Having a Backup Plan as Retirement Approaches

Jeff Viner, 41, wants to retire early, so the Long Beach resident’s investment portfolio is heavily tilted toward stocks.

But if the market can’t get him to where he needs to be in time, he’s prepared to just change his retirement date.

Ulrich Gaisrucker, 41, of Huntington Beach has another plan. Instead of pushing back his retirement, he and wife Margret Phinizy, 53, would just learn to live on less. “Instead of the world cruise, we’d go to Death Valley or visit relatives for vacation,” he speculates. “We could adjust pretty easily.”

Too old to think they have time to waste and too seasoned to believe they can plan for every variable--especially in volatile financial markets--many aging baby boomers now have both a Plan A and a Plan B for retirement. Maybe even a Plan C.

Financial advisors say boomers are using a logical approach to handling long-term planning uncertainties in middle age.

“We have lived long enough not necessarily to be soured, but to know that things might not work out the way we expected,” says Judith Martindale, a 53-year-old financial planner in San Luis Obispo.

There are, of course, personal circumstances, like divorces, mid-life crises, medical emergencies and the unpredictable needs of children, that can derail the most meticulous financial plan.

Whatever the cause, some 40- and 50-somethings may be realizing that, with retirement less than 15 years away, they simply haven’t saved enough so far.

So when the stock market swoons, as it did in the spring, boomers face the painful reality of what might happen to their nest eggs if stocks’ returns over the next 15 years don’t come close to the above-average returns of the last 15 years.

People like Viner and Gaisrucker, who each have saved a bit more than $100,000 so far, could find their retirement savings inadequate if investment returns prove substantially less generous during the coming decade than they have in the past one. And that’s not out of the realm of possibilities: Even high-quality stocks sometimes post dismal returns for extended periods.

Over the last 10 years, many investors have become fans of “passive” investing in the blue-chip Standard & Poor’s 500 index of stocks. Many boomers have come to favor such index funds in their retirement plans, especially 401(k) plans. And in the five years ended last Dec. 31, the S&P; produced a stellar 28% average annual return.

Yet in the 1960s, the average annualized return on the S&P; 500 worked out to just 7.8% a year. It was even worse in the 1970s: just 5.9% a year.

True, stocks in those decades were hampered by rising inflation and rising interest rates. But no one can say for sure that history won’t repeat, or at least rhyme.

The impact of lower returns on your retirement nest egg can be lifestyle-changing. If you had invested $100,000 in the S&P; 500 in 1990, you had $608,810 by the end of 1999. But the same amount invested in 1965 would have been worth just $113,194 by the end of 1974, at the bottom of that era’s horrendous bear market in stocks.

If $100,000 was all someone had socked away for retirement in 1965, that retiree in the 1970s could count on only about a $6,000 annual income from that nest-egg.

“The most important thing in planning for retirement is making informed decisions that take into account investment risk,” says Christopher Jones, vice president of financial research and strategy at Financial Engines in Palo Alto. “If you are substantially investing in stocks, either through equity mutual funds or individual holdings, the range of possibilities [of returns] can be quite wide.”

Since you can’t predict precisely what the market might do, it’s wise to take a look at the vast array of possibilities.

An easy way to do that is to visit the Financial Engines web site at https://www.financialengines.com. You can plug in the details of your investment portfolio and the site’s computer program will analyze the range of possible returns based on subjecting your portfolio to a host of economic scenarios. In roughly a minute, you have a view of your best case, worst case and most likely outcomes.

If those outcomes aren’t appealing, many baby boomers still have the time, and flexibility, to come up with new plans to improve the outlook for their retirement years.

Here are some of those options:

* Work harder now to save more.

Consider a hypothetical boomer, John Jones, who is 40 and wants to retire at age 55. He has saved $50,000 and sets aside $450 a month in his 401(k), but knows that’s not going to be enough.

So, he economizes where possible and starts working some overtime to double his monthly contributions to savings.

What will that mean for his nest egg? Assuming he earns 11% annually on his money--the average annual return of the S&P; 500 over the last 73 years--he’d have $667,620 in 15 years, versus $463,009 if he didn’t ramp up his contributions.

