Retirement planning without a retirement plan

Dear Liz: After nine months of unemployment I finally landed a new job, but at half my former $100,000 salary. In this economy I was happy to get it. I always contributed the maximum to my 401(k) and employee stock purchase plan, but my new company does not offer either of these options. I made it through my period of unemployment on severance, savings and belt tightening. Other than a mortgage, I have no debt. I realize I need to both catch up on missed contributions and continue to put away money for retirement. I just turned 60. What is my best move for continued retirement saving? And how will my reduced salary affect my future Social Security benefits?

Answer: You don’t need your employer to help you save for retirement, fortunately. Since you’re over 50, you can contribute $6,000 to an IRA or Roth IRA annually. You can open an account at virtually any bank, brokerage or credit union. Look for one that doesn’t charge you account service fees and that has a broad array of low-cost investment options. Vanguard, for example, waives its service fees for IRA investors who sign up for electronic statements.

If you’re able to save more, you can do so in a regular, taxable brokerage account. You won’t get a tax break for your contributions, as you would with a traditional IRA, but you can qualify for low capital gains tax rates if you hold your investments for at least a year.

Your Social Security benefits will be based on your 35 highest-earning years. The Social Security website (http://www.ssa.gov) has a benefits calculator that enables you to see your estimated future benefit based on your work record so far, and that enables you to create different scenarios — such as a lower salary going forward, or different retirement ages — to gauge their effect on your future checks.

There’s no such thing as “risk free” retirement investing

Dear Liz: I just started saving for retirement through my job’s 401(k) plan. I’ve been putting aside $400 a month. I just checked my account to see how it was doing. It has lost over $600! I am trying to save for my retirement — not lose. Where should I invest? I’m considering getting a financial planner to help me.

Answer: The most important thing you need to know about investing is that there is no such thing as a truly risk-free investment.

You won’t lose your principal if you invest in “safe” investments, such as Treasuries and FDIC-insured bank accounts. But you won’t earn enough to keep ahead of inflation. Basically, you’ll never be able to save enough to retire, since the purchasing power of your funds will erode over time rather than grow.

To stay ahead of inflation, you need to take more risk. Stocks over time have consistently offered returns that beat inflation. In every 30-year period starting in 1928, stocks have returned average annual returns of at least 8%. But they certainly don’t gain that much every year, and some years you’ll face steep losses. When you invest in stocks, you have to be prepared for volatility. In other words, sometimes your investments will lose money.

You can reduce that volatility somewhat by diversifying your stock investments (some small companies, some large; some U.S. companies, some foreign) and by including a diversified mix of bonds in your portfolio, along with cash.

A fee-only financial planner can help you design an investment plan that makes sense for your situation. Or you can consider opting for the “lifestyle” or “target date retirement” funds offered by your plan, since they do the diversification and rebalancing for you.

Social Security: Grab it early, or wait for bigger checks?

Dear Liz: Which is really better? A smaller Social Security check starting at age 62 that you are still young enough to enjoy for years? Or a much larger Social Security check beginning at 70 that you get for a much shorter period, and then just gets signed over to the nursing home or assisted living facility where you wind up? I won’t be dependent on the money, so I’m inclined to vote to get less earlier. Your thoughts? None of the usual discussion addresses the “quality of life” aspect of Social Security checks.

Answer: You’re right. The math typically favors delaying Social Security payments for as long as you can. Your benefit gets bigger for every year you delay until age 70. Also, your benefits are sharply reduced if you continue to work after taking early Social Security checks.

But this is yet another area where there are no one-size-fits-all solutions. Some people may opt to apply for benefits early, perhaps because their life expectancies are short, they want to let their investments continue to grow tax-deferred or they simply want (or need) the money. Others may delay for as long as possible to maximize their payouts.

You can’t know for sure in advance which is the right approach, since there are so many variables involved — including how long you’ll live and how long you’ll enjoy good health.

As you approach retirement, you should make an appointment with a fee-only financial planner to review every aspect of your retirement plans, including this particular issue. Another good resource is the awkwardly titled “Personal Finance for Seniors for Dummies” by Eric Tyson and Robert C. Carlson, who spend a fair amount of ink on the “when to retire” conundrum.

Is it time to panic?

Dear Liz: Is there a reason not to panic? I see my investments tumbling and I am already very conservative. I don’t want to put it all under the mattress, but what else can a person do to hang on to what I have saved? I am fast approaching retirement age.

Answer: If you’re prone to panic, you should turn off the television pundits who like to scare people, which seems to be most of them.

What you need are perspective and balance. If you’re within 10 years of retirement, you should invest in a session with a fee-only financial planner to make sure your portfolio is appropriately diversified. Taking too little risk can be as dangerous as taking too much when you have a 20-year (or longer) retirement horizon.

Over time, the stock market does march upward, although it’s never a smooth path.

When a 15-year mortgage makes sense

Dear Liz: You recently advised a couple who were in sound financial shape about possibly refinancing their home loan to a lower interest rate. You suggested a 15-year loan to make sure they entered retirement without a mortgage. Why not recommend getting a 30-year loan to get the lowest required monthly payment, then making extra payments to get the loan paid off faster? This approach offers the flexibility of being able to drop back to the lower payment in the event of a job loss or other financial setback. They sounded like well-disciplined people and probably could turn that 30-year loan into a 15-year loan by paying 13 payments a year instead of 12.

Answer: Refinancing to a 30-year loan can certainly make sense for people who want to lock in the lowest payment and maintain their financial flexibility in the face of possible financial setbacks. You’re also right that this couple seems disciplined enough to make the extra payments to get the loan retired before they do.

However, you missed a key factor: This well-disciplined couple had a mortgage with an interest rate of 5.875%. That indicates they’ve had this mortgage for a while. If they’ve paid down enough of the principal balance, they may be able to refinance to a 15-year loan with a significantly lower interest rate (as in slightly over 3%) without dramatically raising their payments. Many people, when faced with that option, would want to lock in the lower rate.