When the AARP conducted a nationwide phone survey in October 2008, asking working Americans aged 45 and older how the turbulent U.S. economy is affecting them personally, 65% said they will have to delay retirement and work longer to compensate for losses. That’s grim news for a populace eager to reap the rewards for decades of keeping their nose to the grindstone. And, it’s just one more bit of proof that we are facing serious times filled with serious financial challenges.Unfortunately, retired people and those within arm’s reach of their Golden Years are experiencing a perfect storm: fuel prices have been at record highs, driving the price of everything from gas to eggs through the roof. Investment earnings are also down… way down. We’ve been financing a war, picking up the pieces from natural disasters both here and abroad, watching the housing market disintegrate, and facing the worst economic crisis since the Great Depression. Dual-income, working households are struggling, but quite probably those hit hardest are the Americans trying to get by on fixed incomes that simply do not stretch as far. For the first time in a long time, Americans are rethinking their relationship with money.
According to the Employment Benefit Research Institute’s 2008 Annual Retirement Confidence Survey, only 29% of Americans believe they’ll have a financially secure retirement, down 12 percentage points from 2007 – the largest drop since the survey began 18 years ago. Healthcare cost concerns and declining home values weigh heavily into this perception. As Americans have become almost solely responsible for their own financial independence in the absence of pension plans, and with many retirees’ money linked to Wall Street in one way or another, wild 700-point market swings are not for the faint of heart.
So, what can you do if you’re at or near retirement age? For starters, you can rethink when you retire. Delaying retirement by a few years, or even just one year, may help you save more and offset market losses. It may not be what any soon-to-retire worker wants to hear, but keeping your job for a while longer is probably the best way to add new money into your retirement savings.
Consider holding off on retirement account withdrawals as long as possible. The longer you can let them work (and hopefully grow), the better off you’ll be. If you have already retired but are able-bodied and so inclined, you may consider getting a part-time job doing something that interests you. The money you make can replace the income you would otherwise take from your retirement accounts – but be conscious of how much you earn as it may trigger a decrease in your social security benefits. If you are younger than full retirement age in 2008 and you opt to work, Social Security will deduct $1 from your benefits for each $2 you earn above $13,560. When you reach full retirement age, your benefit will be increased.
Making Savings Last
Experts usually suggest retirees withdraw 4% of their investment savings in the first year of retirement and then increase it each year to account for inflation. This model gives reasonable assurance – though no guarantees – that a person’s nest egg should last 30 years or more. The 4% strategy is also an effective way to ensure that a big market hiccup during the early years of retirement will not be impossible to overcome.
For those currently living on a fixed income, there are two other savings-preservation options to consider. First, withdrawals can be decreased to even less than 4%, assuming the retiree can still survive at the reduced income level. Second, withdrawals can stay level for a few years rather than being adjusted for inflation. Both options help the retiree withdraw less and keep more money in play to potentially capitalize on future market returns.
Annuities Can Offer a Port in the Storm
If an annuity contract has been part of your overall financial strategy, you may be in better shape than most since one of the strongest selling points of annuities are their guarantees. Depending on the type of annuity you hold, it may have a guaranteed income benefit and/or a guaranteed withdrawal benefit, in which case your payments would remain level regardless of market swings. That’s because annuity guaranteed annual payments are based on the amount of money used to fund the initial account balance, which can go up if the market performs well, but which cannot decrease due to poor market performance. In volatile times, annuities can provide a reliable income stream no matter what’s going on around them.
It’s important to note that annuities are long-term financial products designed for retirement purposes. In essence, annuities are contractual agreements in which payment(s) are made to an insurance company which agrees to pay out an income or a lump sum amount at a later date. There are contract limitations, fees and charges associated with annuities which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees and charges for optional benefits. A financial professional can provide cost information and complete details. It is also important to note that guarantees are based on the claims paying ability of the issuing insurance company.
Little Cuts Equal Big Savings
Living on less means finding more places to cut costs. Consider turning the heat down a degree or two, going without air conditioning if possible, clipping coupons, and cooking at home rather than eating out. Insurance deductibles can be increased to lower premiums, and you can trade in a gas-guzzler for a fuel-efficient automobile. Vacations may need to be postponed (or kept closer to home) and movie nights may involve a rental rather than going to the theater. There are usually places to cut back thousands of dollars a year if you are willing to make some sacrifices.
You may be scared. You may be mad. But, the one thing you should not do right now is pull all your money out of the market and stuff it under your mattress. Diversification is still a prudent investment strategy for the long term. If the ups and downs lately are too much to handle, consider slowly moving some… not all… of your money into lower risk investments such as bonds, CD’s, or annuities, but do not opt for safety at the expense of losing out on significant growth should the markets steady themselves. Even if you are 65, you do not need all of your retirement savings immediately. Some of it will not be accessed for a decade or two, which is why a big picture investment mix is best, helping protect what’s there now AND helping make gains down the road.
Keep your long-term strategy and your timeline in mind: small portfolio shifts can loosen the knot in your stomach, but major pull-outs, especially when the market is down, are not a good idea. For help understanding the current market and how it impacts your investment plan and retirement horizon, be sure to contact your financial professional.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the tax payer. The tax information was written to support the promotion or marketing of the transaction(s) or matters(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. AXA Advisors, LLC and AXA Network, LLC do not provide tax or legal advice.
This article is provided by Fatma Aldas. Ms. Aldas offers securities and investment advisory services through AXA Advisors, LLC (member FINRA, SIPC) at 1633 Broadway, 3rd floor, New York, NY 10019 and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries.
For any questions or concerns, please call me at 212-541-1924.GE – 46998B (12/08)