A strategy of saving more now helps in two ways, financial planners note: You accumulate more money, and it gets you used to living on less now, which means you may need less savings to finance the lifestyle to which you’ve become accustomed in the future.

* Scale back your idea of a “comfortable” retirement.

If you’re working as hard as you can and already economizing more than you want, another option is to simply figure that retirement will be less comfortable than life is today. But before you accept this option, carefully consider how your life would change if you had substantially less income each month. What would you have to give up?

If a good deal of your current expenses involve sending kids to college or paying a mortgage that’s likely to be paid off by retirement, it may be that your income needs will in fact be dramatically lower in retirement.

But if you’ll still have a mortgage or rent costs in retirement and your monthly expenses aren’t likely to decline dramatically, think carefully before accepting the prospect of a too-modest retirement nest egg.

Remember too that even modest inflation adds up over long periods. If you simply figure that inflation will continue to average 3% annually, a lifestyle that costs $1,000 monthly today will cost $1,806 in 20 years and $2,427 in 30 years.

* Plan to retire later.

You aren’t likely to be frail at age 55. In fact, most Americans are healthy and vibrant into their late 60s--and often into their 70s and 80s. Indeed, many boomers, like Jeff Viner, may figure that they won’t face much difficulty in delaying retirement, if that’s what it takes.

Even delaying retirement for five years--say, til age 60--can have a dramatic impact on your savings. If hypothetical boomer Jones, above, worked those extra five years, continuing to save just the $450 monthly, he could have $836,287 at 60, assuming the same investment returns.

Still, even though many boomers may think they’ll never truly retire, their perspective may change past 60. And there’s no way to guarantee that health problems or a changing job market won’t force the retirement issue on people who aren’t ready.

* Plan to tap your home’s equity.

If you’re much closer to retirement, saving much more may not be an option. But if you have a home, you can think of the equity you’ve built up as your fail-safe, financial planners note.

As it is, many cash-poor seniors are house-rich in Southern California. The 1950s bungalow that you bought for $30,000 in the mid-’70s could easily be worth between $200,000 and $500,000 today.

Thanks to tax law changes made a few years ago, you can tap that equity without triggering a big taxable gain. A 1998 tax law says that each homeowner can exclude up to $250,000 in gains on the sale of residential real estate from tax, as long as you lived in the house for at least two of the last five years.

A married couple can exclude up to $500,000 total.

So, if all else fails, you can sell the house and move into an apartment. A $500,000 windfall invested and producing a 6% annual return means $30,000 in income each year. A $300,000 windfall at 6% would mean $18,000 in annual income.

That income is subject to tax, so that’s not all spendable. But it could certainly pay the rent on a decent apartment.

If you love your home and can’t imagine leaving it in retirement, a reverse mortgage might be an option, experts say. Reverse mortgages allow you to stay in your home, but effectively sell the house to a mortgage lender over time. The lender pays you a set amount each month that’s either based on your life expectancy or on a set number of payments. But if you choose the option that gives you just a set number of payments, be sure to understand that you must move before the end of that period.

The other detriment to a reverse mortgage is that they are expensive. Most come with high up-front fees and interest rates that set you back. Don’t enter a reverse mortgage loan agreement lightly.

* Plan to invest more aggressively--now, and in retirement.

Many financial advisors say boomers should plan to invest like they’ve got plenty of time, even after they’re retired. After all, most people will have time to wait on the markets, even if returns are sub-part for an extended period.

People are staying healthier later in life and living much longer. Your retirement savings need to last as long as you do. Since you’re likely to last a long time, your investment portfolio ought to reflect that, says planner Martindale.

An investment mix of 75% stocks and 25% fixed-income assets isn’t too aggressive even for a 55-year-old, many advisors say.

The key is to keep the stock portion diversified. That means having a stake in big stocks, smaller stocks and foreign stocks, experts advise.

If you have a 401(k) retirement plan, and you haven’t looked lately at your asset mix or what’s available in the plan to help you diversify better, this would be a good time: In the first half of this year, diversification went a long way toward determining which investors made money and which didn’t.

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Kathy M. Kristof can be reached at kathy.kristof@latimes.com.