Safeguard Your Retirement in Hard Times
by Ellen Hoffman
Monday, May 5, 2008
provided by BusinessWeek.com


Investment losses, job loss or downsizing, an upward adjustment on your adjustable rate mortgage, and higher prices on everything from gas for your car to rice for the table are only some of the current factors that could derail your financial planning for your golden years.

When your income is not covering all your expenses, it can be tempting to simply cut out the expense of saving for retirement -- or tap the savings in your 401(k) or IRA to pay the bills. But there will always be negative consequences to those actions. If you simply stop saving, you'll almost certainly reduce the amount of money available to you when you decide to retire, and you may even have to postpone your retirement.

Uncle Sam allows you to take out a loan from your 401(k) or to withdraw money for certain financial "hardships," including preventing foreclosure on your home. But the criteria are stiff, and you'll incur financial penalties (BusinessWeek.com, 9/23/05) that could take you years to overcome. And if you're younger than 59-and-a-half and simply withdraw money from your 401(k) or IRA, in almost every case you'll also incur a 10% penalty and have to pay income tax.

Control Your Spending

"Anytime a dollar can stay in the 401(k) or retirement plan, that's a dollar not yet taxed and a dollar that is there for tomorrow," says Jamie Milne, a financial planner in Barre, Vt. "The fundamentals of retirement do not really change in a recession, but the attention to detail (such as controlling spending) is just that much more important."

Controlling spending starts with understanding how you spend. If the numbers are not in your head, take time to review your spending for the last few months, or even for the last year. Also consider the suggestion from Chicago financial planner Malay Vasavda that you invest in money management software to help you monitor expenses on a regular basis.

Once you have the list of expenses, comb through for savings. Michael Foltz, a financial planner in Itasca, Ill., suggests some relatively painless cuts: Reduce the number of restaurant meals or frequent less expensive restaurants, trim auto expenses by finding someone to share your commute, increase the deductibles on homeowner's and auto insurance, and delay major discretionary spending such as an expensive vacation or new vehicle.

Consider Refinancing Your Home

In other cases, downsizing your home -- reducing both mortgage and maintenance expenses -- may be the solution. Loretta Nolan, a financial planner in Old Greenwich, Conn., has a 57-year-old client, a corporate executive, whose home has lost about $200,000 in value recently. The executive had planned to sell the home in a few years and put that extra $200,000 toward an enhanced retirement lifestyle. Instead, she's considering selling now and moving to a home that's less expensive. By doing so, she will both reduce her current costs and free up more of her income for retirement.

If you haven't done so recently, refinancing your home may also help you avoid compromising your retirement savings. Interest rates are relatively low, and if you plan to stay in the home for several years or more, a lower-rate fixed mortgage could be a boon to your budget. Just don't fall for any of the tricky deals -- such as an interest-free mortgage or an ARM with a huge balloon payment -- that have plunged so many homeowners into financial disaster in recent months.

Create an Emergency Fund

Perhaps the biggest key to financial stability in a bad economy is your job. If you lose the job or are asked to take a lesser position, you could lose income, health insurance, and retirement benefits all at once. Protect your income by making yourself indispensable at work, keeping your skills up to date, and staying attuned to external and internal trends that could affect your employer's balance sheet. If your company is publicly traded, pay attention to the stock price, read reports to the shareholders, and keep up with the news.

Even if you don't feel personally threatened by the current scary economic news, consider some preventive measures. Inoculate your retirement savings against future incursions by creating an emergency fund that, in a crunch, could pay up to six months of your expenses; and apply for a home equity line of credit -- easier to get when you are not in dire financial straits -- to use if the unexpected should occur.

Copyrighted, Business Week. All rights reserved.