Ask Jill: Nearing Retirement

(CBS)


This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

When I was a financial advisor, I always told clients that most life-altering investment mistakes often occurred in the decade before retirement. Perhaps it's a sign of the years during which I practiced (1995-2008), but the number one mistake that I saw was assuming too much portfolio risk, only to experience a collapsing market at the worst time. That's why I was pleased to receive these questions from folks who are nearing retirement.


MY HUSBAND HAS 401-K AT WORK WITH PROFIT SHARING. HE IS SEMI-RETIRED COLLECTS SS, WE WANT TO PUT HIS 401-K IN A SAFER PLACE. HE IS DIVERSIFIED NOW, BUT DOES NOT RECEIVE ANY MONIES FROM HIS 401-K. SO WHAT IS THE BEST PLACE TO PUT THE MONEY HE HAS TO KEEP IT SAFER AT HIS AGE OF 66?

Let's start off with some basics: now that he's retired, he should probably roll over his old 401 (k) and profit sharing into an IRA Rollover account. This will expand his investment options, which becomes especially important in retirement. This may be a good time to interview a fee-based financial advisers who is a fiduciary, if you don't already have one.

retirement, workers, baby boomers
CBS

In terms of diversification, it's hard for most investors to down-shift from a growth-oriented mentality into an income-generating one. The first step in the process is to be realistic about how much money the account can generate, without drawing down the principal balance to a dangerously low level.

An easy rule of thumb is to use a withdrawal rate of 3.5% annually. This is lower than the 4-4.5% rate that many others use, but I would rather err on the conservative side! That means that if you have saved $1,000,000, you can count on approximately $35,000 per year from your portfolio. Hopefully that amount, plus Social Security and any other income, will cover your annual expenses. If not, don't be tempted to increase risk, but do squeeze the budget.

In terms of diversifying, your investment mix should be linked to when you need the money and how much risk you can tolerate. There are plenty of tools to help you in this process, but you're probably going to find that a larger chunk of your money should be fixed investments. You may also want to consider using annuities to control your retirement income stream.

I also like to remind people that as you approach retirement, it's important to have a year's worth of living expenses in a boring money market account-that way, if the market is crazy as you retire, you are not forced to see an asset at an inopportune time.

Here's another question about retirement:

Jill: I work for a defense plant in RI. I want to retire at age 55. They offer something called income leveling which means they will give you some extra cash up front for 10 years then cut that amount just about in half at age 65. Is it worth it to do this and not touch your 401K until age 65? Otherwise, retire at 55, don't take any extra up front and tap the 401K now. Thanks. P.S. Miss you here in RI!!!

If the choices are: take income leveling and delay tapping 401 (k), then I would take income leveling. However, don't hate me for saying this, but I would prefer that you not be forced to make that choice. Instead, it would be great if you could pick up a job for the next ten years (no easy feat in this economy) or work part-time work to cover your needs, so that you don't need to take the income leveling, nor do you have to tap your 401 (k).

Last but not least, I just received some good news on the retirement front: Fidelity recently conducted a survey of about 300 companies that had reduced/eliminated their 401k company match in 2009. When asked about their current plans, over 40% indicated they have either already reinstated the match or plan to over the next 12 months. These companies were from a variety of industries and ranged in size from less than 500 employees to more than 5,000. Let's hope that trend continues!


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Jill Schlesinger, CBS
(CBS)

Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.



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    Jill Schlesinger, CFP®, is the Emmy-nominated, Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.