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Layoffs, benefit cuts and disappearing 401(k) balances lashed workers in 2008. Yet everyone still has to provide for retirement. Here are 10 ways you can resolve to get your retirement plan back on track this year.
Delay retirement. The best way to recoup market losses is to work longer. That gives your retirement accounts time to recover before you begin to draw them down.
"Even before the financial crisis, people should have been considering working longer because they are going to live longer," says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of "Working Longer: The Solution to the Retirement Income Challenge." "After the financial crisis, you need to work three to five years longer."
A recent AARP survey found that 65% of workers ages 45 and over are considering delaying retirement and working longer unless the economy improves significantly. Continuing to work, if it's possible, allows you to tuck more cash into your accounts, lets your account accrue returns and work its way up to where it was a year ago, and shortens the length of the retirement you will have to finance.
How long will you have to work to recoup market losses? For employees who have worked for 20 to 29 years and leave their 401(k) invested in a mix of stocks and bonds, it will take, on average, one year and nine months of work to resuscitate their 401(k) accounts, the Employee Benefit Research Institute calculates. If you pull your nest egg out of stocks, that bumps up the recovery time to two years and one month in the working world, EBRI says.
- Calculator: How much do you need to save for retirement?
Put off claiming Social Security. You can sign up for Social Security beginning at 62, and nearly half of 61-year-olds say they plan to, according to a recent Fidelity Investments survey. But waiting until 70 to claim your due will produce bigger payouts if you're in good health and expect to live a long time.
Your Social Security benefit increases by 7% until your full retirement age and by 8% afterward, says Laurence Kotlikoff, a Boston University economics professor and co-author of "Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard -- Today and When You Retire." That's a far better return than most people are getting in the stock market right now.
"You can potentially spend more now because you will have this higher income coming in when you are older," Kotlikoff says. (If you do take Social Security early, there's a way to get a do-over.)
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Get your 401(k) match. The most common 401(k) match is 50 cents per dollar up to the first 6% of pay. If you make $50,000 a year and manage to tuck away $3,000, you can get an extra $1,500 added to your nest egg tax free (until retirement). But some financially struggling companies like General Motors, Kodak and Frontier Airlines suspended their 401(k) matches last year. Plus, 4% of companies plan to eliminate the match this year, according to a Watson Wyatt survey of 248 companies taken back in October. So it's particularly important to get the match if you can.
Avoid early withdrawals. As unemployment rises and health care costs skyrocket, it's more tempting than ever to borrow from your retirement savings to make ends meet. About 18% of Americans have prematurely made withdrawals from their retirement accounts because of the recession, according to a Bank of America survey. The top reasons were to pay off credit card debt (26%), pay down a mortgage (22%) and cope with job loss (22%).
"Do all that you can to cut expenses and find other sources of cash before breaking the lock on your retirement piggy bank," advises Beth Almeida, executive director of the National Institute on Retirement Security.
Catching up with those early withdrawals will be difficult. "When the money is out of your retirement account, you rob yourself of compounded investment returns. And if you don't pay the loan back, you'll have to pay Uncle Sam taxes on the loan and a whopping 10% penalty," Almeida says. Plus, if the worst-case scenario should strike and you're forced to file for bankruptcy, your retirement nest egg in a pension, 401(k) or IRA is protected from creditors, while most other assets are not.
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Rethinking retirement savingThe bear market and economic slump are changing how people are saving, say Judith Rosenthal of Ameriprise Financial and Ed Slott of IRAhelp.com.
Scrutinize 401(k) fees. All sorts of fees -- including administrative, transaction and investment management charges -- can whittle away your nest egg over time. If a worker invests $5,000 annually in a 401(k) over a 35-year period and pays 1.5% of the account balance in fees (using constant 2008 dollars and assuming an after-inflation return of 4.9% annually), he will have $345,000 at retirement. If the same worker can cut expenses to 0.5% of the account balance, his savings will be $423,000 at retirement -- $78,000 more. But keeping costs low can be difficult because not all 401(k) fees are fully disclosed. (See "Is your 401(k) any good?") Many financial advisers think a reasonable rate to aim for is an expense ratio of 1% or less. Low-cost index funds are typically a good way to invest in stocks at rock-bottom prices.
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