Retiring Well

By Jillian Kasky

Karl and Claire Ritzler are typical vanguard baby boomers: they've worked for nearly three decades; two kids are out of the house, and the third is nearing college graduation. And, at age 50, statistically speaking, the Ritzlers are only a little more than halfway through life. That's right: the Society of Actuaries estimates that baby boomers will be the first generation of which both sexes are expected to live well into their 80s, and many will live to see a 100th birthday.

That's great news--if you can afford it. Trouble is, recent studies indicate that most boomers will outlive their savings--unless they change their ways and their retirement plans. A Merrill Lynch report found that the average boomer couple are saving 39% of what they should to preserve their life-style through decades of retirement. Says Sara Rix, a senior policy analyst at the American Association of Retired Persons: "Boomers aren't saving enough to maintain the standard of living to which they've become accustomed."

If you fit that description, take heart: you can still catch up, thanks in part to a healthy U.S. economy and low inflation. But if you haven't done so already, get started now. Whether you're in the peak earning years of your 50s or well into retirement and trying to make your money last, it helps to understand that the old rules of saving and planning for retirement have been thrown out the window by America's happy boom in longevity. It's still true, as New York City-based financial planner Jonathan Satovsky says, that you should "save like mad as early as possible." But that's where the similarities end between your retirement plan and your parents'. If you quit work at 65, you could be retired for 35 years. And that requires a different strategy.

You're also likely to be more active for more years than your parents were, which you should factor into your plans. "Sixty-five is younger now than it ever was," says Elissa Buie, president of the Institute for Certified Financial Planners. She recommends that clients make plans to live through four stages of retirement: continuing to work to some degree; pursuing active leisure, such as travel and tennis, with little or no work; shifting to more sedentary pursuits, like gardening and reading, as one's energy wanes; and finally, dealing with declining health and serious illness.

Your best chance to make your money last is to follow one or more of these strategies for today's longer retirements:

--Stay invested mainly in stocks for higher returns so your money will last well into your retirement.

--Rather than quit work entirely, take a less demanding and more enjoyable job that will pay your current expenses for five to 10 years while your savings grow untouched.

--Don't get panicked by those articles that say you need $500,000 or $1 million in savings to retire comfortably; once you're not working, you have many options to live both enjoyably and less expensively.

STICK WITH STOCKS

The old rule on saving for retirement was that you should gradually reduce the percentage of stocks in your portfolio and increase the percentage of bonds. In fact, a common recommendation still used by some planners is to match your percentage of bonds to your age: at your 65th birthday hold 65% bonds (or bonds and cash) and 35% stocks. But a typical bond, the five-year Treasury, historically yields only about 5.3% and yields even less today--about 4.5%. The broad stock market, in contrast, has returned an annual average of about 11% a year since 1926, 18% a year since 1980. Clearly, if you want your money to last until you're 100, you'll need more exposure to stocks further into retirement.

How much more is the question. And how can you handle their higher risk and volatility? Consider this: only seven times since 1926 has the stock market failed to rise for five years or more. The most recent five-year trough came from 1973 to 1977.

The trick, then, is to keep enough money in the safest high-grade bonds (and in cash) so that you can live off that money--along with your Social Security and pension--during any five-year downdraft in the stock market. That way you're unlikely to be forced to sell your stocks when their price is down. Any money you won't need for at least five years should be invested in a diversified portfolio of stocks or actively managed stock mutual funds.

There are, of course, risks to putting the bulk of your retirement money in the market, such as the chance that stocks will stay down for five years. But there are also risks in holding low-yielding bonds and cash--chiefly the risk that you'll outlive your money. Also, most bond prices would be hit by any revival of inflation. Sticking with stocks is a gamble that financial planner Satovsky says is worth it "if you want to live to 100 and not go broke."

Gene Cavanaugh, a 68-year-old Northern Californian, is adamant that he's got a lot of years left, which is his justification for keeping the half of his net worth that's not invested in Texas and California real estate in the stock market. A former software executive who dabbles in patent law, he has watched his retirement stock portfolio grow by an average annual return of 20% over the past 10 years. "I'm pretty dedicated to the idea of trying to get a surplus on my money," says Cavanaugh. "If I had money I wanted to salt away, I might think about putting it in bonds, but this is money I want to give to my kids."

