MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY 401(k)s

This New Retirement Income Solution May Be Headed for Your 401(k)

Target-date mutual funds in 401(k)s can now add an annuity feature, which will provide lifetime income in retirement.

The stunningly popular target-date mutual fund is getting a facelift that promises to cement it as the premier one-stop retirement plan. By adding an automatic lifetime income component, these funds may now take you from cradle to grave.

Last month the federal government blessed new guidelines, on the heels of initial guidance last summer, which together allow savers to seamlessly convert 401(k) assets into guaranteed lifetime income. Specifically, the IRS and the Treasury Department will allow target-date mutual funds in 401(k) plans to invest in immediate or deferred fixed annuities. Plan sponsors can choose to make these target-date funds the default option, meaning workers would have to opt out if they preferred other investments.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

They have broad appeal and are a big factor in the rising participation rate of workers, and of younger workers in particular. Nearly half of all 401(k) contributions go into target-date funds, a figure that will hit 63% by 2018, Cerulli Associates projects. By then, Vanguard estimates that 58% of its plan participants and 80% of new plan entrants will be entirely in target-date funds. In all, these funds hold about $1 trillion.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money. In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Policymakers have been working towards this kind of solution for the past several years, but have hit a variety of stumbling blocks, including tax and eligibility issues and others having to do with a plan sponsor’s liability for any guarantees or promises it makes through its 401(k) investment options. There are still implementation problems to be worked out, so few plans are likely to add annuities right away. But the new federal guidelines clarify the rules for employers and pave the way for broader acceptance of both immediate and deferred fixed annuities in 401(k) plans. And a guaranteed lifetime income stream is something that workers are clearly looking for in retirement.

More on 401(k)s from Money’s Ultimate Retirement Guide:

Why is a 401(k) such a good deal?

How should I invest in my 401(k)?

What if I need my 401(k) money before I retire?

Read next: Flunking Retirement Readiness, and What to Do About It

MONEY retirement income

The Search for Income in Retirement

Why we may be focusing too much on our nest egg and not enough on cash flow.

There are three components to retirement planning: accumulation, investment, and managing for income. And while we are usually more fixated on “the number” on our balance sheet, the bigger challenge is ensuring that a retirement portfolio can generate enough steady money as we live out our days.

In a recent academic panel hosted by the Defined Contribution Institutional Investment Association (DCIIA), professors Michael Finke of Texas Tech and Stephen Zeldes of Columbia University illustrated the challenge of getting into an income mindset by discussing what’s known as the “annuity puzzle.”

If people were to take their 401(k)s and convert them into annuities, they would get a lifetime income stream. And yet very few people actually annuitize, in part because they don’t want to lose control over their hard-earned savings. “Getting people to start thinking about their retirement in an income stream instead of a lump sum is a big problem,” Finke told the audience.

Also at play is the phenomenon of present bias, whereby half a million dollars today sounds a lot better than, say, $2,500 a month for the rest of your life. This is a major knowledge gap that needs to be addressed. A new survey of more than 1,000 Americans aged 60-75 with at least $100,000 conducted for the American College of Financial Services found that of all of the issues of financial literacy, respondents were least informed about how to use annuities as an income strategy. When asked to choose between taking an annuity over a lump sum from a defined benefit plan in order to meet basic living expenses, less than half agreed that the annuity was the better choice.

Granted, annuities are complicated products. In the past, they got a bad rap for not having death benefits and otherwise misleading investors, but the industry has evolved, and there are now so many different options that it would be quite an undertaking to wade through and understand them all. And annuities aren’t the only way to generate income. Another option people might want to consider is a real estate investment that can throw off consistent revenues from rent. The point is to start thinking more not just about accumulating money but about how you can make that money work for you by turning it into an income-producing asset.

In the meantime, academics like Zeldes are working on how to make annuitization more appealing. In a paper published in the Journal of Public Economics in August 2014, Zeldes and colleagues suggest that people are more likely to annuitize if they can do so with only part of their nest egg, and even a partial annuity can be better than no annuity at all. Zeldes also found that people prefer an extra “bonus” payment during one month of the year, which means that they essentially want their annuity to seem less annuity-like. I’m all for product innovation, but in this case I think we’d be better off learning the value of a steady stream—especially over a fake “bonus.”

