Bailouts and market fluctuations: What to do?
In a financial crisis, the typical advice from experts is to stay the course, keeping investments in place for the long term and waiting out the downturn.
But people close to retirement may not have that luxury. Although the stock market rebounded sharply last week after plunging earlier in the week, share prices remain well below their levels at the start of the year. With all the recent volatility, here are some tips for a contingency plan.
“Anyone who was thinking about retiring soon has got to be thinking about what their options are,” said Judith Martindale, a San Luis Obispo financial planner. “The portfolio that seemed to be perfectly adequate a few months ago may not look as solid today.”
People who have already retired may be forced to go back to work or live on considerably less income until the market evens out. But for those still in the workforce, putting together a decent contingency plan is not as hard as it may appear, said Zvi Bodie, a finance professor at Boston University and author of a bestselling textbook called “Investments.”
The options -- work longer, save more, spend less -- seem common-sensical. But you can add years to your retirement income by implementing relatively painless changes to your plans, Bodie said.
By far, the most powerful option is to delay retirement -- or at least full retirement -- for a year or two. Even a short delay can have a dramatic effect.
How dramatic? That depends on the length of the delay, whether you continue to save while working and whether you earn a decent return on your savings.
A simple back-of-the-envelope calculation says each additional year of work secures about three years of retirement, Martindale said.
The math works like this: The first additional year of retirement secured is the one that you worked through. In other words, if you live until age 87 and you retire at age 66 instead of 65, you dropped the number of years you need to finance from 22 to 21.
The following year is financed with the money you didn’t withdraw in that extra year of work. Year 3 is financed with the amount you saved in that extra year of work, plus the additional amount that you’ll get from Social Security for the retirement delay, plus the investment returns you earned on your money.
“It’s very powerful,” Martindale said.
Despite recent shake-ups in many industries, the job market going forward may well favor older workers, so if you are healthy enough to work, it might not be that difficult to remain employed, even at 65.
Mark Wilson, retirement specialist with Tarbox Group, a Newport Beach financial planning firm, says the company is increasingly seeing clients whose former employers ask them to stay on, at least part time, to consult or to help with projects.
Indeed, a recently released study by the Congressional Research Service says that there’s a looming shortage of workers largely because of demographic trends: More Americans are at the traditional age to retire than the age to enter the workforce. That could result in numerous opportunities for older workers.
And if you can’t stomach the idea of doing what you’re doing for an additional year, do something else.
Bodie’s favorite suggestion for those with college degrees is that they consider teaching -- even if it’s just part time.
“We need good teachers in our public schools,” he said. “It might require a little bit of training, but these are high-value, relatively low-paid positions that are ideal for people of a certain age.”
The hours don’t have to be long -- some can arrange to teach just one or two classes, for instance. The summers are free. And it allows people to share their knowledge and provide a benefit to the community, Bodie said.
“It doesn’t matter if you take a job as a Wal-Mart greeter,” said Wilson, the retirement specialist.
The real issue is that if you’re earning money, you’re pulling less out of retirement savings. That gives the market more time to recover -- and gives you fewer years that need to be financed from savings alone.
Another option for those who have a few years left before retirement is to save prodigiously during that period, said Ellen Hoffman, author of “The Retirement Catch-Up Guide.”
People who had their children young have an advantage because the big expenses of college, weddings and insuring the cars and health of their children are largely past. They can save like crazy and make up for decades of neglecting the retirement plan, she said.
That does two good things for retirement readiness -- it adds dollars to your nest egg and it keeps you accustomed to living frugally. And the less you spend, the less you need.
Here’s a word to the wise: If you’re feeling like you need to save more because the market has ravaged your portfolio, make sure that the money you’re saving so prodigiously now is invested in something that’s secure and likely to grow as fast as inflation, Bodie said.
He recommends the U.S. Treasury’s inflation-protection notes and bonds, which provide a variable interest rate that floats slightly above the consumer price index, which is the nation’s main inflation gauge. These investments won’t make you rich, but they’ll maintain your buying power, Bodie said.
Particularly when the money you’re saving is conservatively invested, saving more doesn’t have the punch that working longer has. But if you save half of your income -- even if you get no return on your investments -- you boost your retirement readiness one year for every year you save, he said.
It may seem obvious, but shaving even a little off of the budget can also make resources go further in retirement. Some people may not be able to live on less. But if you can reduce expenses 20%, or even 10%, it can make a big difference, Martindale said.
“When we do these financial projections, it makes numbers look like God -- not the people and their lifestyle,” she said.
Of course, people who are struggling just to pay for medications may not be able to dramatically reduce expenses. But there are ways to adjust one’s lifestyle and still have an active life. If you cut out going to the movies but have friends over for a potluck dinner and a video rental, you can still socialize, eat and see films, while saving $100 or more each month.
If you adjust your lifestyle before retirement, it will give you the ability to save. If you do it after retirement, you simply make your nest egg last longer.
For instance, if someone who planned on $50,000 annually could cut their expenses by 20% and live on just $40,000 annually, they would gain a year of retirement income for every four years of frugality.
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Kathy M. Kristof welcomes your comments at kathy.kristof@latimes.com but regrets that she cannot respond to every question. For past Personal Finance columns, visit latimes.com/kristof.
