A Happy Retirement: 6 Steps That Work

Optimism about the nation's economic prospects is back. That's the most encouraging news from our latest Consumer Reports Retirement Survey of more than 24,000 of our online subscribers.

Among the retired, semiretired, and those still in the workforce, 60 percent of 54- to 76-year-olds polled by the Consumer Reports National Research Center this fall said that they were feeling upbeat about an economic recovery. That compares with just 34 percent who felt that way a year earlier.

But if our readers feel optimistic about the national economy, they still have grave concerns about their own financial futures. Our survey found that 70 percent of retired subscribers said they were highly satisfied in retirement, but some had fears about adequate resources and health-care coverage, some were getting the wrong information about important topics, and some were disenchanted with retirement.

Among the survey's less sanguine findings:

• Overall, median net worth declined 18 percent. Our subscribers saw an average 11 percent drop in their retirement assets.

• Median net worth dropped 30 percent for those still working. In fact, 23 percent weren't sure they'd be able to retire. More than half of those said they wouldn't have enough money to live without working. Only 19 percent of workers were highly satisfied with their retirement planning.

• Retirement isn't always voluntary. Twenty-four percent of full-time retirees told us they had stopped working because they were made to, their health declined, or they no longer had the energy to work. Those retirees were less satisfied than others. Among the semiretired, 33 percent said they had to scale back from full-time work for the same reasons.

• Some people make plans based on incorrect information. Among subscribers who expected to retire early, 17 percent didn't realize they'd collect less than their full Social Security benefit. Nineteen percent thought they could bridge the gap between employer-sponsored health coverage and Medicare with a privately purchased health-insurance plan, an option Consumer Reports has long criticized as inadequate, restrictive, and impossible for many to obtain or afford.

The $1 Million Sweet Spot

Retired subscribers' satisfaction with their retirement reached a plateau when their net worth was between $500,000 and $1 million. Having more didn't make much of a difference. But notably, even among those who reported having less than $250,000 in net worth, more than half were highly satisfied with their retirement. In addition, 38 percent of retirees said they depended on a defined-benefit pension for a significant portion of their income.

What Succeeds Over Time

Last year's whipsaw stock market upended the fortunes of even the most seasoned investors. At the same time, it proved the argument for investing discipline. Our survey found that investors who didn't much change or increased their investments after the market's swoon in October 2008 were more highly satisfied than those who became more conservative.

That discipline bears fruit over time, our survey confirmed. Those who began saving in their 30s had gains in net worth of almost $400,000 more than those who started by their 50s or 60s. Long-range planning allows more aggressive investing, and retirees who told us they used that approach had a median net worth of more than $200,000 over those who were more conservative. Folks with family money or early career success generally had a leg up on others, no surprise. But retirees from all backgrounds credited their traditional defined-benefit pension plan -- the kind that pays a set income for life, an increasingly rare benefit -- among the best "steps" they took toward retirement.

For those in their 20s and 30s, the advice is clear: Choose a career that has the potential for early financial success or find a job with a secure defined-benefit pension (or both, if such a job exists); buy a home in which to build equity; and invest early and, in those early years, relatively aggressively. Even respondents who started saving in their 40s had, on average, $230,000 more than those who started saving in their 50s or later.

And if that advice seems to come too late for you, there's still hope. Our recommendations are geared to people who are still working but are closing in on retirement, though the advice makes sense for people of all ages.

Six Steps

Live modestly: This was the top "best step" listed by retirees who said they were highly satisfied with their lives; 39 percent said they did not spend beyond their means. One way to rein in spending is to create a budget using store-bought software such as Quicken or a free online service such as Yodlee MoneyCenter (www.yodlee.com). Those programs help you track your spending and your progress toward meeting saving goals by consolidating your financial data from banks, credit-card companies, and brokerages.