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read more about annuities in the Ultimate Retirement Guide:
What is an immediate annuity?
What is a longevity annuity?
How do I know if buying an annuity is right for me?

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

MONEY retirement income

5 Retirement Investing Pitches You Should Ignore

Egg in cup tilted to look like fish swimming toward hook
Ramón Espelt Photography—Getty Images/Flickr

If a financial adviser tries to sell you on one of these investment vehicles, don't take the bait.

You’re probably already wise to many schemes designed to separate you from your money—emails from Nigerian princes, phishing scams, and the like. But does your BS detector go off when confronted with slick come-ons for perfectly legal but dubious investments? To see, check out these five pitches that are often targeted to people investing for retirement.

1. “What you need is a self-directed IRA.” If the people pushing self-directed IRAs recommended that you self-direct your IRA dough into low-cost index funds, I’d urge you to sign on. But the companies and advisers pushing self-directed IRAs typically tout them as a way to invest your retirement dollars in “alternative” or “nontraditional” investments that can range from cattle and fishing rights to restaurant franchises and bankruptcy claims, all in the name of diversification. “Di-worse-ification” is more likely. State securities regulators even warn that some promoters may step over the line into illicit investments or activities.

If you’ve got a huge retirement stash and want to take a flier with a teensy-weensy percentage of it in legal-but-exotic alternatives, fine. Good luck with it. But if you’re dealing with money you’ll be relying on to get you through retirement, stick with a good old, if slightly boring, diversified portfolio of stocks and bonds.

2. “I can get you high yields safely!” Given today’s low interest rates, who wouldn’t take this bait? Problem is, the combination of high yields and low risk is an oxymoron. Fatter yields and higher returns always come with greater risk, even if that risk isn’t apparent or is being downplayed by the person peddling the investment. Which means pushing the envelope for more yield can backfire. Just think back to 2008, when investors got burned in auction-rate securities, bank loan funds. and other investments that were marketed as cash equivalents.

When it comes to the portion of your savings that you must have ready access to and don’t want to put at risk, you need to play it safe. So resist the siren song of tempting yields offered by private investment notes, promissory notes, commercial mortgage notes, and the like and limit yourself to top-paying FDIC-insured savings accounts and short-term CDs. Granted, they’re not yielding much, but at least you won’t be in for any nasty surprises.

3. “Don’t risk your money on the volatile stock market—buy gold.” The gold fanatics haven’t been out in force lately because the stock market has been doing so well, up an annualized 20% or so for the past three years. But the gold bugs will resurface big time once stocks hit an extended period of turbulence or experience a major 2008-style meltdown. That’s when you’ll hear phrases like “nothing holds its value like gold” and “gold provides a safe haven against stock market volatility.”

When you hear those lines, remember this. Gold can fluctuate just as wildly as stocks. Gold recently traded at around $1,200 an ounce. Which means anyone who bought gold three years ago at a price of $1,700 an ounce is sitting on a loss of almost 30%. There may be other reasons to put a bit of your savings in gold—diversification, a hedge against inflation, or a weak dollar (although I’m not a big gold fan even for these reasons). But if it’s stability of principal you seek, gold is not where you’ll find it.

4. “For retirement peace of mind, buy yourself guaranteed income.” There’s actually a lot of truth to this statement. Research shows that retirees who get a monthly check for life from a traditional pension are more content than those who have the same level of wealth but only a 401(k). The problem is that many of the people touting the virtues of guaranteed income are often peddling variable annuities with income riders that can carry bloated fees of 2% to 3% a year, and are devilishly complicated to boot.

If you would like more guaranteed lifetime income than Social Security alone will provide, consider putting a portion of your savings into a type of annuity that’s easier to understand, less costly, and that you can comparison shop for on your own: an immediate annuity. Then invest the remainder of your nest egg in a mix of stocks and bonds that can provide additional income, plus long-term growth.

