Retire When You Want To

You’re going to need to save and invest more — and smarter. You can’t count on huge market returns.

Work Back From 4 Percent

A worry-free retirement boils down to knowing that your money will outlive you. Figuring out a sustainable withdrawal schedule can be vexing, though. Here’s what the number crunchers have figured out: Assuming you start in your 60s with an age-appropriate mix of stocks and bonds (typically a 60/40 split), if you withdraw 4 percent of your stash a year and adjust that amount annually for inflation, odds are excellent that your money will last at least 30 years. Remember: 80 is the new 65 in terms of life expectancy, and about 20 percent of men who are now 65 (and one-third of women) will live to at least 90.

At this 4 percent withdrawal rate, a $1 million retirement portfolio will generate $40,000 (pre-tax) in income in year one, or $3,300 a month. Want $5,000 a month? That’ll be $1.5 million to start, please. Social Security will no doubt add some monthly income. And if you’re lucky enough to still be eligible for a pension, count your blessings. (Just 20 percent of private-sector employees are covered these days.)

Save More in Tax-Sheltered Plans

If the math of a 4 percent withdrawal rate just sent shivers down your spine, it’s time to get much more serious about saving in tax-sheltered retirement plans such as IRAs and 401(k)s. OK, so maybe you won’t be able to come up with the scratch to salt away the $16,500 maximum allowed for 401(k)s this year and the $5,000 limit for IRAs ($22,000 and $6,000, respectively, if you’re over 50). But the more you save now, the more likely you’ll be able to retire when you want to.

To ensure that you don’t fall victim to good intentions unfulfilled, authorize your brokerage or fund company to automatically pull money out of your bank account biweekly or monthly and put it into a self-directed retirement plan. This is especially important for self-employed people, who lack the forced savings regimen of employees with 401(k)s. The maximum deductible amount for SEP IRAs this year is the lesser of 25 percent of self-employment income or $49,000. “Every time I hear a client say they will just wait and make the contribution at the end of the year, I think, ‘Yeah, sure you will,’” says Jeff Rose, a certified financial planner in Carbondale, Ill. “I push every client to automate whatever he or she can handle.”

Opt for a Roth 401(k) if your employer offers one, and a Roth IRA if it doesn’t. (The IRA is available only for individuals with incomes below $120,000 and married couples with joint incomes under $176,000.) That way you’ll lock in tax-free withdrawals in retirement. Yes, you will forgo the up-front tax break on what you contribute, but the math typically works in favor of the Roth over time. Note to higher-income earners: If you don’t qualify for a Roth in 2009, you may want to stuff money in a traditional IRA this year and move it to a Roth in 2010, when Uncle Sam will let anyone convert, regardless of income.

Pick Your Target (Fund)

Financial Engines, an independent investment advisory firm specializing in 401(k)s, has determined that only about a third of plan participants do a good job of choosing an age-appropriate mix of stocks, bonds, and cash. Everyone else is either too aggressive (overweighted in stocks) or too conservative (heavy in stable value funds and guaranteed investment contracts).

It’s easy to see why so many investors are so lousy at planning for retirement. Choosing among a 401(k)’s funds can be overwhelming. You might resort to dart throwing or putting equal amounts in every fund offered. And when the markets go kerflooey, you could easily decide to immediately move your money from the falling fund into one that hasn’t lost value.

Sound familiar? Then shift your money into your plan’s target date fund matching your anticipated retirement date, assuming your employer offers this option. Then walk away. Target date funds are designed to hold an age-appropriate mix of stocks, bonds, and cash; as you age, the fund automatically shifts your assets accordingly.

However, don’t enroll in the target date fund until you’ve reviewed its glide path — the percentage you will have invested as you age. You’ll want to avoid concerns raised in recent congressional hearings that some target date funds have invested too heavily in stocks for their employees nearing retirement.

You’re also going to need to give the liability side of your balance sheet a serious rethink. “What you spend and how you deal with debt is totally within your control and can have a huge impact on your net worth,” says Bret Elliott, a CFP in Lafayette, Colo.

Cut the Cash Flowing Out

Can’t imagine where you’ll come up with money to save more for retirement? Then it’s time to get serious about things like driving the car for a few more years and to accept the notion that saving for your retirement should take precedence over saving for your child’s college education. (There are loans for school, but you’re pretty much on your own for retirement.) Beyond the big-ticket expenses, comb through your monthly bank account and credit card statements for savings. “Little things bleed out the side; you don’t notice them, but they add up,” Elliott says. Adjusting to a more moderate lifestyle today means you’ll need less to maintain your quality of life in retirement. The payoff: You can speed up your target retirement date.

Don’t Mortgage Your Future

It’s hard to retire when you want to if you’re still on the hook for a crushing mortgage. Keep that in mind if you’re now in your 40s or 50s and considering taking on a hefty mortgage that will last through your 70s. “I truly believe a worry-free retirement requires being debt-free,” says Atlanta financial adviser Brian Preston. “So that means getting the house paid off before you stop working.”

Get your current mortgage paid off faster by accelerating your payback schedule. One extra payment a year shaves five years off a 30-year mortgage. Be careful about committing to the higher payments on a 15-year loan or arranging for a biweekly schedule on a 30-year loan, though. These strategies only make sense if you have ample emergency savings that will let you keep up with the payments if you get laid off or end up at a lower-paying job.

Choosing the right “where” for retirement can go a long way in allowing you the “when” you want. Investigate inexpensive places to live: You may need to downsize to a smaller home or relocate to a more affordable region.

Home In on the Right Home

Where you live in retirement will have a big impact on your finances. If you plan to stay in your current home and will have the mortgage paid off, make sure you’ll have enough saved to cover property taxes and inevitable repairs. Another option is staying local but downsize to a less expensive residence — either a smaller home or a place in a nearby, less chi-chi town. Why pay inflated real estate prices and steep property taxes for great public schools now that your kids are grown?

For the biggest bang for your retirement bucks, consider relocating to a much less expensive region of the country. Nearly half of baby boomers in their 50s with household incomes over $100,000 expect to move to an area with lower housing costs when they retire, according to a 2006 Hanley Wood survey.

It’s never too early to start forming your short list. Check out CBS MoneyWatch.com’s take on the best places to retire, then compare your current area’s cost of living to a retirement hot spot. For example, move from Miami to Asheville, N.C. (rated No. 1 by Topretirements.com), and your living costs will be nearly 30 percent lower. Trade Chicago for Fargo, N.D. (yes, Fargo’s on some lists of the best retirement places), and your living costs will be almost 40 percent lower. Just be sure to have some money saved to send that deep dish pizza to Fargo.

More on MoneyWatch:

• Can You Afford to Retire ... Ever?
• The Best Places to Retire
• The Best Retirement Plans