How to Cope With a Deflated IRA
A military pension helps, but don't give up on stocks.
From Kiplinger's Personal Finance magazine, January 2009
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Who: Robert and Judy Parsons, both 67
Where: Edenton, N.C.
Question: What should retirees do in this volatile market?
Robert Parsons retired in 1985 after 26 years as a Navy air-traffic controller, then spent several years in law enforcement before he developed a bad back and retired for good. After watching the value of his IRA shrink from $130,000 to $98,000 in just a few weeks this fall, he's wondering what he should do now to protect his nest egg. His investments may eventually recover, but, asks Parsons, "Do we have time for that?"
Time is of the essence if you're in your sixties. But you could live 20 or 30 more years, so it's no time to panic and abandon the fundamentals. You need cash for your immediate needs, but you also need growth via the stock market over the long term, says Stuart Ritter, a certified financial planner with T. Rowe Price. "You are not going to use all of your money in the next two years." Even if you're 65 or older, Ritter recommends keeping about 55% of your retirement savings in a diversified portfolio of stocks and stock mutual funds.
The Parsonses' investments are well diversified, but they need enough money on hand to cover their current expenses and any emergencies. Marc Schindler, a certified financial planner in Bellaire, Tex., recommends keeping as much as two years' worth of expenses in cash, such as in a money-market account or short-term CD.
You won't need that much if, like the Parsonses, you have sources of guaranteed income (the couple have Robert's military pension and their Social Security checks). In fact, they don't plan to tap their IRA until they start taking required minimum distributions at age 70. And because Robert is a retired member of the military, Tricare for Life helps fill the gaps in Medicare and lowers the couple's out-of-pocket costs.
Retirees who aren't as fortunate can bolster their depleted savings by withdrawing less money than they had originally planned. One common guideline recommends withdrawing 4% of your savings in the first year of retirement, then bumping up your withdrawals by about 3% of the original balance every year to keep pace with inflation. But in a down market you'll do better if you base your 4% withdrawals on the reduced value of your nest egg, rather than the original balance, and temporarily discontinue those 3% increases.
You won't need to spend as much of your retirement savings if you boost your income. And combining part-time work with a hobby -- such as working at a golf course, garden center or veterinary clinic -- might also get you an employee discount.
In addition, working at an extra job for a few years after retirement could help you delay taking Social Security. And for each year after your normal retirement age that you hold off, your benefits will be increased by 8% for the rest of your life.
If you qualify for $1,600 a month at age 66, for example, delaying the start of benefits until you're 70 would bump up your benefit by about $500 a month (see the Retirement Estimator at www.socialsecurity.gov). All future cost-of-living increases would add to that higher base.
Reader Comments (6)
Posted by: david at 12/10/2008 10:06:18 AM
Why this article chose a well off US citizens to discuss, and not a the typical working person is quite strange. Military retirees receive very generous pensions (typically 50 to 70 percent of their pay after only 20 service) which by the way is paid for by people who may be working at Burger King. When you add in the yearly cost of living adjustments along with the free Medical benefits it quite the deal. Any normal US citizen would die to have half of the tax dollars a Military or Federal retiree is given.
Posted by: John Friedson at 12/10/2008 04:56:15 PM
David, you have a common misconception of military retirement pay - it is not "50%", it is 50% of BASE PAY. Much of military pay is allowances, such as housing and food and area cost of living adjustments, and assuming you don't get forced out due to reduction's in force or 'up-or-out' policies [or killed] when you DO retire, you get NONE of that. It is much closer to 30% than to 50% at 20 years.. and just maybe you should look at a service-persons earnings during those time, the hours put in and risks taken even when not deployed to training or combat, and then decide if it is such a 'great deal.'
Posted by: Debi at 12/10/2008 11:28:58 PM
Military retirees also get regular COLA, medical care, exchange/commissary privileges (no taxes paid), access to military flights (albeit based on rank).
Posted by: Emily Booth at 12/10/2008 11:41:24 PM
David, the worker at Burger King isn't sacrificing their life for the burger eaters. Your choice of words was apt, however, when you spoke of death in relation to the military. A federal retiree does not get social security benefits. The Burger King employee does.
Posted by: Kenneth at 12/24/2008 11:37:27 AM
Very simplistic. Applicable only to those who have the same financial profile as the couple in the article. And as for what David says, he could have joined the military too. Or not? John has appropriately corrected David's misconceptions. Military retirement has many wonderful features, but if one has not made the senior officer ranks things can still be limited.
Posted by: Hal at 01/29/2009 05:08:03 PM
How can you tell a retiree to put 55% of their money into stocks. We went through this in 2001 & 2002, and we have not seen the end of this downturn yet. Take a look at your achives (Kiplinger 2003) where you told everyone how to re-build your portfolio now! This happens over and over. If you had gone to CD's in 1999 you would be way better off now. I agree with some stock exposure for a retiree, but not 55%. Even John Bogle says that is too much.