5. Forget bonds—you can live off stock dividends! Unfortunately, it’s not just wrong-headed advisers who spout the line that dividend-paying stocks are a reasonable substitute these days to bonds. Many of my compadres in the financial press also create the impression that putting more money into dividend stocks is an acceptable way to generate extra income now that bond yields are so low. Granted, bond yields are anemic. And when interest rates rise (whenever that may be), bond prices will take a hit, with longer-maturity bonds getting whacked more than short- to intermediate-term issues.

But none of that means that dividend-paying stocks are less risky than bonds. Stocks that pay dividends are still stocks, and thus far more volatile than bonds. If you doubt that, consider this: From its high in May 2007 to its low in March 2009, the iShares Select Dividend ETF lost more than 60% of its value compared to just over 50% for the broad stock market. That’s an extreme case. But the point is that dividends or no, stocks have a much bigger downside potential than bonds.

So by all means include dividend stocks as part of the stock allocation in your portfolio. But don’t let anyone sell you on the idea that dividend stocks can be a substitute for bonds.

More From RealDealRetirement.com:

The Smart Way To Double Your Nest Egg in 10 Years
How Smart An Investor Are You? Take This Quiz
How To Build A $1 Million IRA

 

MONEY financial advice

Tony Robbins Wants To Teach You To Be a Better Investor

Tony Robbins vists at SiriusXM Studios on November 18, 2014 in New York City.
Tony Robbins with his new book, Money: Master the Game. Robin Marchant—Getty Images

With his new book, the motivational guru is on a new mission: educate the average investor about the many pitfalls in the financial system.

It might seem odd taking serious financial advice from someone long associated with infomercials and fire walks.

Which perhaps is why Tony Robbins, one of America’s foremost motivational gurus and performance coaches, has loaded his new book Money: Master The Game with interviews from people like Berkshire Hathaway’s Warren Buffett, investor Carl Icahn, Yale University endowment guru David Swensen, Vanguard Group founder Jack Bogle, and hedge-fund manager Ray Dalio of Bridgewater Associates.

Robbins has a particularly close relationship with hedge-fund manager Paul Tudor Jones of Tudor Investment Corporation.

“I really wanted to blow up some financial myths. What you don’t know will hurt you, and this book will arm you so you don’t get taken advantage of,” Robbins says.

One key takeaway from Robbins’ first book in 20 years: the “All-Weather” asset allocation he has needled out of Dalio, who is somewhat of a recluse. When back-tested, the investment mix lost money only six times over the past 40 years, with a maximum loss of 3.93% in a single year.

That “secret sauce,” by the way: 40% long-term U.S. bonds, 30% stocks, 15% intermediate U.S. bonds, 7.5% gold, and 7.5% commodities.

Tony’s Takes

For someone whose net worth is estimated in the hundreds of millions of dollars and who reigned on TV for years as a near-constant infomercial presence, Robbins—whose personality is so big it seemingly transcends his 6’7″ frame—obviously knows a thing or two about making money himself.

Here’s what you might not expect: The book is a surprisingly aggressive indictment of today’s financial system, which often acts as a machine devoted to enriching itself rather than enriching investors.

To wit, Robbins relishes in trashing the fictions that average investors have been sold over the years. For instance, the implicit promise of every active fund manager: “We’ll beat the market!”

The reality, of course, is that the vast majority of active fund managers lag their benchmarks over extended periods—and it’s costing investors big time.

“Active managers might beat the market for a year or two, but not over the long-term, and long-term is what matters,” he says. “So you’re underperforming, and they look you in the eye and say they have your best interests in mind, and then charge you all these fees.

“The system is based on corporations trying to maximize profit, not maximizing benefit to the investor.”

Hold tight—there’s more: Fund fees are much higher than you likely realize, and are taking a heavy axe to your retirement prospects. The stated returns of your fund might not be what you’re actually seeing in your investment account, because of clever accounting.

Your broker might not have your best interests at heart. The 401(k) has fallen far short as the nation’s premier retirement vehicle. As for target-date funds, they aren’t the magic bullets they claim to be, with their own fees and questionable investment mixes.

