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Too Much Retirement Planning May Be As Bad As Too Little

Suggestions to rebuild the nest egg and secure the future

January 5, 2009

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In the wake of big investment losses many have turned to Plan B to strategize and rebuild their retirement nest egg, according to Consumer Reports latest retirement survey. There is a lot of ground to recover, 51 percent of retired readers and 55 percent of those just short of retirement are facing investment losses of at least 20 percent in the past 12 months.

The Consumer Reports National Research Center surveyed more than 19,000 online subscribers between the ages of 55-75 and found about half have already made strides to generate more cash, including eating out less and cutting back on entertainment. About one-third have cut their credit card use and spent less on groceries and household goods.

“When bad investments happen to good people, they have to work harder to slash debt, cut spending and save more. Switching to Plan B means seizing the reins in every areas of your financial life over which you have control,” said Noreen Perrotta, Consumer Reports Money editor.

The Consumer Reports Retirement Survey also found that consumers who planned ahead were more satisfied with their retirement prospects, even in the current economic climate. Among pre-retirees 90 percent planned ahead by reading books or articles, consulting professionals, using online software, taking courses or conversing with family and friends. The more planning methods used, the more satisfied the respondents were.

However, pre-retirees who had done more planning reported worse losses, on average, than those who hadn’t planned.

Retirement planning strategies encourage investors to diversify beyond safe vehicles such as bonds and CDs. Respondents who had planned were less conservative, in general, than those who didn’t. Before the meltdown, this strategy was much more beneficial according to Consumer Reports’ 2007 Retirement Survey. But it proved punishing during the unusually severe market downturn of recent months.

The 2008 report also found that using financial pros gave planners no edge. Unlike last year’s survey, those who reported using financial planners this year said they were no more satisfied than those who educated themselves. Both groups said they lost money at about the same rate. Respondents who had financial planners had a net worth that was about $230,000 greater than those who didn’t. But CR doesn’t know if they were wealthier to begin with.

Forty-three percent of respondents that did four or more planning activities said they would now delay retirement a year, compared with 28 percent of those who had done nothing. Greater losses might have forced the decision.

Consumer Reports February issue offers a complete guide with 17 moves to help retirees, pre-retirees and younger workers rebuild the nest egg and secure their financial futures in the wake of a down-turn economy. Here are some of the highlights:

Retirees

1. Consider your withdrawal rate. In general, financial planners say an annual withdrawal rate of about 4 percent from your total investments is optimal to ensure the money lasts as long as you do. However, when your assets fall in value, you’ll have to withdraw at a higher rate to have the same income. The alternative is to withdraw and live on less or invest more conservatively, risking that you will run out of money sooner.

2. Pick up extra money by working. For those with the ability, working even part-time can help mitigate a financial burden. Twenty-two percent of CR’s respondents said they’re working part-time, and 22 percent of those who are fully retired said they wish they could work again. Employers might be willing to hire experienced older workers.

3. Don’t abandon moving plans. Your $400,000 home may have lost $100,000 in value, leaving you with less to spend on housing elsewhere. But values are down in many areas, and moving to a lower-cost area might still be worth that trade-off.

Pre-retirees

1. Reset your retirement clock. If you’re eligible for a pension, and assuming your employer’s plan is healthy, working more years can add to your payout, which is often based on salary and number of years worked. Even those without a traditional pension can use that time to shore up the nest egg. If you’re 50 or older, you can contribute up to $22,000 this year to tax-deferred accounts such as 401(k) plans.

2. Keep on contributing. At the least, put enough in to get the full employer match. If your employer no longer matches, try to contribute at least as much as before. If you’re able, make up for the match with a higher contribution.

3. Borrow with caution. If you are eligible for a reverse mortgage, proceed with caution. This is even more important for younger eligible homeowners. If you live long enough to spend the loan — a possibility if you’re in your 60s — you could be back at square one but with far less home equity. Another option, borrowing from your 401(k), if possible, also has pitfalls. For one, if you leave your job or lose it, the loan must be repaid in full or it becomes a taxable distribution.

Younger workers

1. Start early and diversify. Survey respondents who said they started saving in their 20s and 30s were far more satisfied with their retirement prospects than were those who started later. They also reported higher net worth. Diversifying savings vehicles also affected satisfaction with retirement plans. Those who used six or more—401(k)s, IRAs, taxable accounts, home equity, CDs, and real estate, for instance—were more satisfied than those who used three or fewer ways to save.

2. Stay in the market. With time on their side, young workers can afford to allocate stocks more heavily, ratcheting slowly downward as they age. Indeed, with stocks at their lowest levels in years, long-term investors with guts can bag some bargains now.

3. Fund retirement before college. It’s never too early to begin saving for your children’s education, but you shouldn’t put all available cash there. Experts recommend giving priority to retirement saving. You can always borrow to pay for college, but not for retirement.

For the complete story including helpful advice for retirees, pre-retirees and younger employees, pick up a copy of Consumer Reports’ February issue, on newsstands January 6, 2009. The full guide is also available at www.ConsumerReports.org.

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