How to Keep Your Retirement on Schedule

Recent market turbulence has drastically reduced the balances in many IRA and qualified plans, often by as much as 50 percent. The fallout from the subprime mortgage meltdown of 2008 has left a dark cloud covering much of the financial landscape in America and has effectively forced a large percentage of older workers nearing retirement to rethink, re-strategize and reschedule their retirement plans.

But while many of them have resigned themselves to working for another five or even 10 years to make up for the losses that they sustained in 2008 and 2009, a recent study has indicated that the majority of them did not shift their plan assets from their current allocation during the crisis. Whether this was done out of fear, ignorance or deliberation is unclear, but it may indicate an improvement in the level of investment knowledge of the average retirement plan participant.

However, most recent polls, surveys and reports conducted by various retirement plan providers and mutual fund companies reflect a substantial shortfall in retirement savings among workers over 50. Many of those in this category feel that their current IRA and retirement plan balances are less than half of what they need to be in order for them to live the kind of life that they desire after they stop working.

(But perhaps not surprisingly, these same studies also show that virtually none of them have taken much concrete action to get their plans back on track, such as increasing their retirement plan contribution levels.)

Nevertheless, you may be pleasantly surprised to discover that you don't have to put your retirement dreams on hold, as long as you are willing to make a few basic adjustments. Although it still takes $1 million to generate $40,000 of annual income at 4 percent, there are other ways to realize at least a portion of this income without having to stock up on lottery tickets or hope for an inheritance from a rich relative. Instead, take concrete steps to salvage your retirement plan and still be able to enjoy your golden years.

Step 1 Of course, one of the most obvious solutions that you can implement to help keep your retirement plan on track is simply to decrease your expenditures. Turn off your cable TV and dust off that library card. Install energy-efficient light bulbs and roll a new layer of insulation in your attic. And, for crying out loud, keep your tires properly inflated, which costs nothing but can make a substantial difference in your gas mileage.

Get a membership to a discount house such as Sam's Club or Costco and purchase staple foods in bulk for less. If you are five years from retirement and can reduce your expenses by $1,000 per year, funnel the difference into an IRA or your retirement plan (the latter option is probably better if your employer matches your contributions). Your money could easily grow by 50 percent if the markets turn back around during this time.

Step 2 Consider using income benefit riders within your retirement plan if you have not done so already. This should be done when your IRA or qualified plan balance is at its lowest, so that the greatest amount of growth can be insured. Most variable annuity carriers now offer riders within their contracts that guarantee a payout to the annuitant based upon a hypothetical percentage, such as 6 percent, regardless of how the markets perform. These riders can offer peace of mind plus potential growth in a strong market, and many qualified plans are housed inside annuity contracts that have this feature.

Step 3 Accept an early retirement buyout if your employer offers one. If you are able to invest your severance pay now, you could reap big gains within a relatively short time if the markets recover. Many employers who jettison employees prematurely will often rehire them as independent contractors or consultants. Of course, make sure that the buyout offer is enough to justify this course of action.

Step 4 Be sure to roll your retirement plans over correctly when you retire. A direct rollover from your employer plan to an IRA or Roth IRA is usually the best way to go. If you take your rollover in the form of a check, then your employer is obligated to withhold a mandatory 20 percent from your plan for taxes. Direct rollovers from one account to another are exempt from this type of withholding.

Step 5 Use the bear market to your advantage by converting your traditional IRAs and qualified plans to Roth IRAs. The income limit for Roth conversions has been lifted for 2010, which makes it much easier for many taxpayers to convert their entire accounts in a single year. Those with large balances can also defer half of the tax bill to the following year if they desire. But this is the time to convert; if your retirement savings were previously worth $200,000 and have dropped to $125,000, then you have just saved taxation on $75,000 by converting now!

Step 6 Draw a slightly smaller amount out of your retirement savings plan. If you have $300,000 in your plan, reduce your initial distributions by 50 percent for the next two years. If you were going to take 4 percent per year from your plan, then this reduction would leave an additional $12,000 in your plan over the next 24 months--money that may grow substantially in a recovering market.

Step 7 If all else fails, consider staying at your job for just one more year, or perhaps two. But make the maximum possible retirement contribution during this phase; if you are over age 50, you are allowed catch-up contributions into both your employer plan and a traditional or Roth IRA.

This sacrifice is lessened when you consider that you weren't going to be working at all during this time, so any money earned is "gravy" in a sense. If you can't stomach the idea of continuing at your current job, consider retiring from there and getting a full or part-time job in a field that you are interested in or passionate about, such as a hobby or craft store, church or other religious organization. Twenty hours a week at $10 an hour equals $20,000 a year-half of that $40,000 that is generated from a 4 percent distribution from that million dollars that so many of us do not have.

Source:Net