It’s a spooky time for those contemplating retirement. The economy is still shaky, even after two-and-a-half years of supposed “recovery.” Stocks continue to yo-yo wildly, while Treasury bills and bank deposits barely yield enough crumbs to keep a mouse alive. Unless you’ve got a plump government pension to lean on (and even those aren’t totally secure these days), you may be wondering whether retiring in 2012 is really such a good idea at all.
I won’t try to pretend I can give one crystal-clear answer for everybody. But if you’ve been wrestling with the pros and cons of retiring this year and you’re still undecided, let me suggest four factors you might weigh before taking the plunge.
Factor #1: Your Health
How is your health? Have an honest conversation with yourself. If your genes, combined with the present state of your health, seem to point to a long lifespan, you’re probably going to need more money to support you in retirement.
On the other hand, if you’re already struggling with significant health issues, it may make sense for you to retire as soon as you believe you’ve accumulated the smallest pot of gold necessary to maintain a comfortable lifestyle. Indeed, retiring at an early date could add greatly to your enjoyment of the rest of your life, and even restore some of your lost health.
Factor #2: Portfolio Size
The size of your portfolio will undoubtedly form a crucial element in your decision whether to retire in 2012.
Here’s how I look at the issue: the number that really counts for a retiree is how much income you can expect your investments to generate. If I figure my annual expenses are running at, say, $80,000, I need at least that amount of income from my portfolio (minus any Social Security or pension receipts). Income, of course, can flow from dividends and interest, or from capital appreciation. The combination is what we call total return. While it’s impossible to know exactly what returns the financial markets will produce in the years ahead, we do know the range of returns for the past 140 years
Let’s assume you’re planning to hold a mix of stocks and bonds similar to the model portfolio from my Profitable Investing advisory service — 50%-60% stocks, with the rest in fixed income. Over the long run, that mix has generated a high enough total return to let a person draw out approximately 4% a year, for 30 years, with an annual pay hike to offset inflation and very little risk of running out of money.
In other words, you should be able to siphon off an inflation-adjusted $80,000 a year from a portfolio valued around $2 million.
Longevity makes a big difference, however. If you believe, on the basis of family history and your personal health situation, that you’re more likely to live 20 years in retirement, you can safely withdraw about 4.8% a year.
Some online retirement calculators, such as the good (free) one devised by T. Rowe Price, assume somewhat lower returns for the stock market than the historical average. Even under this more conservative method, though, you should be able to pull out 3.5% a year for 30 years.
To lessen even further the odds that your kitty might run out, I recommend an additional refinement: Tilt the stock segment of your portfolio toward high-yielding names. By living on your dividends alone, you eliminate the need to sell stocks or mutual funds into a bad market. Use your capital gains, as they materialize, to reward yourself with special treats — that sea cruise you’ve been dreaming of, the new Town Car, the lakefront condo, whatever.
Factor #3: Creative Adjustments
Maybe, after adding up your resources, you conclude you’ve almost got enough, but not quite. Or not quite enough to give you a comfortable margin of safety. In that case, you need to start thinking creatively. How can I reduce my expenses — or boost my income?
On the expense side, the most obvious item to zoom in on is your cost of shelter. Millions of retirees have balanced their budget by moving to a smaller home.
If you live in a part of the country where real estate is expensive, you may be able to save dramatically by taking a more radical step. Home prices have plummeted in many Sunbelt locales. In Port Charlotte, Florida, for example, the price of a median home has dropped to about $60,000. Selling your home on the East or West Coast and moving to Arizona or Florida, or certain areas of Alabama or Georgia, could fatten your retirement kitty overnight.
Even if you’re determined to stay put, there are plenty of ways to trim your living expenses. Can you get along with one car rather than two? It might save you thousands of dollars a year. Take advantage of price wars to switch your cable TV or Internet service between the telephone company and the cable company. Travel midweek rather than on weekends. Sign up for senior discounts on dining, entertainment and shopping. AARP offers numerous discounts, or you can visit the website www.seniordiscounts.com for a free list of discounts in your area.
Remember, you can pad the income side of your ledger with part-time work. Earning up to $14,160 per year won’t affect your Social Security benefits if you’re under “full” retirement age (66 if you were born in 1946); and after you reach full retirement age, you can earn as much as you like without forfeiting any benefits.
Factor #4: The Intangible Factor
Perhaps the most important factor to consider about retiring in 2012 is intangible. What do you plan to do with your time? I had an interesting conversation some years ago in the barber’s chair. The gentleman cutting my hair was past 70, spry and wiry. I asked him why he was still working.
He said he didn’t really need the money. When he was in his mid-50s, though, he had a number of friends the same age, mostly state and municipal workers, who retired early.
For a couple of years, my barber’s friends bowled together, played golf, etc. But then he noticed they stopped. And then they began to die off. “I’m the only one left,” he told me.
I don’t infer from this anecdote that retiring early is fatal to your health, or that everybody should keep working to age 70. However, I do think it’s crucial to have some notion, in advance, of how you’re going to fill your retirement days.
What will you to do make the time fulfilling and rewarding?
If you’ve got a solid answer to that question, you can retire in 2012 with a smile on your face. If you’re not sure, my advice is: Keep punching the clock, for one more year at least!