Maximize your savings: Even if you don't have a defined-benefit plan, regularly contributing to a 401(k), 403(b), IRA, or other investment vehicle pays off, our satisfied retirees told us. (Saving too little was a regret of 27 percent of dissatisfied retirees.) At 50 and older, you can put as much as $22,000 into a tax-deferred, traditional 401(k) plan or after-tax Roth 401(k) or their 403(b) equivalents in 2010.

Reduce debt: Thirty-eight percent of retirees owed $25,000 or more on their mortgages. But 74 percent of retired respondents who were free of major debt reported being highly satisfied with their retirement. For greater peace of mind, pay off your debts before retiring. Even a low-rate mortgage can be a burden if other expenses rise and your income-producing assets falter. Notably, debt-free retirees had a higher median net worth than those with debt: $843,000 compared with $717,000.

In the current economic environment, accelerating payment of your mortgage can be a wise investment. Most certificates of deposit, bank accounts, and other safe savings vehicles are paying less than 2 percent, so putting your money into additional payments on a 5 percent mortgage instead offers a better return (though you'll give up some tax deductions on mortgage interest). By making extra principal payments, you can whittle down your loan's interest cost and term handsomely. For example, adding $100 per month to payments on a 30-year, $150,000 mortgage with a fixed rate of 5 percent reduces the total interest by almost $35,000 and cuts the loan's term by 6 1/2 years.

Don't invest too conservatively: Taking on even a moderate amount of risk pays off. Median net worth for retirees who said they took a middle-of-the-road approach was $836,000 vs. $671,000 for conservative investors. Notably, the difference in net worth between self-described moderate and aggressive investors was relatively small: a $57,000 advantage for the more aggressive. The lesson: You don't have to go out on a limb to get the best return. Diversification will help reduce your risk.

Study your options: When you design your dream retirement, also devise a Plan B in case you're forced to retire early or can't sell your home (a predicament of 8 percent of surveyed retirees). Your alternative plan might include a more restrictive budget or a different retirement location. To determine your Social Security benefits at different ages, go to www.ssa.gov.

A major issue will be health-care coverage. You can move to your spouse's insurance plan, find a new job with health benefits, extend your own employee coverage under the COBRA law (go to www.dol.gov and type "cobra" in the search box for details), or look for private health insurance. If you go that last route, try to get group coverage through professional or other membership associations.

Take the intangibles seriously: Stress affected overall satisfaction in retirement even more directly than net worth, our survey found. A quarter of retirees cited non-monetary stresses such as family relations, poor health, a loss of identity, and boredom. So before you retire, develop hobbies and line up volunteer work, trips, or part-time jobs. Strengthen your personal connections outside the workplace. And, of course, do what you can to maintain good health.

The Case for Diversification

Diversified investments -- stock and bond mutual funds and real estate, for instance -- correlated with higher net worth among the retirees in our survey. Those who invested in three or fewer investment vehicles had a median net worth of $496,000 compared with $861,000 for those with four to six. Over the long haul, variety worked in our readers' favor.

But diversification is your friend even in the short term. In recessionary times, diversifying among just four asset classes -- large- and small-cap stocks, long-term Treasury bonds, and shorter-term Treasury bills -- reduces the risk that everything will decline together.

Lessons From the Past

When the Consumer Reports Money Lab analyzed investment returns two years after the official ends of three past recessions (those ending in March 1975, July 1980, and March 1991), we found that conservative, moderate, and aggressive portfolios all made money. How they were allocated didn't much matter; total returns of conservative portfolios (one-quarter in all four asset types) and aggressive ones (40 percent small-cap stocks, 35 percent large-caps, 15 percent long-term Treasuries, and 10 percent Treasury bills) varied by no more than 4.3 percentage points.

Still, it's important that you don't put all your eggs in one basket. In the two-year slow-growth recovery after the 1991 recession, short-term Treasury bills were up only 1.9 percent while long-term Treasury bonds gained 27.5 percent. Both are considered safe. Among stocks, large-caps rose 23.2 percent and volatile small-cap stocks were up 46.7 percent.


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