Another of the book’s contrarian takes: Don’t dismiss annuities. They have acquired a bad rap in recent years, either for being stodgy investment vehicles that appeal to grandmothers, or for being products that sometimes put gigantic fees in brokers’ pockets.

But there’s no denying that one of investors’ primary fears in life is outlasting their money. With a well-chosen annuity, you can help allay that fear by creating a guaranteed lifetime income. When combined with Social Security, you then have two income streams to help prevent a penniless future.

Robbins’ core message: As a mom-and-pop investor, you’re being played. But at least you can recognize that fact, and use that knowledge to redirect your resources toward a more secure retirement.

“I don’t want people to be pawns in someone else’s game anymore,” he says. “I want them to be the chess players.”

MONEY Longevity

Americans Are Living Longer Than Ever. And That May Kill Your Pension

With more workers likely to reach age 90, employers will have to step up their pension funding. Or, more likely, hand you a lump sum instead.

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.

Read next: You May Live Longer Than You Think. Here’s How to Afford It

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY retirement income

Boomers Are Hoarding Cash in Their 401(k)s—Here’s a Better Strategy

Paul Blow

Yes, you need a cash reserve in retirement, but you can go overboard in the name of safety. Here's how to strike the right balance.

As you close in on retirement, it’s crucial to minimize the risk of big losses in your portfolio. Given how expensive traditional safe havens, such as blue chips and high-quality bonds, have become, that’s tricky to do today. So for many pre-retirees, the go-to solution is more cash.

How much cash is enough? Many savers seem to believe that today’s high market valuations call for a huge stash—the average investor has 36% in cash, up from 26% in 2012, according to a recent study by State Street. The percentage is even higher for Baby Boomers (41%), who are approaching retirement—or already there.

That may be too much of a good thing. Granted, as you start to withdraw money from your retirement savings, having cash on hand is essential. But if you’re counting on your portfolio to support you over two or more decades, it will need to grow. Stashing nearly half in a zero-returning investment won’t get you to your goals.

To strike the right balance between safety and growth, focus on your actual retirement needs, not market conditions. Here’s how.

Safeguard your income. If you have a pension or annuity that, along with Social Security, covers your essential expenses, you probably don’t need a large cash stake. What you need to protect is money you’re counting on for income. Calculate your annual withdrawals and aim to keep two to three years’ worth split between cash and short-term bonds, says Marc Freedman, a financial planner in Peabody, Mass.  That lets you ride out market downturns without having to sell stocks, giving your investments time to recover.

This strategy is especially crucial early on. As a study by T. Rowe Price found, those who retired between 2000 and 2010—a decade that saw two bear markets—would have had to reduce their withdrawals by 25% for three years after each drop to maintain their odds of retirement success.

Budget for unknowns. You may be able to anticipate some extra costs, such as replacing an aging car. Other bills may be totally unexpected—say, your adult child moves back in. “People tend to forget to build in a reserve for unplanned costs,” says Henry Hebeler, head of AnalyzeNow.com, a retirement-planning website.

In addition to a two- to three-year spending account, keep a rainy-day fund with three to six months of cash. Or prepare to cut your budget by 10% if you have to.

Shift gradually. “For pre-retirees, the question is not just how much in cash, but how to get there,” says Minneapolis financial planner Jonathan Guyton. Don’t suddenly sell stocks in year one of retirement. Instead, five to 10 years out, invest new savings in cash and other fixed-income assets to build your reserves, Guyton says. Then keep a healthy allocation in stocks—that’s your best shot at earning the returns you’ll need, and you can replenish your cash account from those gains.

MONEY retirement planning

Why Gen X Feels Lousiest About the Recession and Retirement

THE BREAKFAST CLUB, from left: Molly Ringwald, Anthony Michael Hall, Emilio Estevez, Ally Sheedy, Judd Nelson, 1985.
Three decades after "The Breakfast Club" hit theaters, Gen X is still struggling. Universal—Courtesy Everett Collection

Sandwiched between much larger generations and stuck with modest 401(k)s, Gen Xers get no love from financial planners, marketers or media. No wonder they're feeling low.