If you invest in individual stocks, be sure to diversify adequately among the shares of a dozen or so companies in different industries, including some whose fortunes move up and down with the economy (like equipment manufacturers and financial firms) and some that don't (like food- and drugmakers). If you own too much stock in the company for which you've worked for decades--a common condition in these days of company stock options and company-stock matches in 401(k) plans--an unexpected setback for that company or its industry could wipe you out. Guy Cambie, a certified financial planner in Austin, Texas, urges investors to divorce themselves from the sentiment of any particular stock. One solution: mutual funds, in which, as Cambie notes, diversification is done for you.

Michael Danzansky, a certified financial planner with the Washington Financial Group in Bethesda, Md., cites a Big Blue example. "People always thought IBM would be a stable stock until it fell 75% between 1987 and 1993," he says. "A lot of investors, especially employees holding shares in their retirement plans, suffered from that." It took nearly four years for the stock price to recover; it has more than doubled since. "Even the most aggressive investor should have some exposure to the bond market," Danzansky adds. "Stock and bond returns don't always correlate, so there will be times when you need bonds to hedge stocks."

One way to help yourself become more tolerant of risk is to stop watching your portfolio daily. "On any given day the volatility in the market won't represent what it would be if you extend it for a year," says Buie. It's O.K. to look at monthly statements, but try not to rejigger holdings more often than four times a year.

GET A(NOTHER) JOB

Rather than jump directly from full-time work to full-time leisure, in the traditional model of retirement, more Americans are shifting gradually from one to the other. Some enjoy work, even if they're tired of their current job, and decide to take up something new and fun--perhaps teaching at a community college or working at an antiques shop or travel agency--often part time and for less pay than they earned before. Others would love to give up work entirely but can't yet afford to do so.

If either description fits you, consider this emerging model of phased retirement: First, if you're still employed in the job or career in which your earning power is greatest, save as much as you can during your peak earning years. As your children finish college, save and invest the money you had been spending on them. Talk with a financial planner or accountant to see whether you should save in a regular IRA or the new Roth IRA. In the first you'll get an immediate reduction in your taxable income for all contributions but must pay income tax on all the proceeds as you withdraw them in retirement. With a Roth IRA you make contributions with after-tax dollars, but the principal and earnings on it can be withdrawn tax-free when you've retired. The basic rule is that you're better off with the Roth if you expect to be in the same or a higher tax bracket in retirement; you're advised to use the regular IRA if you expect to retire in a lower tax bracket.

Now, when you feel you have a decent nest egg built up--or can't stand your old job for another day--retire from that job and find another one that's more enjoyable, perhaps part time. You probably won't make as much money, but try to live on what you make. You won't need to save much, if anything, but (and this is the key) you'll be able to leave your savings invested to grow unmolested for five or 10 years or more. For as long as you can cover your expenses with the reduced income from your new job, you won't need to tap your retirement savings, which will double and redouble. If a portfolio of 70% stocks and 30% bonds produces a conservative return of 8%, your money will double within nine years. If your portfolio returns 15%, it will take less than five years to double.

Finally, when you're ready to give up work altogether, you'll have enough savings to supplement your Social Security and private pension benefits and support yourself into your second century.

Peter Keller, 56, of Hollywood, Fla., has found a fun second job that allows his investments to work overtime. "A second career isn't so bad after all," says Keller, who closed his dental practice after 26 years to help Fort Lauderdale's Nova Southeastern University bring South Florida its first dental school. "I went to the same office for so long that when the opportunity to help the community called, I accepted."

Keller uses his dental skills and knowledge in a way he never knew was possible. As associate dean at the College of Dental Medicine, Keller earns less than half what he did when he was a practicing dentist, but it's enough to maintain the life-style he and his wife are used to. (Their kids are out of college.) He doesn't have to tap into the money he's saved, so while he's working, so are his savings; half are invested in stocks and mutual funds, the other half in real estate. Eventually he plans to retire from work entirely. "That's when I expect my golf handicap to drop significantly," he says, smiling.

A.A.R.P.'s Rix says she expects boomers to work far longer than those of other generations--some for the fun of it and others because they can't afford to retire altogether.

Early retirees who took "package" deals or "buyouts" in their late 40s or early 50s will tell you that while they hoped to pocket that money and find another high-paying job, it hasn't been so easy. "In many cases it's easier to stay employed than to become employed again at an older age," says Rix.

LIVE BETTER FOR LESS

Toss out those articles and brokerage ads that scream out that the cost of retirement is at least a million dollars. It just isn't so. By making the most of your investments and the least of your expenses, you can retire in comfort with far less.

In retirement your expenses can diminish considerably. You no longer need "work" clothes. You don't commute. Your kids are (you hope) out of the house and out of college. You don't need as large a house or apartment. And if you live in a major city or one of its suburbs, you can probably save even more by moving to a place with less expensive housing and lower taxes and other costs. You can probably even get better weather in the bargain.

