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| The Basics | 4 ways to stretch cash and retire on time
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If you've fallen short of your savings or investment goals, you may still be able to retire without compromising your lifestyle. Here are four strategies to consider.
By Karen Hube
How much do you really need to retire comfortably?
In theory, the answer might make you queasy. To start with, many financial planners say you need enough invested to replace about 80% of your current income. On top of that, they say, you should have one to two years worth of expenses in cash or cash-equivalent investments like short-term Treasurys and money market funds.
All told, for most people, a $1 million nest egg is a bare minimum, many planners say.
But before you sink your head in your hands and kiss your retirement plans goodbye, heres the good news: These days, many retirees are proving that reality is quite different than theory.
People are still finding ways to retire
Most people dont have the kind of money that planners say you need, especially after a market downturn such as the one weve experienced, says Lynn Ballou, a financial adviser in Lafayette, Calif.
According to the Employee Benefits Research Institute (EBRI) in Washington, more than 75% of people aged 40 to 59 have less than $100,000 squirreled away for retirement.
Yet many people are still finding ways to retire, Ballou says.
Of course, some people have so little socked away that they would have to make serious cutbacks in spending if they retired. And there are those whose retirement funds have been all but washed out -- employees at beleaguered companies like Enron, for instance -- and who have no choice but to postpone retirement indefinitely.
Yet if you have been diligent about saving but fall somewhat short of your savings target, you may still be able to take the plunge without compromising your lifestyle.
The first step is to be realistic about how much you can expect in income from Social Security and other sources. According to EBRI, almost 20% of retirees say their standard of living is somewhat or much worse than they had expected before they retired.
The primary reason: They had inflated expectations of how much income Social Security would provide. If youre 50, earn, say, $75,000 today and expect to retire in 16 years, your annual Social Security benefit would be $35,000 to $40,000 a year. That assumes 3% annual inflation adjustments; in todays dollars, that amount would be about $21,500.
People who have participated in pension plans can count on just over 40% of their income in retirement coming from Social Security -- a portion that would shrink if President Bushs proposed Social Security reforms find their way into law, according to Gary Burtless, an economist and senior fellow at the Brookings Institution in Washington.
Almost 20% would come from pensions and annuities, according to EBRI. That means 40% of income has to come from investments or other sources.
(Thats if youve planned properly. A fact of life in 21st century America is that half the private sector work force is not covered by a pension plan at any given moment and thus could be forced to rely on Social Security.)
So, if youre trying to figure out how to retire, heres a look at some ways you might be able to make the numbers work:
1. Take a part-time job
The most common and increasingly popular way that people are making retirement work is by getting a part-time job. Technically, that means youre not retired, although many retirees would argue it depends on what your definition of retirement is.
Retirees are taking jobs at a pace unlike any other time in history, says John Challenger, head of Challenger, Gray & Christmas, the big outplacement firm in Chicago.
People retire from their full-time, rigid, stressful career jobs and take on low-stress, enjoyable part-time work that helps them support their lifestyle, he says.
A 2002 study by EBRI found that about one quarter of retirees have held jobs, mostly on a part-time basis.
This is a concept thats going to get much more popular as a lot of baby boomers realize theyre not going to be able to have the idealized retirement, says Paul Nastasi, a financial planner in Baltimore, Md.
Indeed, some two-thirds of workers say that they plan to work after they retire, according to the EBRI. Among those, while some will work simply for the enjoyment of it, almost half say they will work to maintain health-insurance coverage and one-third say they need extra cash to make ends meet. Indeed, younger people may find they have to worker longer than they'd like so that they can get full Social Security benefits. If you were born after 1960, the retirement age is 67.
If you can find a way to keep working without stress and more flexibility, it can make a lot of sense, Nastasi says. Were seeing a lot of people move to vacation communities where there is a good lifestyle and a lot of service jobs. One spouse will often take a job to support their lifestyles.
At the Dolphin Head Golf Club in Hilton Head Island, S.C., a few years ago, high-school kids filled many of the part-time jobs on the course and in the clubhouse. But now we no longer have high school kids -- we employ older people, says club manager Melinda Gibbs.
