Personal Finance

Rebuilding finances takes time — but now’s a good time to start

Layoffs. Pay cuts. Frozen pensions. Missing 401(k) matches. A lousy stock market.

The Great Recession damaged Americans’ nest eggs — and their psyches.

Even Uncle Sam’s effort to get the economy out of the ditch has hurt. Zero interest rates mean retirees get next to nothing on their savings.

It’s time for repairs.

The job’s made easier now that the economy has been on the mend for a few years. And Wall Street, for all its rocky moments, just posted a good year.

Making up for lost time, however, requires action.

For many, it means finding new ways to spend less and save more for retirement. Others need to get their investments in order, perhaps taking prudent risks for the first time or resisting the temptation to risk too much.

Retirees may need a new strategy if they can’t collect enough income from their low-paying CDs and other savings to live on.

Reaching retirement may be tougher these days but is worth the effort, says Barbara McMahon at Innovest Financial Partners Inc.

“You’re going to have to work longer, you’re going to have to save harder, and you may have to forgo the lifestyle you’d like now,” she said. “The other choice is you revise your notion of retirement.”

Financial planners say a return to the basics of saving, investing and spending wisely can make those later years a bit more golden again.The job of setting things right starts by taking stock of where you stand.

Fidelity Investments figures you may need a nest egg that is eight times your annual pay when you retire.

As to whether you’re on pace, Fidelity offers a yardstick for that, too. It suggests having saved two years’ worth of pay by the time you’re 40, or four years’ pay by age 50.

Falling behind?

The first step — and not an easy one — is to cut a leaner budget. Weigh each expense to see whether it is something you need or simply want. The best way is to save automatically before you have a chance to spend.

Olathe resident Steve Goble was out of work most of last year and has yet to restart his retirement savings since finding a job in September.

Goble said his wife may start saving more in her retirement plan, now that he’s working again. But he doesn’t have a plan at his new job, so he’s thinking about automatically transferring money from his checking account to an individual retirement account.

“It’s forcing me to have a lot more discipline, to peel that money off every month,” Goble said. “Otherwise, it gets into your daily cash flow and you get back into spending and going out to eat.”

Planners say to look for other chances to put more away, especially if you’re in a catch-up mode.

Save your tax refund this year instead of spending it.

And next time you get a pay raise, put that money in your 401(k), said Jana Castanon, at the counseling group Apprisen.

Some 401(k) plans will automatically bump up how much you contribute at work every year or two, helping you ease into a higher savings rate.

Planners say another way to close a retirement gap is to delay when you expect to retire, perhaps by five years. It means more years of saving and fewer years that the nest egg has to support you.

Sure it’s tough. But your retirement may depend on it.

Ramelle Timm saved at work. Her employers matched part of what she put in.

“I was on track and figured I had another 15 years of work,” the Kansas City resident said. “I felt good about it.”

Instead, she lost work in October 2009. It took a year to find a new job, and it paid much less.

Meanwhile, Timm cut out travel and spent less on clothes, restaurants, movies and plays. No more ballroom dancing lessons.

“I’ve given up a lot of wants,” Timm said.

But not needs, not even the needs of others.

Timm continued to tithe at her church – the same amount as when she was working.

It meant tapping her retirement accounts, which have fallen to only 17 percent of what they once held.

Timm left her new job after the company couldn’t pay her in December. She is optimistic about the stronger job market these days, but is realistic about her chances to retire.

“I’m at a point now where unless I get some wonderful job where I can save a lot of money, I will work till I die,” Timm said.

Follow a glide path

Working hard to save money won’t be enough. Your money has to work, too.

Investing in a mix of stocks and bonds will help you reach the day you can comfortably stop working.

The standard advice is to start young and invest aggressively while you can, as Danielle Naven did.

Naven, 25, had to work a year at her job in Overland Park before qualifying for the 401(k) plan. It didn’t slow her down.

She opened individual retirement accounts, typically at tax time to take advantage of the deductions they can offer.

And her money is working.

Naven has 86 percent of her retirement savings invested in stocks. The rest is invested in bonds, which are less volatile than stocks and tend to hold up better when the market slumps.

