Mellody Hobson: Take Stock Before Retiring

The baby boomer generation, those born between 1946 and 1964, account for more than 28 percent of the population -- approximately 76 million people. According to American Express Financial Advisors, these boomers own nearly $3 trillion in IRA accounts and $2.2 trillion in 401(k)s -- money which will soon be available to them.

In fact, beginning July 1, the oldest of the baby boomers will turn 59 ½, making them eligible to withdraw money from their retirement savings accounts without a tax penalty. If you are one of these boomers, there are some important factors to consider before tapping into your retirement savings.

1. Take Stock

It is extremely important to gain a true understanding of all of your assets as well as where your income will come from during your retirement years. The bottom line -- you must know what you have. Take inventory of the following:

      Social Security benefits
      401(k) plan assets
      IRA assets
      Potential inheritance income
      Home value
      Insurance policies
      Other savings and investments

Additionally, it is vital to come to a realistic understanding of your lifestyle choices and where you view yourself in retirement. Finally, depending on your career history, you may have retirement money in a few different 401(k) plans as well as an IRA. In order to keep track of all your retirement dollars, it is best to roll all of your tax-deferred retirement assets, such as your 401(k) and Traditional IRA, into one IRA account.

2. Keep cash on hand

It is a good idea to set aside at least two to three years of cash to cover your day-to-day incidentals while in the first stages of retirement. Having this cash cushion will allow you to avoid having to sell your investments in a down market should one occur early in your retirement years.

3. Liquidate taxable accounts first to preserve tax free growth

Although you can begin taking withdrawals from your tax-deferred accounts at age 59 ½, you are not required to take withdrawals until age 70 ½, so you will want to continue to let these assets grow tax-free for as long as possible. If you need income, consider liquidating taxable accounts holding individual stocks and stock mutual funds.

4. Delay drawing down Social Security as long as possible

Putting off retirement not only means more earned dollars and additional time for your investments to grow, but can also result in a higher value of benefits received. For example, a 40-year-old who makes $40,000 a year and opts for Social Security at the earliest possible time (62 years and 1 month) would be entitled to $955 a month in benefits. However, if the same individual delays retirement another eight years (age 70), they would receive $1,751 in benefits -- a difference of almost $800 a month.

5. How low can you go?

You want to withdraw the least amount possible to sustain your lifestyle to avoid running out of money. In fact, one or two percentage points can make a huge difference.

Mellody's Math:

If you have a balance of $250,000 upon your retirement, a small variance in the percentage withdrawn can be significant:

      At a rate of 4 percent a year, (assuming you stick with the initial balance and the identical amount) your balance would be zero after 25 years
      With a 6 percent annual withdrawal, your balance would be zero in about 17 years
      At 10 percent, your balance would be zero in just 10 years

6. Stay invested

While it is important to consistently re-examine the asset allocation across your investments, do not abandon stocks altogether when you reach retirement. Additionally, do not automatically move your entire stock portfolio to cash or low-paying certificates of deposit in reaction to a drop in the value of your portfolio. Even in your retirement years, you need exposure to stocks for growth. In fact, if you are too conservative, you may outlive your money. That said, my recommended allocations by age are:

      30s and younger: 100 percent stocks
      40s: 80 percent stocks and 20 percent bonds
      50s: 75 percent stocks and 25 percent bonds
      60s: 70 percent percent stocks and 30 percent bonds
      70s and older: 50 percent stocks and 50 percent bonds

This is the identical asset allocation I have suggested over the years on "Good Morning America." I do not believe the allocation should shift because of recent market volatility. While I am biased toward stock investments, I have always counseled diversification across different types of stocks, which helps to mitigate risk. To that end, make sure you are not overweighted in company stock and that your equity diversification is comprised of a variety of mutual funds instead of individual securities.

And What If You Are Not Ready to Retire?

      Extend your retirement: Putting off retirement not only means more earned dollars and additional time for your investments to grow, but can also result in a higher value of benefits received. For example, a 65-year-old who opts to delay their Social Security benefits until age 70, will receive $300 more a month -- a 6 percent increase in benefits.
      Catch-up: Americans over the age of 50 can take advantage of "catch-up provisions" for their retirement. Through 2005, individuals age 50 and older may contribute up to an additional $500 to their IRAs per year, increasing to $1,000 in 2006. This additional allocation can add up nicely and make for a larger nest egg for your retirement years. For example, if an investor "catches up" with $500 more a year for 15 years (assuming an 8 percent annual return) they would have $15,000 more than an investor who did not take advantage of the catch-up provision.

      Reverse your mortgage: One prescription for seniors in need of extra money is a reverse mortgage. Reverse mortgages let you tap into home equity and repay the loan with proceeds from the eventual sale of the property -- often at death. The greatest appeal of a reverse mortgage is that you can be guaranteed a source of monthly income for as long as you need it, even if you live beyond your life expectancy. For example, the money can be used to pay for costly long-term care insurance premiums, home health care services or domestic help. Currently, about 13.2 million households could qualify for an average of $72,128 apiece in reverse-mortgage loans. The total of the loan must be paid back when the last surviving borrower dies, sells the home or permanently moves away. In most cases, in order to qualify for a reverse mortgage, you must be at least 62 years of age.

Key facts about reverse mortgages:

1. The home must be the primary residence for the borrower and generally, only single family, one-unit dwellings are eligible.

2. There are three major reverse mortgage products in the United States: the Federal Housing Administration Home Equity Conversion Mortgage, which is a federally insured reverse mortgage; the Fannie Mae Home Keeper loan (and the Home Keeper for Home Purchase loan); and the Equity Guard Plan and the Cash Account Plan.

3. The costs associated with getting a reverse mortgage vary depending on the product you choose. However, costs typically include the origination fee (which can be financed through the reverse mortgage), an appraisal fee and charges similar to those associated with a regular mortgage.

4. The money provided through a reverse mortgage does not affect your regular Social Security or Medicare benefits. However, it may affect your ability to be eligible for state and federal government assistance programs, such as Medicaid.

Mellody Hobson, president of Ariel Capital Management ( in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.