Income isnt always the primary motivation, she says. Many work because they get golf privileges, and its a way to afford to play on a private golf course, Gibbs says.
For example, Bob Sertner, 75, of Bondville, Vt., an avid golfer, figured out a way to support his expensive habit after retiring from his interior decoration business. He got a winter job selling ski tickets at Stratton Mountain. The company that owns Stratton, Intrawest Corp., is a giant resort company with golf resorts at desirable spots such as Lake Tahoe, Calif. and Copper Mountain, Colo. Sertner and his wife, Joan, 72, have frequently traveled to these resorts to take advantage of deeply discounted room rates and free rounds of golf for Intrawest employees.
2. Draw down a home-equity loan
If you want to retire in your 50s, or even earlier, cash flow is likely to be a major concern even if you have a fat retirement account.
But theres a creative solution: You can take out a home equity line of credit to tide you over, says Lisa Osofsky, a financial planner and CPA at M.R. Weiser in New York City. One of my clients got laid off at 55 and avoided having to go back to work by taking out a line of credit, she says.
Granted, to get this kind of security you would need to have substantial equity in your home. But the closer to retirement you get, the more likely you are to have this kind of cushion built up, according to the U.S. Department of Health and Human Services Administration on Aging. The agency says some 76% of Americans age 65 or older own their homes outright.
Even if you dont think you will use it, theres no harm in establishing a line of credit as security, says Keith Gumbinger, a vice president at HSH Associates, a mortgage data publisher in Butler, N.J. Its an excellent idea, assuming you get a competitive rate and you dont have to pay inactivity fees.
Competitive rates these days run around 5%. Some lenders require that you pay a $50 to $100 annual fee if you dont use the line of credit. Be sure to apply for the line of credit while you are still employed to increase your chances of qualifying for a sizable line of credit at a competitive rate, Osofsky says.
3. Replace your mortgage with an interest-only loan
One way to free up extra cash is to refinance your mortgage and take out an interest-only loan. This wont save you a bundle -- possibly a couple hundred of dollars a month, depending on the size of your loan.
But that might buy you some extra comfort, either for spending money or so you can continue to sock money into your retirement account, Osofsky says.
With mortgage-interest loans, you only pay interest on the loan for a fixed period of usually up to 10 to 15 years. This reduces your monthly payments, and your full payment would be tax deductible.
For example, on a $200,000 loan with a 30-year fixed rate of 6%, your monthly payment would be about $1,200. According to HSH, an interest-only loan with the same terms would cost you $1,000 a month.
The drawback is that interest-only payments wont help build equity in your home. Plus, says Keith Gumbinger of HSH, Youre forestalling the inevitable -- at some point that home loan has to be paid off.
4. Move to a less-costly area
Only about 10% of people move after they retire, usually for financial reasons or to seek a milder climate, according to Charles Longino, a gerontologist and demographer at Wake Forest University in Winston-Salem, N.C.
But uprooting can pay off in a big way as part of a retirement plan. Real estate is the most significant asset that most couples have, Ballou says.
Especially if you live in a hot housing market, you can raise a substantial amount of cash by selling your home and choosing a new and desirable -- but less expensive -- locale.
Bette and Jim Nordant, of Naples, Fla., are proof that this strategy isnt just a quick fix to a cash-flow problem, but a long-term planning solution. Ten years ago, when they lived in Alomo, Calif., their financial planner said they needed another $200,000 saved to retire and maintain their lifestyle, Bette says.
They raised the cash practically overnight by selling their home and buying an equivalent home for $200,000 less in Boca Raton, Fla. Soon they sold the house in Boca Raton and moved across the state to Naples. These steps have enabled them to live their ideal retirement, spending half the year in Florida and the other half in the Sierras in California. We didnt have to downsize to do this. We found a home of equal quality, Bette says.
Whether you consider one or more of these strategies to make a comfortable retirement feasible, be sure to start planning early, Ballou says. The more thorough your planning, the more likely it is that you can arrange the kind of retirement you want.
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