9 retirement resolutions for 2009
CHICAGO — Exercise more, stop smoking, lose weight — all are excellent ideas for 2009 for those who need to prod themselves in those areas.
But instead of making the traditional New Year's effort to shed 15 pounds, usually in vain, how about aiming to trim your spending by 15 percent?
It's a worthy goal for anyone, but perhaps particularly for those nearing retirement age. With fewer years to let their investments recover from the biggest stock-market decline in decades, more immediate steps may be necessary to help keep finances in line.
"The money saved can be used to pay off debt and increase retirement savings," said Mitch Franklin, assistant professor of accounting at Syracuse University and an advocate for cutting back by 15 percent.
Here are nine financial resolutions for '09 with extra relevance for retirement planning, as recommended by a variety of personal finance experts:
This is a good time to get a handle on your expenses and determine what can be reduced or eliminated.
Larry Reno, 62, didn't wait for New Year's to take the plunge. Startled into action by the market's plunge, the retired civil servant from Fayetteville, Ga., has slashed household spending for him and his wife Cindy by 10 to 15 percent since mid-September.
The Renos achieved it without taking a machete to their spending budget. They switched to a discount store for their grocery shopping, consolidated errands into a single trip, ate out less often, and signed up to be "secret shoppers," or mystery shoppers — getting paid to evaluate retailers. Instead of spending over $100 to replace Larry's old dress shoes, he got them resoled for $37.
Reno says the spending reductions provide flexibility to make sure money is available when truly needed.
"It makes me feel good when I know that I'm saving a little bit of money and I won't have to cut back on money for other things," he said.
"People should resolve to stay calm and not make any hasty decisions," said Tahira Hira, a professor of personal finance and consumer economics at Iowa State University.
Putting blinders on and refusing to open financial statements probably isn't the best way to achieve that calm, however. That might mean missed opportunities to make a sound decision about allocations or investments. Nor is pulling back on all investments indefinitely, especially when it comes to 401(k) or other retirement plans.
The market will eventually bounce back, and you have to stay invested to benefit. Investments in cash are for the short term and ultimately lose ground to inflation.
"History has shown that discipline is often rewarded," said John Curry, head of individual retirement services at New York-based AllianceBernstein Investments.
He noted that in the first year after the bottom of the tech bubble, the market was up 25 percent.
This may not be possible for those who are extremely stretched, but it's an excellent way to supplement funds depleted by the stock market's decline.
"If we are not maximizing our retirement contributions, we are leaving a lot off the table — (missing out on) tax savings and in many cases employer contributions," said Hira.
After eliminating your card debt, use only one card and pay off the balance monthly. Lingering credit card balances will only continue to chip away at your potential retirement income.
Rick Kahler, a fee-only financial planner in Rapid City, S.D., advocates being even tougher on yourself and cutting up all cards: "If a person is a chronic overspender and is unwilling to give up all their cards, saying, 'I'll just keep one for emergencies,' it doesn't work any better than an alcoholic giving up everything in their liquor cabinet except the bottle of Jack Daniels, just in case friends come over."
Those in or near retirement may need to tap an emergency fund to avoid drawing down their retirement savings earlier than planned in a distressed market.
Certified financial planner R. Gene Stout, director of the financial planning program at Central Michigan University, says emergency funds in the "red zone" near the start of retirement — the last five years before retirement and the first five years of retirement — should be large enough to last at least a year. This strategy avoids the need to liquidate a retirement portfolio still heavy on equities in a distressed market, he says, and provides more years of portfolio growth later in retirement. "The probability of not running out of money in retirement is dramatically improved."
Check to see if you should rebalance your portfolio to make sure your asset allocation is in line with your investment goals. If you're a traditional buy-and-hold investor, the percentage of stocks in your portfolio will be at a low at the market bottom, leaving you poorly positioned to benefit from a recovery.
Bill Reichenstein, a finance professor at Baylor University, advises keeping stocks at close to a set percentage of your portfolio that reflects your risk tolerance through thick and thin; for example, 60 percent stocks and 40 percent bonds: "A fixed-weight strategy helps you overcome inertia and forces you to buy stocks after bear markets and sell stocks after bull markets."
Financial advisers have traditionally counseled spending no more than 4 percent of your savings in the first year of retirement, then in subsequent years increasing the dollar amount of that initial withdrawal by the rate of inflation. This strategy is deemed to give a retirement portfolio a very high probability of lasting for a 30-year retirement.
The so-called 4 percent withdrawal rule is only a guideline, however. When determining an appropriate withdrawal rate you'll want to factor in your age and health, recognizing that a spike in inflation or investment losses can significantly affect the income generated by your retirement accounts.
David Hefty, a certified financial planner in Auburn, Ind., says retirees should spend no more than 5 percent of their Dec. 31, 2008, balance during 2009 — or 4 percent, even better.
Make sure your will is updated and that the correct beneficiaries are named on all documents, including insurance policies, IRAs and pensions. If you don't have a will, make an appointment with an attorney.
"This may not sound like retirement advice, but it is: No will, or a badly drawn will, can destroy your spouse's retirement," said Michael Kresh, a certified financial planner and president of M.D. Kresh Financial Services Inc. in Islandia, N.Y. "And you'd be amazed at how many ex-spouses and former best friends show up as beneficiaries."