Retirement fears at the big 4-0

By MP Dunleavey

Editor's note: Columnist M.P. Dunleavey and six other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" in Dunleavey's column on MSN Money and on her blog.

Most people are anxious about saving for retirement, and the Women in Red are no exception. Of course, some are more anxious than others.

For those of us in our 40s (or just down the block), facing retirement within a couple of decades is like having another kind of biological clock go off, and it causes thoughts like these:

• "WHY DIDN'T I START SAVING WHEN I WAS 12?"

• "WILL I RETIRE IN THIS LIFETIME?"

• "CAN THIS 401(K) PLAN BE SAVED?"

Actually, it's better that the panic kicks in now, while there's still time to take action.

Given that our projected retirement dates start at 70 ("Or maybe 72," says Tricia, who still has two more kids to put through college), even the older members have a good three decades to save for that quiet hammock somewhere.

Needless to say, at the rate some of us are going, it could be a hammock and not much more. So we're going to get a grip now, with the sort of straight-no-chaser analysis of each woman's retirement strategy that the WIR are known for.

• How much has each woman saved?

• What are her current contributions?

• Where are her funds invested?

• How can our investment strategies be improved?

We'll start with Beth and Tricia, both of whom turn 40 in a few months, and there will be two more articles to take care of the rest of the WIR.

Beth: Investing with less stress

Before she was laid off last June from a job with the U.S. Bureau of Land Management in Eugene, Ore., Beth, 39, had made good progress in saving for retirement. By the time her husband Scott, an architect, qualified for his company's 401(k) plan last year, Beth had already saved about $59,000 in the government's Thrift Savings Plan. Their total portfolio is about $70,000. Here's how their nest egg looked:

Beth's and Scott's retirement nest egg
Beth's Government Thrift Plan portfolio
70% in C Fund: Large-cap index fund	$41,300.00
10% in G Fund: Government securities bond fund	$5,900.00
10% in S Fund: Small-cap index fund	$5,900.00
10% in I Fund: International fund	$5,900.00
Other retirement funds
Beth's Roth IRA	$1,680.00
Scott's Roth IRA	$2,961.00
Scott's 401(k) plan	$6,665.00

But they are not contributing to any retirement plans just now while Beth works on becoming a licensed massage therapist. She hopes to work in a local hospital when she graduates.

They also have some debt to contend with, including $8,000 in credit-card debt. But they do have $80,000 in equity in their home.

At first, Beth didn't worry about rolling over her savings because she hoped to land another government job. When that didn't materialize -- and after Beth decided in January to become a licensed massage therapist -- the questions about what to do about the couple's retirement savings became more urgent.

• Beth knew she couldn't afford to make any contributions while she was a student in the year-long program.

• She was also tired of fretting about her 401(k), her husband's 401(k) and their two Roth IRAs -- all in different institutions.

• She hoped to find a way to consolidate these accounts without compromising growth -- especially while they aren't contributing -- and make her life easier as family CFO.

Working In retirement

Seattle financial advisor Bill Schultheis, author of "The Coffeehouse Investor," turned out to be a good fit for Beth and her husband because his philosophy is high on the value of part-time work in retirement, and because he's pragmatic about distribution rates -- what he calls "your burn rate."

Not that long ago, the ideal was to save enough so you could live on 70% to 80% of your current income, by drawing down about 4% of the value of your portfolio each year.

(If you imagine a conservative growth rate of 7%, drawing down only 4% per year means that you don't touch your principal -- leaving that as a cushion for emergencies or as an inheritance for your kids.)

But like many planners today, Schultheis believes people should plan to live on 100% of their current income. While some expenses may go down in retirement (you're not saving for retirement, for one thing), others may rise, including travel, hobbies, visiting family and health care.

Given how little most Americans have saved for their later years -- according to the Center for Retirement Research in Boston, more than one in four employees don't even contribute to their companies' retirement plans -- the majority will need to work.

The expert weighs in

Schultheis is optimistic about Beth and Scott's retirement prospects for three reasons:

• Their three-year-old daughter's college education is likely to be covered by the 529 plan that her grandparents have set up for her.

• Scott plans to keep practicing architecture as he gets older. "He has no intention of 'retiring'," Beth says.

• Beth's new career as a massage therapist is ideal for working full time now and part time in retirement.

To simplify their holdings, Schultheis recommended that Beth roll over her government 401(k) into the Vanguard STAR Fund (VGSTX). He also said the couple should roll both of their Roth IRA accounts into the Vanguard STAR fund.

"The 10-year return is 9.6%, and it's got a mix of about 65% stocks to 35% bonds, which is a good mix for them," he says. Scott doesn't have access to Vanguard funds through his 401(k), so Schultheis had him move his investments into a similar fund available through his job, the John Hancock Lifestyle Growth Fund 1 (JILGX), a large-cap blend fund. As a one-year-old fund, its return history isn't established. But the mix is similar to the Star Fund.

The point, Schultheis says, is that these two funds give the couple a broad exposure to the market, the potential for steady returns -- and low stress. "They could leave their money there for several years and do quite well," he says.

Enough money to live on

Let's say that, starting in two years, after Beth gets her license, their combined income eventually rises to $89,000 a year -- which is what they earned jointly before Beth was laid off. The couple can sock away about $10,200 a year that earns 7% annually. By the time Beth turns 70, they will have built up a nest egg of about $700,000.

With an additional $30,000 in combined Social Security benefits starting at age 70, that nest egg should last them until they turn 100. Assuming they draw down $70,000 a year to live on ($46,000 in expenses, plus taxes), they'll only spend about $100,000 of their principal.

But here's where part-time work can make a huge difference. If Beth and Scott worked part-time just from age 70 to 75, earning $20,000 a year, that raises the value of their portfolio to about $850,000. A cushion like that could allow them to take a trip to Europe each year -- or visit their daughter more often, wherever she's living.

Note that at their current and projected level of savings, Beth and Scott are on track to have in retirement the same standard of living they have now. It's a modest lifestyle, but at least they can relax now and know they have the basics covered.

And there's room to grow if, say, Scott becomes architect to the stars and Beth their masseuse.

Tricia: Working to create consistent returns

Tricia has a three-part retirement picture that will sound familiar to anyone who has changed jobs and ended up with a crazy quilt of accounts.

● Part 1: The 401(k) plan from the old job When Tricia, 39, was laid off from her previous job, she had a 401(k) with about $9,000 in Vanguard mutual funds. Because she was no longer with the company, she could no longer contribute to her 401(k) plan.

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