It’s understandable if you’re feeling a bit anxious. Not only was the U.S. credit rating just downgraded for the first time in history, but over the last few years we’ve had a housing bubble, a credit bubble, runaway government spending, soaring gas prices, a global recession, high unemployment, the risk of a U.S. debt default, and a fiscal crisis in Europe.
Add to that things like the tsunami and nuclear disaster in Japan or the Arab revolts in the Middle East and you can almost see our national blood pressure rising. This is especially true if you, like 78 million other baby-boomers, are getting close to retiring.
In the face of so much uncertainty, how can you minimize anxiety and head into retirement feeling confident and assured?
Answer: Focus on things you can control.
Legendary basketball coach John Wooden once said: “The more concerned we become over the things we can’t control, the less we will do with the things we can control.”
Here’s an exercise that can help keep the focus on things you can actually do something about:
Take out a piece of paper and divide it into two columns. At the top of the left column, write “Things I can control about retirement.” At the top of the right column, write “Things I can’t control about retirement.” Now start filling in each.
You’ll probably notice that the right column is full of the things we mentioned earlier, like the markets, political uncertainty and unemployment.
The left column will be made up of things like saving, reducing debt, creating a retirement budget, evaluating housing options, creating a distribution plan, deciding when to take Social Security, planning meaningful pursuits and completing your estate plan.
As you look at those two columns, ask yourself this question: “During my typical day, do I spend my time and attention focusing more on the left column or the right column?” If you answered the right column, chances are that your stress level is high and your productivity is low. Focusing on things you can’t control is a recipe for frustration.
If you shift your focus to those things in the left hand column, you’ll notice that your productivity will go up and your anxiety will begin to go down. This is especially true in the area of your finances, because that is what is causing most people to lose sleep.
According to a recent poll by Gallup, the No. 1 retirement fear (held by 53 percent of Americans) is not having enough money. Only about a third of people felt that way when Gallup did the same poll in 2002. Thankfully, this is an area that you can actually do something about. Here are eight things you can do to boost your income security.
One obvious way to pad your nest egg is to save more. If you are still working, make saving a high priority. Both 401(k)s and IRAs have higher contribution limits for people over 50. Take advantage of those limits by putting away as much as possible. The maximum 401(k) contribution for 2011 is $16,500 plus an additional $5,500 if you’re over 50. IRA contribution limits are $5,000 plus an additional $1,000 if you’re over 50.
That means that a working, married couple could delay retirement by five years and sock away an additional $280,000 simply by maximizing their 401(k) and IRA contributions. The delay also could give markets time to move higher which, when coupled with the new additions to your portfolio, could significantly improve your financial position in retirement.
Pay off debt
Debt adds risk and reduces cash flow. Those things are especially troublesome to someone in retirement. By retiring debt free, you can greatly reduce the amount of savings necessary to fund your retirement. Assuming a 4 percent withdrawal rate, it takes $25,000 in savings to generate $1,000 in income each year (25 to 1).
That means if you’re mortgage is $1,300 per month and you’re able to pay it off before you retire, you could slash $390,000 from the amount you need to save for retirement.
Working longer may not sound fun, but neither is running out of money. If you haven’t saved enough, one option is to keep working and earning a paycheck. This strategy has multiple benefits: it allows you to save more, it gives your portfolio more years to recover and grow, it could help boost your potential Social Security benefits and it decreases the overall amount of income you need to draw over the years.
If the amount you need to make up is smaller, you also could consider working part-time. This could mean doing a phased retirement with your current employer or choosing something else entirely. Either way, it could give you increased freedom to begin following your retirement dreams while still providing some income.
Cut retirement expenses
If the idea of working longer doesn’t appeal to you, consider retiring on schedule and make up for any shortfall by reducing your retirement expenses. Examine your retirement budget for items you can reduce or eliminate.
Housing and transportation are often major expenses. Consider downsizing to a smaller home or sharing a car with your spouse. Staying active and healthy can save on health care co-pays and prescription costs. Substituting planned hobbies or activities with less expensive alternatives also can trim costs without significantly changing the quality of your retirement.
Taken cumulatively, these adjustments to your retirement budget can help reduce the strain on your nest egg and still provide a meaningful retirement.
Delay Social Security
If you delay collecting Social Security until after your full retirement age, you will get a permanent increase in your benefits. The increase is based on the year you were born. For example, those born after 1943 will get an 8 percent credit for each year they wait. The increase caps out at age 70, so a person waiting until then could see an increase of 24 percent to their benefits.
Review your asset allocation
The market upheaval of the last several years and investors’ response to that upheaval has wreaked havoc on many people’s asset allocations. Rather than having a balanced, diversified portfolio, many have sought safety by moving everything to cash or bonds. That could cause serious problems in the future if inflation picks up or the bond market stumbles. To protect your assets and maximize your returns over time you should meet with a trusted adviser and make sure the investments you hold are appropriate based on your risk tolerance, goals and time frame.
Protect against sequence risk
Stock and bond returns can be volatile. Sequence risk is simply the risk that you will retire and begin withdrawing money during a period of low (or negative) investment returns. Those early negative returns greatly increase your odds of running out of money.
One way to minimize sequence risk is to have a year or two of withdrawals sitting in cash. If you retire just prior to a bull market, you can pull income from your growing investments. If you retire on the cusp of a bear market, you can take withdrawals from your cash. That way you won’t be forced to sell investments in a down market in order to fund retirement and you will be less likely to run out of money.
Draw a greater percentage from your nest egg
Deciding how much to take from your portfolio each year during retirement is one of the most important decisions you will make. You don’t want to run out of money, but you don’t want to live like Scrooge either. Most experts peg the “safe” withdrawal rate at around 4 percent per year. If 4 percent of your nest egg isn’t enough to meet your needs, you can always take more. Keep in mind, however, that the more you take, the greater the chance that you will outlive your assets.
As you can see, by focusing on those things that you can control, you can minimize anxiety and maximize security as you approach retirement. Statistically speaking, the world doesn’t come to an end very often. Rather than worrying about all the things that make headlines, focus instead on giving your very best to those areas that you can do something about.
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