one year of contributions to your retirement plan at work, producing one extra year of employer match and one extra year of investment growth. And, you've reduced -- by one year -- your retirement life expectancy, meaning the money doesn't have to last as long.

The message here is simple: Our world is now very different from the one that existed just a year ago. We must adjust our thinking accordingly and recognize that our decisions and behaviors are as important to our financial security as the market.

As this is my final column, let me say that it has been a privilege to serve you in this forum. I invite you to learn more about dealing with today's environment by watching my new PBS television special "Rescue Your Retirement" (check local listings) and read my new book "Rescue Your Money." You can get my latest information at RicEdelman.com -- sign up for my biweekly e-mail bulletin or check out my monthly newsletter, "Inside Personal Finance."