Tips for Maintaining Retirement Readiness in Tough Times

Establish and maintain an emergency fund. sufficient to cover at least three months of your expenses saved in a highly-liquid account, such as a money market mutual fund or a savings account.

Avoid borrowing against your 401(k) account.  Besides borrowing against your future, if you leave your employer, you may still be responsible for paying the loan back within 60 days.  If you cannot repay it within that time, IRS penalties could be imposed.

If your employer stops matching your 401(k) contributions, consider redirecting your contributions to a Roth IRA.  In addition to providing tax-free income once you retire, you can liquefy your contributions at  any time for any reason without IRS penalty or income tax consequences.

What’s Your Retirement IQ?

The Ventura (California) County Star has published the following Retirement IQ Test. Are you up to the challenge?

1. What percentage of your savings can you withdraw annually in retirement without risk of running out of money?

(a) 3 percent (b) 4 percent (c) 7 percent (d) 10 percent

2. Approximately what percentage of preretirement income is generally needed to maintain a person’s current lifestyle in retirement?

(a) 45 to 60 percent (b) 60 to 75 percent (c) 75 to 99 percent (d) 100 percent or more

3. Working full-time for three years past one’s anticipated retirement date and continuing to save 15 percent of salary could raise annual retirement income by how much?

(a) 7 percent (b) 12 percent (c) 17 percent (d) 22 percent

4. At what age will most of today’s workers be eligible for full Social Security retirement benefits?

(a) 62 or 63 (b) 64 or 65 (c) 66 or 67 (d) 70

5. How much extra can workers 50 or older contribute to their retirement plans in 2009?

(a) $6,000 extra, for a maximum $21,000 (b) $5,500 extra, for a maximum $22,000 (c) $7,000 extra, for a maximum $24,000 (d) $7,500 extra, for a maximum $25,000.

6. The typical person age 50 and older with a 401(k) account with his or her current employer holds about how much in the account?

(a) $47,000 (b) $97,000 (c) $147,000 (d) $247,000

7. The number of workers 65 and older is expected to grow by how much over the next decade?

(a) More than 20 percent (b) More than 40 percent (c) More than 60 percent (d) More than 80 percent

8. What percent of homeowners 50 to 65 plan to use home equity to finance ordinary living expenses in retirement?

(a) 6 percent (b) 10 percent (c) 20 percent (d) 50 percent

9. A job layoff in one’s 50s or 60s typically reduces total household wealth by what percent?

(a) 11 percent for married couples and 23 percent for single people (b) 16 percent for married couples and 28 percent for single people (c) 21 percent for married couples and 33 percent for single people (d) 31 percent for married couples and 43 percent for single people

10. What percent of U.S. workers are covered by traditional defined-benefit retirement plans (pensions)?

(a) 10 percent (b) 20 percent (c) 50 percent (d) 75 percent

Answers:

1. (b) The 4 percent rule advocated by many financial planners holds that if you withdraw no more than 4 percent of your portfolio in the first year of retirement and then increase that amount for inflation each year, your money should last at least 30 years. That rough guideline takes into consideration the role of expected earnings on your portfolio as well as inflation.

2. (c) Most employees will need an average of between 77 and 94 percent, according to Aon Consulting’s 2008 Replacement Ratio Study. It’s best to plan for the high side since health and medical costs are impossible to predict. Also, people tend to spend more money when they have more leisure time.

3. (d) Investment management company T. Rowe Price says retirement income goes up about 7 percent for each additional year of work, or around 22 percent after three years.

4. (c) Between 66 and 67, depending on date of birth. Retire before that and your benefits will be reduced by 20 to 30 percent. Check retirement benefits by year of birth at the Social Security site (http://ssa.gov) for your specifics. Knowing the right age is essential to making retirement plans that won’t leave you short of money.

5. (b) Employees age 50 and up can make up to $5,500 in catch-up contributions in 2009, added to a base contribution limit of $16,500 for a maximum $22,000.

6. (b) $96,809 as of Feb. 26, according to the Employee Benefit Research Institute. Whether you’re ahead or behind your neighbors and peers in retirement savings, don’t lose sight of the long term - keep saving.

7. (d) The number of workers 65 or older is predicted to soar by more than 80 percent by 2016 (from 2006 totals), according to the U.S. Bureau of Labor Statistics.

8. (a) 6 percent, according to a 2007 report by the Center for Retirement Research at Boston College. You should try to avoid tapping home equity for routine retirement expenses, if possible. The housing crisis has called into question projections that home equity is likely to become an increasingly important source of retirement income.

9. (c) 21 percent for married couples and 33 percent for single people, according to a 2007 report by the Urban Institute. These statistics serve as a warning to build up emergency savings and not cut things too close in case of an unexpected job loss late in your working career.

10. (b) AARP says only 20 percent are covered, meaning most people have to look after their own finan- ces with such vehicles as 401(k)s and IRAs for their nest eggs.

Scoring system:

0-3: Better bone up fast or you’ll have to keep working till you drop.

4-5: You need to study some more.

6-7: Not bad, but the road to retirement affluence could still be bumpy for you.

