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Rethinking Retirement?

You’re ready to retire, sit back and enjoy the good life. You’ve paid off the mortgage, sent the kids to college, and worked hard to save for your retirement—to have enough for an annual vacation or perhaps take the grandkids to Disneyland. Things were looking pretty good…until the economy took a downturn. Now, what do you do?

It’s an unfortunate fact of life, but these are tough economic times: Many investors have seen their retirement accounts shrink in value because of the volatility in the stock market. While the stock prices may rise over time, many individuals are being forced to re-examine their retirement plans. For older individuals with less time to plan for retirement, a serious review of their financial future may be essential.

Getting back to basics
The fundamentals of planning for a financially secure retirement are simple: Accumulate enough money at retirement so those savings may carry you through the rest of your life and enable you to afford the lifestyle you desire.

Unfortunately, market declines and reduced expectations for future market returns are playing havoc with many retirement plans. Given the current economic environment, here are some options to consider as you refine your retirement plan.

Saving more while you work
Take full advantage of your company retirement plan. If you participate in a 401(k) plan, contribute as much as you can or at least enough to earn the matching contribution from the company.

Set up an automatic savings plan with deductions from your paycheck earmarked for retirement.

If possible, reduce your monthly household spending and/or discretionary spending. Will refinancing your mortgage reduce your monthly payments? Will increasing your insurance deductibles ultimately put more money back into your pocket?

Making those assets work harder
Examine how your funds are invested and how your “cash” is employed.

A well thought out asset allocation for your investments, one that incorporates your time horizon and risk tolerance, can provide diversification, peace of mind, and maximize your investments. Generally, the younger you are, the more of your long-term investments should be in equities. Over time, high quality stocks have historically produced greater returns than bonds and cash investments.

Your cash should be working hard too. Take advantage of higher interest rates on longer term CDs and on accounts that provide less liquidity.

Working longer
While it’s a tough choice, delaying your retirement enables you to save more for retirement in several ways:

  • Obviously, the longer you work the more time you have to save.
  • Leaving funds longer, especially in tax-deferred retirement accounts, enable them to grow faster. For example, if you delay retirement for five years and earn just 5% on the funds, you will gain about 27% more just from the earnings.
  • Delaying Social Security will also increase your monthly benefits. If you are currently 55 years old, you can start collecting full Social Security retirement benefits at 66. If you retire at 62, you will only get 75% of that amount. But if you delay collecting benefits until you are 70, you will get 132% of that amount.

Spending less in retirement
Everyone wants a “full and active lifestyle” even in retirement. But can you spend less and still enjoy your retirement? Redefining what a “full and active lifestyle” means to you could reduce your retirement income requirements. Belt tightening in retirement works just as well as reducing discretionary spending now. Less travel, less expensive cars, moving into a smaller home or apartment can make a difference. As part of your retirement planning, set sensible spending priorities just as you do now.

The declining stock market has affected almost everyone, and demands that you take time to reevaluate your overall retirement plan. Finding more ways to save and making wiser investments are always a good idea, but is especially important when times are tough.