Take, for example, Mal and Phyllis Goldberg, 72 and 74, respectively. They left their Long Island, N.Y., house and careers for a resort-like community in Spring Hill, Fla., near Tampa. "I moped when I retired," says Mal, a former high school math teacher. "I was in shock." Until he discovered that the $50,000 a year they earn from his retirement plan, Social Security and an early-retirement incentive is a royal sum in a state with no income tax and a less expensive cost of living. Today Mal and Phyllis golf and laze poolside, and he's president of the local organ society. They also save about $10,000 a year on property taxes, oil-heating costs and other day-to-day expenses. Retirement's sure been cheap. But has it been good? "You'd need a team of horses to drag me back to work," he says.

If you like small towns and rural areas and sports like skiing and fishing, even bigger bargains can be found in retirement-friendly parts of the Deep South, the Rockies and the Southwest. In honky-tonk Branson, Mo., the heart of the Ozarks, $120,000 will buy you a three-bedroom, two-bathroom house. By contrast, the same amount would be good for only a 20% down payment on a four-bedroom house in tony Westchester County, N.Y.

Before you pull up stakes, ask yourself how much money you might need to live year to year. Experts say it's somewhere between 60% and 80% of your annual income before retirement. Even if you plan to retire with lower fixed costs in a state with little or no taxes, "don't go much lower," Satovsky warns. "If your cost of living drops, you may decide you want to spend more money on new, more expensive habits, like travel."

To get a fix on what your total income is likely to be, start by calculating what you'll receive from Social Security, private pensions and any other sources, such as alimony. The current maximum benefit from Social Security is $16,476 a year, and the age at which you can receive that money is increasing. Beginning next year, the minimum age for full benefits will start its jump from 65 to 66. Beginning in 2003, the age at which full benefits are payable will gradually increase to 67. You can start tapping into your account as early as age 62, but that will reduce forever the amount of your monthly benefits. Also, half your Social Security benefits will be taxed if you and your spouse earn more than a certain amount each year, currently $32,000. Get a personal earnings and benefit estimate statement from Social Security by calling 800-772-1213.

Next, determine how much money you can expect to get from your pension, assuming you have one. One important question to ask: Will your pension be reduced by the Social Security benefits you receive?

Finally, determine how much income you can expect your savings to kick off each year without reducing the principal--something you should postpone until the last years of your life.

THE WILD CARD

The X factor for every retiree is health care. You can eat right and exercise, but illness and injury can still strike at any time. "The importance of having the right insurance in place can't be stressed enough," says Satovsky. Americans over age 65, of course, receive most of their health coverage through Medicare. But it doesn't cover prescription drugs and certain other expenses. And if you eventually need nursing-home care, you can get coverage through Medicaid--but only after you've spent almost all your own money.

Lee Collins, 80, made only three annual payments before she needed the long-term-care policy she bought at age 70. She suffers from Alzheimer's and is nursing home-bound. Without insurance her illness "would have completely depleted her savings," says her son Peter Collins. Long-term-care insurance, Peter figures, has saved the family at least $200,000. "We're a 'Thank you, God' story," he says when he thinks about the three payments of $2,500 each that bought this kind of security. "We're making out like bandits."

"It used to be that long-term-care-insurance plans were only for older people," says Richard Coorsh of the Health Insurance Association of America. But in 1996, Congress passed, and President Clinton signed, a bill making the benefits tax free, a not so subtle endorsement of and push for boomers to buy such policies. On average, a policy that covers $100 a day at a nursing home (with inflation protection) costs just $802 a year for a 50-year-old and $1,829 for a 65-year-old, according to a study of national averages by the H.I.A.A.

The lesson in all this: retire happy, healthy and with enough money to afford the activities you most enjoy. You may not choose to spend your preretirement years toiling in the halls of academe, like Keller; or your retirement ones playing poolside bingo, like the Goldbergs; and, unlike Cavanaugh, you may decide the volatility of the stock market isn't for an aging heart.

Karl Ritzler, however, has some retirement advice worth repeating: "Neither of my parents lived to be 60. I want to end the grind of the workday and do more of the things I enjoy...I may even work at the local Wal-Mart," he says with a laugh before adding, "This is a learning experience; nothing is set in stone." Until you are--but that's an entirely different kind of retirement.

--With reporting by Leslie Everton Brice/Atlanta and Melissa August/Washington

With reporting by Leslie Everton Brice/Atlanta and Melissa August/Washington