8-9: If your planning matches your knowledge, you should be in good shape.

At Work in Washington

The adverse impact of the current financial crisis and recession on Americans' retirement savings is taking on new prominence in Washington. As a result, Congress can expect new legislative proposals that would make it easier or more attractive for individuals to sock money away for their golden years.

While little in the way of actual legislation has been introduced, two of the most concrete items may be found in the Obama Administration's budget proposal. They have garnered broad support among Democrats in the past though neither one has been introduced as legislation yet.

The first pertains to retirement benefits for lower earners. It would expand the "savers' credit," a tax break designed to spur more retirement savings on the part of  middle- and lower-income Americans with a tax credit of 10% to 50% of the amount they save. Currently, couples earning $55,500 a year or less are eligible. The proposal would raise that threshold to $65,000 and would make the tax credit refundable so even workers who earn too little to owe income taxes could benefit. It would raise the credit to 50% of contributions for all recipients in contrast to the current 10%-to-50% sliding scale.

The budget's second retirement provision would require most employers to let workers contribute to an Individual Retirement Arrangement (IRA) through automatic payroll deductions. Companies in business under two years or with fewer than ten employees would be exempt.

While the AARP supports both ideas, the American Benefits Council, an employers' lobby, says it has concerns about the specific proposals. Competing legislation is likely to surface in coming months.

Retirement USA

Pension advocacy groups have joined forces with the Service Employees International Union to launch a project aimed at overhauling the U.S. retirement system. The initiative “Retirement USA,” aims to create a "universal, secure and adequate" retirement system that works alongside Social Security benefits. The Economic Policy Institute and the National Committee to Preserve Social Security and Medicare are among the advocacy groups working with the Union to facilitate the creation of a new system.

The coalition of groups has issued a report outlining several characteristics and goals that should be maintained and achieved with the new proposed retirement system. Lifetime payouts, pooled assets, portable benefits and effective oversight are among other characteristics and goals suggested by the coalition.

The report also contains examples of retirement systems adopted by other countries.

The coalition values your suggestions, which you may submit online at  www.retirement-usa.org.

The Recession: No Dampening of Perceptions

The recession has forced nearly two in five Americans to save less for their golden years, but it has not dampened their perception about whether middle income families can save for retirement.

Thirty-five percent of Americans believe it is possible for a typical middle income family to save for a secure retirement, according to a new COUNTRY Financial Survey. That percentage is virtually unchanged from the prior two years when the US economy was in a better state.

Yet, 26% of those surveyed say the effects of today's economy will cause them to delay their retirement.

Gender Split on Saving 

The genders are split on who has the best saving skills.. Overall, Americans think women (37%) are better at saving and investing for the future than men (29%).  Men, though, think they are better at this task (42%) while women believe they have the upper hand (49%).

Retirement Market Insights

Retirement plans have lost nearly a quarter of their value in the current economic crisis. Their assets tumbled to $7.86 trillion in 2008, down from $10.3 trillion the prior year, according to a new report, "Retirement Market Insights 2009," from the Spectrem Group.

Assets held in defined contribution plans, which include 401(k)s, fell 21% in 2008 to $3.8 trillion, down from $4.8 trillion the year before. Yet, the prevalence of these plans continued to increase overall. They expanded as a percentage of all retirement assets to a record 49% in 2008.

More information about the Spectrem report is available at www.spectrem.com.

Compare Me

In today's economy, it is more important than ever to find helpful ways to save for long-term financial goals such as retirement. Now, a free web-tool from ING offers a new approach to retirement saving by leveraging the power of "Peer Comparison." The tool makes it possible for anyone to see where they stand in relation to others on a wide range of saving, spending, investing, debt and personal finance matters.

By relying on peer data, the tool provides an objective way for users to gauge their own financial status and, ultimately, take action. For example, if investors determine they have saved less in their workplace retirement plans than their counterparts, they might be inspired to save more. If they come out ahead of the curve, they might find encouragement to continue their good habits.

The tool is available at www.INGCompareMe.com.

Weathering the Storm

OppenheimerFunds Retail Retirement has announced several educational programs to help alleviate concerns regarding market volatility and retirement savings plans. Its flagship tool is called "Weathering the Storm - Four Key Steps to Help Keep Your Plan on Course." Through four distinct sections, it advises retirement plan sponsors on how to evaluate their plan's investments, to ensure their plan meets participants' needs, to reexamine their plan's fees and expenses, and to address their participants' concerns. Each section also features a list of supplementary resources available.  

The program is available at www.oppenheimerfunds.com.

Buyouts in Chesapeake

The Chesapeake, Virginia, City Council has voted to begin a program that will offer one-time payments of up to $20,000 to employees who retire before October, 2009. The program will be open to about two-hundred eligible city employees. Even if all of them take the offer, the City of Chesapeake would still have to do layoffs over the next year, officials say. If no one takes the retirement offer, about sixty city employees could lose their jobs over the next year, City Manager William Harrell said. But if half of those employees took the offer, the city could avoid thirty-seven layoffs.