Mellody Hobson: Take Stock Before Retiring

June 30, 2005 -- -- 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:

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:

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:

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?

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 (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.