Financial Literacy - Retirement income planning
7 ways to stretch your retirement income

When you rebalance your portfolio to match its original asset allocation, you are in effect buying low and selling high. For example, if you originally had a 60 percent stake in equities and 40 percent in bonds, but now you're at 50-50 due to the recent stock market malaise, you in effect are buying stocks while they're cheap if you rebalance to the 60-40 ratio. Be mindful of the tax ramifications if you buy and sell within a taxable account, however.

Risk-averse investors may look for safe havens like CDs, annuities or guaranteed income products during times of financial upheaval, but buyer beware.

"The devil is in the details," says Dan Deighan, who heads Deighan Financial Advisors in Melbourne, Fla.

"Any time you're looking for a guarantee, you have to ask yourself 'Who's the guarantor?''' he says.

"What do their financial statements look like? What are the conditions under which the guarantee is established? What could happen that would cause the guarantor to not be able to perform? And, of course, what is the safety net that exists for that?"

If you're not sure what to invest in, consider hiring a trusted financial adviser for help.

"There's no question that you have to tap into somebody that really truly understands this stuff and isn't selling and pitching it because of the commission," Deighan says.

"The way to protect yourself is to get some objective advice."

Catch up on your 401(k)

Most Americans rely on defined-contribution retirement plans such as a 401(k) to save for retirement, but most of us don't seem to be saving enough.

Bankrate's story, "Figuring retirement needs in a shaky economy," offers clues on how big your nest egg must be to generate enough cash flow, depending on your annual income needs.

The average worker contributes about 7.5 percent of his or her salary toward a 401(k) or 403(b) retirement plan, according to the most recent data from EBRI.

If you're 35 years old and make $40,000 per year, you will have approximately $342,300 saved after 30 years, assuming a 6 percent annual return, a 7.5 percent contribution rate, a 3 percent annual salary increase and no employer match.

If you need to draw $3,000 a month from your account and earn 4 percent, that money will last just under 12 years, not factoring in inflation, taxes or emergencies.

With any luck, your retirement will last longer than 12 years. One solution is to beef up your savings. If you're over age 50, the IRS allows catch-up contributions to your 401(k) account as well as other retirement vehicles.

For example, you can contribute up to $5,500 over the regular limit of $16,500 in 2009, for a total of $22,000.

Depending on your age and your account balance, catch-up contributions could add a much needed boost to your retirement account, especially if returns are good while you accumulate the money.

Using the same example, above, let's say you started saving at age 35 at that 7.5 percent deferral rate. If you get 3 percent raises each year, by age 50 you would be earning $62,320 and you would have accumulated $86,560 in your 401(k) account.

If you take advantage of catch-up contributions for the next 15 years, your savings would be worth $719,517 at age 65, assuming the same 6 percent return and a steady annual contribution of $22,000. (The actual savings amount could be higher because these catch-up contributions are scheduled to increase slightly from time to time.)

Of course, this kind of heavy-duty, deadline-oriented savings style would demand a deferral bump-up from 7.5 percent of your salary to about 35 percent -- at least initially. As you get raises, though, the deferral rate would decrease.


The numbers look even better if your employer provides matching contributions.

"I think the catch-up provisions for not only 401(k)s but IRAs and other types of plans are a great opportunity to save more on current income tax as well as sock away more money toward the future," says Craig Skeels, a Certified Financial Planner and managing director of Apex Wealth Management Group in Oxnard, Calif.

"The trade-off that people have to realize is once they do retire and start withdrawing money from these plans, it's subject to income tax. And one of our concerns with the current environment is that tax rates, unfortunately, are probably going up in the future."

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