The Great Recession took a heavy toll on all generations. Yet the downturn and slow recovery seem to have left Generation X feeling most glum.

Defined as those aged 36 to 49, Gen X members are least likely to say they have recovered from the crisis, according to the latest Transamerica Retirement Survey. They are most likely to say they will have a harder time reaching financial security than their parents. Gen X also is far more likely to strongly believe that Social Security will not be there for them and that personal savings will be their primary source of income in retirement.

“Generation X is clearly behind the eight ball,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. “They need a vote of confidence. But they still have time to fix their problems.”

Arguably, Gen X was feeling most beat up even before the recession. This group is in the toughest phase of life: kids at home, a mortgage, not yet in peak earning years. Mid-life crises typically hit at this age. Studies show that the busy child-rearing years tend to be the unhappiest of our life. The happiest years are 23 and 69 with a big dip in between.

And let’s not forget that Gen X is only two-thirds the size of Millennial (ages 18 to 35) and Baby Boomer (ages 50 to 68) populations. Marketing companies and the media have largely ignored this generation, which early on acquired the downbeat label: slackers. Collinson believes the financial industry is equally focused on older and younger generations, leaving Gen X all alone.

“They have to stake out a plan and pursue it on their own,” she says. “The harsh reality is people have to take on increasing responsibility for their own financial security.”

Maybe that’s why Gen X believes it must build a bigger nest egg. Asked for their retirement number, the median Gen X respondent said they need $1 million. Nearly a third said $2 million or more. The median figure for both Millennials and boomers was $800,000 with only 29% and 23%, respectively, saying they would need $2 million or more.

Perhaps Gen X is being realistic. Even $1 million won’t provide a cushy lifestyle. A 64-year-old retiring next year with that amount would receive an annual payout of only $49,000 a year, according to Blackrock’s CoRI index, which tracks the income your savings will provide in retirement. Looked at another way: purchasing an immediate annuity for $1 million today would buy $5,000 of monthly income, according to ImmediateAnnuities.com. Not bad. But less than most might expect.

Gen X has boosted savings since the recession, the survey found. The typical Gen X nest egg is now $70,000, more than double savings of just $32,000 in 2007. This suggests that Gen X did a good job of sticking to their 401(k) contribution rate during the downturn, buying stocks while they were low and enjoying the rebound. Millennials did a little better, going from $9,000 to $32,000. Baby Boomers were less likely to hang in through the tough times, partly because older boomers were already retired and taking distributions. The median boomer next egg has risen to $127,000 from $75,000 in 2007.

Overall, Baby Boomers felt the brunt of the downturn. They suffered more layoffs and wage cuts, took a bigger hit to their assets, and by a wide margin more Boomers believe their standard of living will fall in retirement. But at least many Boomers are still blessed with traditional pensions and have a better shot at collecting full Social Security benefits.

Millennials are old enough to have learned from the downturn but not so old that they had many assets at risk. This generation began saving at age 22, vs. age 27 for Gen X and age 35 for boomers. Millennials also benefit from modern 401(k) plan structures with easy and smart investment options like target-date funds and managed accounts.

Meanwhile, Gen X is largely pensionless and was something of a 401(k) guinea pig when members entered the labor force. Plans then were untested and lacked many of today’s investment options or any educational material. The plans may have been mismanaged, subject to higher fees or even ignored. Even today, the Gen X contribution rate of 7% lags that of Millennials (8%) and Boomers (10%). Gen X is also most likely to borrow or take an early withdrawal from their plan (27%, vs. 20% for Millennials and 23% for boomers). Some of this relates to their period in life. But they have other reasons to feel glum too.

Still, there is some hope for Gen X. Recent research by EBRI found that if this generation manages to keep investing in their 401(k)s, most could end up with a decent retirement—no worse than Baby Boomers. And they still have time. If Gen Xers raise their savings rate a bit more, they can retire even more comfortably.

Do you want help getting your retirement planning off the ground? Email makeover@moneymail.com for a chance at a makeover from a financial pro and to appear in the pages of Money magazine.

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