retirement

Retirement sooner than never

Thomas HardyMany baby boomers joke about working until they keel over because they can't afford to retire. That may not be the case, but boomers as a generation might need to work longer than they were planning to. Thomas Hardy, a finance professor at Cleary University and California Lutheran University's Institute of Finance, has some advice for anyone hoping to enter their golden years sooner rather than later.

Has the current economic situation changed retirement planning for baby boomers?

Clearly, the reduction in 401(k) balances and other retirement accounts coupled with the drop in housing prices has made it necessary for many baby boomers to delay retirement. Every extra year of working helps build up retirement account balances, delays the beginning of drawdown and reduces the amount that will be needed in retirement. So as unpleasant as it may be, (delaying) retirement may be the best and sometimes only way to handle the changed situation.

For retirees already on a fixed income, what have been the effects of the recession?

One effect of the recession is low interest rates, which reduces the interest income some retirees count on for living expenses. But while low interest rates decrease income, there is a silver lining. Rates tend to correlate with inflation, and the greatest risk for retirees already on a fixed income is higher prices, but the recession has kept inflation relatively benign. At the current anemic rate of economic recovery, it should be at least several more years before the threat of serious inflation revives.

How can an individual plan for retirement and determine the total amount he or she needs once retired?

The process of estimating needs for retirement requires making a series of carefully thought-out assumptions about savings, retirement age, longevity, lifestyle and long-term investment returns. Just about any Certified Financial Planner would be able to assist in estimating the amount one would need for retirement and put together a plan to reach that goal.

What significant impact has the economic meltdown had on investment plans such as 401(k)s?

As most everyone is aware, the stock market crash of 2008-2009 caused many 401(k) accounts to drop in value by 40 percent or more, but the most significant impact was on investor psychology. After the market crashed, many investors got out of equities and into low-risk, low-return investments and they missed the rebound growth that occurred from the market bottom. Over the very long term, the market has averaged a return of 7 (percent) to 10 percent per year, but the average investor in the market has obtained a return closer to 2 percent since investors often get out of the market after it has fallen to a bottom, and they stay out until the market has run up high again, getting back into the market in time for the next market crash.

Is there an ideal age retirement planning should be put first on the list of savings?

No matter what your age, if your employer offers a 401(k) match, that should be first on the list of savings as it is free money. Next on the list for all ages is to build an emergency fund of six to nine months' of living expenses. Third on the list for all ages is paying off credit card debt. The return on paying off credit card debt is much higher than can be obtained from investing in the market with essentially no risk. Once these are complete, whatever the age, then it is time to begin saving for retirement in a 401(k) and/or in a Roth IRA.

What advice would you give to individuals who are planning for their retirement?

While college savings for children is a good idea if you can afford it, you should save for your own retirement first. Your children can get loans to go to college. You cannot get a loan to fund your retirement.

Special thanks to Thomas Hardy of Cleary University and California Lutheran University for providing information about planning for retirement.

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