Catch up on Retirement

by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
Updated August 18, 2009

Key points

If your risk tolerance is conservative to moderate, consider aiming for a portfolio that is approximately 25 times as large as your withdrawal in the first year of retirement.
If you are behind on your retirement savings, your options include saving more now, spending less in retirement, retiring later and working part-time after you retire.
Avoid ramping up your portfolio risk or assuming your investments will produce overly optimistic rate of returns in an effort to meet your retirement goals.

Are you behind on your retirement savings? Maybe your portfolio suffered a setback during the recent bear market, or you got off to a late start.

But don't focus on the past. Focus on what you can do now to achieve a comfortable retirement. With the disappearance of traditional workplace pensions and the potential for reduced Social Security benefits, chances are your retirement will largely depend on your personal commitment to retirement planning and investing.

How much do you need to save?
If you're a conservative-to-moderate investor and want a high level of confidence that you'll maintain your inflation-adjusted standard of living for 30 years, shoot for a portfolio approximately 25 times as large as your first-year withdrawal. This translates into roughly a 4% withdrawal rate in the first year of retirement.

That may sound ambitious, depending on how far you are from retirement, what you hope to spend and how much you've already saved. But the target above assumes a portfolio big enough to let you increase your first-year withdrawal each year for inflation with a high level of confidence (90% probability) that the money will last for 30 years. You may settle for a lower probability of success, work longer, or spend less. Or a combination of trade-offs could work well.

Your options

Spend less and save more now. It's as simple as it is unpopular. Create a budget and put your expenses under the microscope. Earmark your next raise and/or bonus for retirement savings. You also may be able to consolidate loan balances into lower-cost, and potentially tax-deductible, forms of debt.
Max out your 401(k) or other employer retirement plan, especially if you receive matching contributions. If you're age 50 or older, make catch-up contributions (see table).
Contribute to a deductible traditional IRA or a Roth IRA, if you're eligible. People 50 and older can also make IRA catch-up contributions.
If you're self-employed, talk to your CPA about small-business retirement account options—an Individual 401(k), SEP-IRA, Qualified Retirement Plan (QRP)/Keogh or SIMPLE IRA. You can even set up a defined benefit QRP. Schwab's Personal Defined Benefit Plan provides a turnkey solution, including the actuarial computations.
Save extra money in personal taxable accounts, if you've maxed out tax-advantaged accounts.
Spend less in retirement. We suggest you plan for as much income in retirement as when you were working. However, you might be able to get by with less, especially if your mortgage is paid off and the kids don't move back in.
Postpone retirement to allow you to build a bigger retirement portfolio and shorten the time you'll rely on savings. You can also increase your potential Social Security benefit by waiting to receive payments (up to age 70).
Work part-time. Many retirees find they enjoy the social interaction and sense of purpose as well as the income.
Consider tapping into your home equity as an additional source of retirement income. You may scale down to a smaller home in retirement and pocket the difference.
Finally, you could settle for a lower probability that your portfolio will last. There's nothing magic about a 90% confidence level, although we think it's a worthy goal.

Words of caution
Be careful about ramping up portfolio risk to meet your retirement goals. Unless you were irrationally conservative to begin with, you can't magically become more risk-tolerant. Also, avoid plugging in an overly optimistic rate of return. For planning purposes, assume high-single-digit returns for stocks, about half that for bonds and even less for cash. Stay diversified, and stick with your long-term asset allocation plan to potentially maximize expected returns for your level of risk.

Your Schwab Consultant can help you put together a prudent retirement program. You can also try crunching the numbers yourself with Schwab's Retirement Savings Calculator. Schwab clients can log on to access a more detailed Retirement Assessment tool. Either way, get started today.

Over 50? Consider these catch-up options

Account	Contribution limit (2009)	Age 50 or older additional catch-up amount (2009)
401(k), 403(b), or 457 qualified employer plan	$16,500	$5,500
Traditional IRA and Roth IRA	$5,000	$1,000
SIMPLE IRA	$11,500	$2,500
QRP/Keogh and SEP-IRA	20% of net self-employment income (or 25% of compensation), up to $49,000	None
Individual 401(k)	20% of net self-employment income (or 25% of compensation) plus $16,500, up to $49,000	$5,500

If you have questions or need help, please contact your Schwab consultant. If you're not yet a Schwab client but would like to learn more, a Schwab consultant can help. Call 800-435-4000 to get started.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation.

Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

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