With stocks sagging, home prices tumbling and food and gas prices robbing people's budgets, these are nerve-jangling days for consumers. Especially if you're retired. Wasn't retirement supposed to be the time to finally relax?
Don't despair. You can blunt most threats to your retirement with smart investing, shrewd planning and old-fashioned thrift.
Here are five of the biggest threats to your retirement. Then take action. The cures are less painful than you might think.
When money buys less each year, thanks to rising prices, you have to withdraw more and more from your retirement account. Eventually, you could run out of money sooner than you expect.
The consumer price index, the government's gauge of inflation, rose 3.9% for the 12 months that ended in April. But to many people, the real rate of inflation is far higher. Sharp increases in food (5%), health care (4.8%) and energy (15.9%) have battered retirees, particularly those with little income.
Even low inflation hurts retirees, because of its cumulative impact. Say you withdraw $1,000 a month for expenses. After 10 years of 3% inflation, your monthly $1,000 withdrawal would command the buying power of only $760 — a 24% plunge.
Inflation hits dollar-denominated paper assets, such as U.S. stocks and bonds, hardest. To help beat inflation, you can put some money in hard assets or foreign investments.
Take gold, for example. Gold retains its value when paper currency doesn't. Consider StreetTracks Gold Shares, an exchange-traded mutual fund that invests in gold bullion and trades under the ticker GLD.
Another option: Treasury Inflation-Protected Securities, or TIPS. These are federally backed bonds whose value rises according to inflation. Buy TIPS from the Treasury, at treasurydirect.com, or via TIPS mutual funds. Vanguard Inflation-Protected Securities fund (VIPSX) charges rock-bottom expenses.
THREAT: Not saving enough
About 36% of workers have amassed less than $10,000 for retirement, the Employee Benefit Research Institute reports. Only 27% have more than $100,000. "About two-thirds of the population hasn't saved anything meaningful," says Dallas Salisbury, EBRI's chief executive.
The consequences of saving too little are especially severe these days. Fewer companies offer health care benefits to supplement Medicare, forcing retirees to pay more for care than in the past. And as people live longer, they need more money for a longer period.
How much should you save? Experts say your first year's withdrawal from your retirement savings shouldn't exceed 4% or 5% of your total. If you'll need $40,000 a year to cover your expenses — beyond Social Security and any pensions — then you should start with $800,000 to $1 million.
Gradually save more
Most people set their initial goals too high, says Ray Ferrara, a financial planner in Tampa. "It's like starting an exercise program," Ferrara says. "You start with 50 sit-ups, it hurts, and you quit."
Set aside a sum that won't affect your lifestyle. Starting with a 401(k) is easy because the money goes straight from your paycheck into savings — and, often, your company will chip in, too. Once you get used to saving a little money, you can raise your contributions.
If you don't have a 401(k) option, consider starting an automatic investment plan with a fund company. You agree to let the company tap your checking account electronically once a month. T. Rowe Price (www.troweprice.com) will let you start an automatic investment plan with just $50 a month. So will the Ariel funds (www.arielfunds.com).
THREAT: Low stock returns
Over the long run, stocks tend to outperform bonds and money funds. But for the past decade, the S&P 500-stock index has returned an average of only 4.2% a year, including reinvested dividends. By contrast, the Lehman U.S. Aggregate Intermediate bond index was up 5.7% a year. It could take a decade or longer to make up for this grim decade of stock underperformance. What's an investor to do?
The S&P 500 is a well-diversified portfolio of stocks, but it contains just one asset class: large-company stocks. Had you invested $100 a month in the Vanguard 500 Index fund over the past decade, you'd have $15,484 now, according to Morningstar.
But let's say you had diversified. Instead of putting all your money in the Vanguard 500 index fund, you used Vanguard's Total Stock Index fund, which includes small- and midcap stocks, plus Vanguard's Total Bond Index fund; Total International Index fund; Emerging Market Index fund; and Real Estate Investment Trust Index fund.
Rather than putting $100 a month in the S&P 500 fund, you put $20 a month in each of the five funds above. A decade later, your account would have had $23,803, according to Morningstar — a 54% rise over the 500 index fund.
No one can foresee the future — which is why it's best to split your money among a series of diverse investments.
THREAT: Unscrupulous advice
A naive investor with $500,000 in retirement savings is a tempting target, indeed. About 44% of all investor complaints received by state securities regulators come from seniors, up from 28% in 2005.
What will fast-talking financial advisers say to part you from your money? Anything. They'll promise high returns, ultra-safe accounts, investment secrets. They may not even be after all your money — just a high commission for an investment that does nothing for you but lines their pockets.
No opportunity is so urgent that you must invest in it immediately. You're unlikely to make a million dollars from advice at a free seminar. "Those events are sales events, and seniors need to approach them with great caution and skepticism," says Karen Tyler, North Dakota's securities commissioner.
Investigate any broker or adviser before doing business. Check their complaint and disciplinary record at www.finra.org. If you feel you've been duped, alert your area's securities administrator. Information for all 50 states is at www.nasaa.org.
THREAT: Falling home prices
Counting on a big profit from the sale of your home to fund retirement? Not so fast. Home prices are falling across the nation.
A lower house price could also affect your retirement if you were considering a reverse mortgage, which lets you tap your home equity while remaining in your home. You may not be able to get as much cash out of your home as you had planned — or any at all.
Most people who have owned their homes for 10 years or so still have plenty of equity, even though prices have fallen. Those hurt the most are those who bought houses in the past three to five years.
The longer you stay in a house, the more price appreciation and equity you build up. Still, you may have to live in your house longer than you hoped — or, when you sell it, move to a less-expensive area.