Getting the mix right depends a lot on when you expect to retire. And that’s the strategy behind an increasingly popular type of mutual fund available from many fund families and in many 401(k) plans.

They’re called target date mutual funds.

Each of these funds’ asset mix is aimed at a specific year for retirement. The Fidelity Freedom 2050 Fund, for instance, is aimed at someone who will turn 65 that year or close to it.

With nearly 40 years to go, a 2050 fund invests the way Naven does – mostly in stocks and relatively little in bonds.

As the target dates of these funds approach, their investments shift so they rely less on stocks and more on bonds.

Morningstar Inc., which studies mutual funds, has found that some groups change their mix faster than others.

For example, among 46 funds that target 2050, Morningstar said, stocks account for 100 percent of one but only 70 percent of another. Among 2030 funds, the current range for stocks was anywhere from 92 percent to 53 percent.

The message for investors is that there’s no right mix for everyone. Investors also need to look at how much risk they’re willing to take with their money along the way.

Morningstar analyst Josh Charlson said the stock market’s big fall in 2008 led some target date funds to hasten their glide toward more bonds.

“A lot of firms realized they were taking too much risk around the retirement date,” Charlson said.

Investing, in other words, takes discipline just as savings does.

Balance, consistency

For example, planners recommend rebalancing your mix of investments when it gets off track. A strong year for stocks means selling some to buy bonds and restore the original mix. A bad year might mean the reverse.

And if you’ve been knocked off your retirement schedule, it may mean shifting to a target date fund that is set for when you turn 70 – and then working until you reach 70.

Advisers caution against taking more risk to try to catch up to your original retirement date.

“The danger in trying to be more aggressive is you take more chances and more things can blow up on you,” said Steve White, an adviser with Edward Jones in Lee’s Summit.

Caution also can go too far.

Sandi Weaver, president of Financial Security Advisors in Prairie Village, said a few of her clients jumped out of stocks in 2008. It cost them when stocks rebounded in 2009.

“We still see the impact on their performance of that clutch,” Weaver said.

Will you run out of money in retirement?

A new question pops up at retirement: How much can I afford to spend?

One adage says spending 4 percent of your nest egg each year will make it last. It’s a bit more complex than that.

The 4 percent rule actually says to set your retirement budget at 4 percent of what you have when you retire. You can increase spending only to keep up with inflation.

Many seniors are finding that their CDs can’t keep up.

As a result, some have moved their money where it can still collect higher amounts of income, such as stocks that pay dividends, corporate bonds and other securities.

More income, however, means more risk.

“Without taking a lot of risk you’re going to have a real hard time earning more than 1½ or 2 percent,” said John Leis, vice president of personal financial solutions at American Century Investments. “And if you are, you’re probably sticking your neck out risk-wise a little more than you should.”

The risk is that the kinds of investments still paying higher income are vulnerable to losing money. What they pay out in dividends or interest can be wiped out if their prices fall.

“You clearly can’t live off income anymore,” said George Syata, a principal at Practical Planning LLC.

A better strategy, planners say, is to keep perhaps a few years’ worth of living expenses parked in safe accounts such as insured bank deposits. The rest can be invested much as you had invested before retirement, in stocks and bonds.

The Vanguard Group recently calculated that keeping up in retirement means investing about half your nest egg in stocks even after you retire.

Morningstar found that the average target date mutual fund still has about 40 percent of its money in stocks at the funds’ retirement dates. The average falls to 30 percent during the next 20 years after the retirement target date.

Retirees can chose less risky stocks than they bought during their working years.

For example, the target date funds at American Century have shed their more aggressive stocks by the time they reach their target dates. Stocks from emerging market countries such as Brazil are gone. Large U.S. based companies’ stocks take precedence over small-company stocks that can be more volatile.

Preparing for retirement has another payoff. You can delay taking Social Security benefits.

Taking benefits at age 62 means losing a third of the monthly income you’d collect by waiting until your reach full retirement age, said Robin Brewton, a vice president at Social Security Solutions Inc. Waiting until age 70 bumps up your benefits still more.

Brewton said if you already started taking Social Security, it’s possible to suspend your benefits once you reach full retirement age and let them build again before restarting.

The road to recovery starts by recognizing that our retirement plans have been beaten up. Although we can’t change that, we can do something about it.