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With the market so volatile, your chance at a comfortable retirement may seem dicey no matter what you do.
According to a recent Vanguard study, 401(k) participants as a group changed their allocations only slightly during the 2008 bear market. Now, it's time for boomers to get constructive. The retirement you want may be more attainable than you think.
Although you might have to save a bigger chunk of your income than you do right now, you also have resources beyond your 401(k), IRA and Social Security. Your home, your ability to work a few years longer, a pension if you have one---all these can have a big impact on your future income. Once you see how much they are worth, you'll be able to construct a realistic plan that doesn't force you to take huge gambles.
You need to know what it takes to build up a sufficient nest egg with a conservative portfolio so that you can sleep at night even during volatile markets like this one.
Putting the long-term risks of stocks and bonds into perspective is a good place to start.
When you're saving for retirement, you have to strike a tricky balance. If you hold a lot of lower-risk bonds, your money won't grow very fast. You have to let your savings do all the heavy lifting, which can mean accepting a diminished standard of living if you didn't get a really early start. Even then, you may not have eliminated all the risk.
Against that backdrop, "it's very tempting to rely on stock returns as the silver bullet for your retirement plans," says Boston University economics professor Laurence Kotlikoff. It's also dangerous, he adds.
Since 1926, stocks have returned average gains of 9.6% a year, while corporate bonds have returned average gains of 6%, according to Ibbotson Associates. But as we've learned the hard way recently, those smooth averages hide a lot of wild swings over shorter periods. And if a deep downswing occurs when you are less than 10 or even 15 years from retirement, the consequences can be severe if you have a lot of stocks. Suddenly, saving more in order to be a bit more conservative looks attractive. It increases your odds of avoiding a big loss.
Compared with stocks, bonds may be low-risk, but they're not no-risk. Bond prices can fall sharply when interest rates rise. Rates are low now, but there are plenty of concerns that they will rise significantly in coming years. "Stick with bonds that have maturities of no more than three years," says Chris Cordaro, an advisor in Morristwon, NJ. You also need to protect yourself against bond losses caused by defaults, so look at bond funds that concentrate primarily on high-quality issues, such as U.S. Treasuries, high-grade corporate bonds and high-quality munis.
If your budget is tight today and you just can't find another dime to set aside, you are not alone. But you should resist the urge to become really aggressive to make up for what you've lost. You probably have some other arrows in your quiver. Just working a bit longer, even if it's part-time, can go a long way toward getting you to a comfortable retirement.
You could work a couple of years beyond 65. That helps even if you make less than you did most of your career. The key is to earn enough to cover living expenses without having to dip into your savings or start collecting Social Security. For each year that you delay Social Security, your eventual payment is boosted 8%. And by the time you do retire for good, your nest egg will have grown larger, and you'll have fewer years over which you'll need to spread it. "The combined effect can have an incredibly powerful impact on your retirement lifestyle," says Steve Vernon, an actuary in Oxnard, CA.
Source: MONEY, October 2009
