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Retire at 55? Think again

Did your plan to retire at 55 nose dive in tandem with the stock market plunge? In pre-carnage days, the high-flying market fueled fabulous dreams of early retirement. Employees with plump portfolios weren't looking to shave just a few years off their working days and retire at, say, 62 or 60. They wanted out at 55.

Fast forward to today. You're still punching the clock and glad you have a job. Your portfolio has lost some serious weight, and you're hoping you can retire at 65.

At least 20 percent of older workers have had to postpone their retirement plans, according to a recent survey by AARP.

If your dream of retiring early was rudely interrupted by the stock market, your portfolio may have needed some diversification, says David Marotta of Charlottesville, Va.- based Marotta Asset Management.

"During the last half of the '90s people looked for the best rate of return. They looked for funds that had four or five stars in Morningstar, which, at the time, were large-cap growth funds. People were taking money out of normal growth and out of bonds and putting it into these aggressive growth funds.

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"Everybody who lost money thinks their crash is the same as everyone else's. It's not. A diversified portfolio can take a 10 percent hit because in a good year it will be up 20 percent. But if you're down 50 percent, you're not going up 100 percent in a good year."

Even in the best of times, quitting work before Social Security and Medicare kick in can be budget busting.

"When I ask people when they want to retire, 55 is the number they throw at me all the time," says Rick Fingerman, a certified financial planner with Financial Planning Solutions in Medford, Mass., and president of the Financial Planning Association of Massachusetts.

"Unfortunately, not too many people, even with tremendous incomes, can do that because they usually have tremendous debt that goes with it -- a big mortgage, kids in college. For most people at 55, their expenses aren't a whole lot less. When they're 65, they've paid the mortgage, the kids are out of school, they can almost survive on Social Security and a little extra."

Planning your retirement
CFP Jason Flurry of Planmark Capital Management in Alpharetta, Ga., says there are basically five factors used in retirement planning.

1. Time until retirement
2. Current savings (now and ongoing)
3. Desired retirement style (expenses)
4. Time in retirement (life expectancy)
5. Desire to leave an estate for others

"Since the components for retirement planning haven't changed, individual expectations have to come back down to more normal levels," Flurry says. "Staying ahead of taxes and inflation are the main challenges for someone planning their retirement income.

"My advice is save as much as you can in tax-qualified accounts, maintain proper diversification, and pay down debt as fast as possible. That way you're consistently building and preserving wealth while reducing your future expenses."

Paying down debt has helped two of Flurry's younger clients get to the point where they'll easily be able to retire at 55 if they so desire.

Tammy Davis of Woodstock, Ga., is 41 and her husband Mark is 34. They've been married four years and own a plumbing business. Tammy handles the bookkeeping, but she wasn't always so careful with money.

"There was a time when my credit was maxed out. I had too many credit cards. I eventually got them paid off. Mark and I have two credit cards, and we pay them in-full every month.

"For a while I was a single mom with no support, and I didn't put the max in my retirement plan, but I always had a 401(k) or some retirement plan, and I've had a savings account for emergencies. There were times when I pretty much depleted it, but that's what it was there for."

Although Tammy and Mark aren't sure when they want to retire, they like knowing they won't have to work until age 65.

"We've talked retirement lately. I told Mark I get to retire seven years before he does and he said, 'No you don't, I'll retire with you.' We travel a lot; we do pretty much anything we want to do. We like to spend money, and as long as we're working I don't feel bad about doing that."

Knowing how much you owe and getting a realistic estimate on future expenses is important in any retirement plan, but especially so if you want to retire early.

Fingerman says this encompasses more than daily living expenses, mortgages, tuition and car payments.

"We look at their buying habits -- if they finance or pay cash. I ask them when was the last time the roof was done, how old is the furnace, etc. If they say the roof hasn't been replaced in 30 years, I add that in."

And, he adds, don't forget to factor in medical, dental and long-term care insurance.

Tapping your retirement
If you want to retire early, it helps to have some savings built up for that express purpose. Leave the retirement accounts alone as long as possible, but you can tap into IRAs and 401(k)s early if the need arises.

IRS regulations allow you to withdraw money from an IRA before age 59½ provided you take "substantially equal payments" for a period of five years or until age 59½, whichever comes later. While the withdrawals will be taxed, you won't have to pay the 10 percent early-withdrawal penalty.

The IRS also allows penalty-free early withdrawals from 401(k)s provided you have quit your job and are at least 55 years old or will turn 55 that year. Again, you'll have to pay income tax on the amount withdrawn. The main hitch is that while the IRS allows withdrawals from a 401(k), your company may not and the IRS says your company has final say-so.

Some companies may not allow withdrawals at all; others may allow one lump-sum withdrawal or one withdrawal a year to avoid the administrative hassles of setting up a payment schedule. You might want to reconsider if you have to pay taxes on your entire 401(k) at once.

Rick Fingerman advises clients who want to take early withdrawals to split their IRAs.

"Take, for example, $100,000 and, assuming a rate of return of 5 percent for 10 years, put it in a separate IRA, and use it for an income stream until you're 65. Then you have your other IRA, Social Security and, perhaps, a pension to fall back on.

"You can have 10 IRAs," says Fingerman. "You can take one IRA and split it into three. You could put one away until age 65, start one of the others using substantially equal payments, and then a few years later start the other one."

Spreading out the risk
Speaking of IRAs and 401(k)s, whether you're close to retirement or 20 years from it, it's a good idea to review investments and make sure they're diversified so the portfolio can stand up to future market slides.

David Marotta says the most common mistakes he sees are a lack of small-cap and value stocks and funds, and too many assets that are negatively affected when the dollar loses value.

"We tend toward large-cap growth. We need to go more toward value and blend, small- and medium-cap. But don't make the same mistake and buy only value stocks," Marotta says. "Also, most people don't have enough assets outside the reach of the U.S. dollar. For every quarter point the Federal Reserve cuts interest rates there's a tremendous amount of money being pumped into the economy. Those dollars tend to deflate the value of the dollar. Foreign investments do very well (in these times.)"

Here's the breakdown Marotta recommends for a well-diversified portfolio for someone approaching retirement. It can be tweaked a little to compensate for years until retirement, risk tolerance and whether it's in a taxed, tax-deferred or tax-free account. This portfolio keeps 45 percent of the investments outside the reach of the falling U.S. dollar.

30%-35%: U.S. stocks
5%-10%: U.S. bonds
20%: Foreign stocks
10%: Foreign bonds
15%: Hard assets (precious metals, oil, real estate investment trusts, timber, natural gas. Hard assets are leveraged against inflation.)
15%: Cash

Make sure you'll have enough money to live the lifestyle you want no matter what the stock market does. Talk to a financial planner about retirement whether you want to retire early or at 65. This probably can't be stressed enough.

"Michael Jordan had a coach; Tiger Woods had a caddy. It's good to have someone to bounce it off of," says Flurry." Check with someone who might see it from a different angle, someone who has no personal benefit in whether you work or not. It's a big decision."

-- Posted: Dec. 20, 2002

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See Also
PLUS: Highlights of AARP survey
11 ways to save after retirement
Retirement plan distribution rules
Financial advice glossary
More advice stories

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