Thursday, Jan. 07, 2010

How to Spend and Invest

For years, Americans were able to live happily ever after in retirement — without working or worrying whether their money would run out. They had a sturdy three-legged retirement stool to lean on: a guaranteed pension through their company or union, generous Social Security benefits through the Federal Government and sizable savings gathered through diligence and long bull markets in housing and the stock market.

But that was then. Today this three-legged stool is so rickety, you could blow it apart with a good sneeze. The swelling number of people in retirement, and their living longer once they get there, has overtaxed the pension system; benefits have been eroding for years. Meanwhile, our personal savings rate hovered near zero for much of the past decade while stocks and housing have been dead money. One in four homeowners owes more on their mortgage than their property is worth.

How will you pay for life after work? The full answer includes a long list of things, including working longer, saving more and maybe even lowering your expectations a bit. Clearly, with longevity expanding and work in the information age less physically taxing, it's not a big deal for most folks to work a few more years. Meanwhile, saving more is tough, but at least the government has created compelling tax incentives for folks past age 50 to sock away an additional $5,500 a year. As for lowering your expectations, well, you can look at your decimated net worth for encouragement.

But the real key to retirement security is taking care of what has replaced the three-legged stool: your medley of self-directed and largely self-funded tax-advantaged savings accounts, including IRAs and 401(k)s. How you nurture these accounts now and plan to draw them down later will determine how much longer you must work and how much lower you must reset your expectations. Here are some pointers for making the most of your new retirement stool.

See more about how much money you can withdraw each year:
Get Real About How Long You'll Live
Start Retirement with a 4% Withdrawal Rate
Don't Lose Faith in Stocks
Take These Steps to Improve Your Nest Egg