TIME Retirement

Inflation? Hooey, but You Still Need Protection in Retirement

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Just as economists and bond traders missed the reversal from inflation to disinflation three decades ago, a new generation lulled into a new reality will miss it again when consumer prices push higher in a sustained way.

Betting on the return of inflation has been a fool’s game for more than two decades. But that doesn’t mean inflation has been whipped forever, and even a moderate sustained rise in consumer prices can have devastating impact on unprepared retirees.

Consider that at just 2.5% inflation, prices would double (and your buying power would be cut in half) over a 28-year retirement. At 4%, prices would triple over that period and your buying power would fall by two-thirds. This is brutal math for any retiree in good health and living on a fixed income.

Economists like Paul Krugman at the New York Times argue there is little to fear. He believes a wrongheaded inflation obsession, chiefly among policymakers, is holding back the economic recovery. Certainly, inflation has been tame; there hasn’t been an annual reading over 4% since 1991 and most readings have been below 3%. Last year came in at just 1.5%, sparking more worries about falling prices than about rising prices.

But others argue that just as a generation of economists and bondholders accustomed to soaring inflation during the 1970s were caught off guard by 25 years of disinflation, today’s generation similarly will be caught off guard by a reversal—and the return of more rapidly rising prices. As the noted economist David Rosenberg at Gluskin Sheff recently wrote:

“We have an entirely new crew of bond traders on the desks, the sons, daughters, nephews and nieces of the old guard, who have only known disinflation, deflation, lower (minuscule) bond yields and radical Fed easing cycles. That is all they have known for their entire professional lives. Their elders didn’t see the great deflation coming, and the offspring don’t see the remote prospect of a moderately higher inflation environment coming at any time on the forecasting horizon.”

To be clear, almost no one is suggesting anything like the 1970s is in store for as far as the eye can see. But health care costs are rising a little faster, rents are going up, and labor may at last be gaining some leverage on wages in the improving economy—all potential harbingers of higher inflation down the road.

“This should scare the hell out of those of us who are retired and living on (at least partly) fixed incomes,” writes the economist Lewis Mandell for PBS. Just to be safe, you may want to inflation protect your income. Certain assets like gold and real estate serve as an inflation hedge but come with drawbacks. Gold produces no income; real estate can be fickle and difficult to sell. Happily, Social Security benefits rise along with consumer prices. So that portion of your security blanket is fine. But almost no other income-oriented investment, including most traditional pensions, automatically adjusts for inflation.

Protecting retirement income is not cheap. Mandell estimates that an immediate fixed annuity with an inflation adjustment initially generates about a third less income than one without an adjustment. So you don’t want to over do it. Still, if you can afford to sacrifice some income now such an annuity with a portion of your savings may offer peace of mind.

Another way to protect your retirement income from inflation is through Treasury Inflation-Protected Securities, better known as TIPS. These T-bonds adjust for rising consumer prices over the life of the bond, which may go out 30 years. They aren’t perfect, or cheap. But TIPS may afford the best income protection you’ll find.

Let’s say you want to protect $10,000 of annual income for the next 30 years. According to Mandell’s calculations, if inflation averages 2% over that period an investment of $52,257 in TIPS would offset any purchasing power loss due to inflation. If inflation over that period hewed to the 100-year average of 3.43% you’d need $79,553 in TIPS. At 4%, you’d need $88,703.

This exercise helps make clear the impact even modest inflation can have on your ability to pay for things with a fixed income over many years. Serious inflation probably isn’t in the cards anytime soon. But with a long runway still ahead, young retirees are at risk of losing their lifestyle unless they protect at least some of their income from the effects of inflation.

TIME olympics

Plushenko’s Retirement Is Proof He Should Have Quit Before Sochi

Sochi Olympics Figure Skating
Evgeni Plushenko of Russia waves to spectators after he pulled out of the men's short program figure skating competition due to illness at the Iceberg Skating Palace, Feb. 13, 2014, in Sochi, Russia. Ivan Sekretarev—AP

The iconic Russian figure skater, hobbled by injuries, should have given way to a younger generation before the Sochi Olympics began

After his aborted performance on Thursday—and the subsequent announcement of his retirement—it became all too clear that Evgeni Plushenko should have passed the torch to a younger skater before the Sochi Olympics commenced. For nearly a decade, the flamboyant figure skater has dominated the sport in Russia. At the age of 31, which is right around retirement age for an Olympic figure skater, he decided to try his Olympic luck for the third time despite a recent spinal surgery. It worked out well for him on Sunday, when he won a gold medal along with nine of his teammates in Sochi as part of the team figure skating competition. But four days later, when it came time for him to perform in the men’s singles, he skated up to the judges booth after a warm-up and told them he couldn’t go on. With that, Team Russia’s chances of a gold dropped to zero in the event where it has long been dominant.

As TIME reported earlier this week, Plushenko’s back was troubling him toward the end of his solo performance at Sunday’s team event. But he and his coaches boldly decided to carry on. “There are no healthy athletes in the major leagues,” said his coach, Alexei Mishin. “Everybody hurts.” Plushenko even suggested that he might compete in the next Winter Games four years from now.

That sounded almost delusional. On the strength of his remaining talents, it had been hard for him even to make it into these Olympics. He lost a key qualifying round in December to a young upstart named Maxim Kovtun, who is 12 years younger than Plushenko and approaching his prime. But the veteran wouldn’t give up. He refused to compete in the last qualifying round for Sochi, saying that he was too busy training for the Olympics, and he used his celebrity status in Russia to help lobby for another shot. After much debate in the press, he got it.

The Russian figure skating association allowed him to dance a “control run” for a committee of skating experts less than three weeks before the Games. Although that performance was never shown to the public or the press, the committee ruled that it was enough to give Plushenko a ticket to Sochi.

That now looks to have been a mistake. The pain that began bothering him during the team event on Sunday never went away, his coach said on Thursday. Then things got worse. The day before the singles event, Plushenko took a heavy fall during training. “The pain didn’t let up in the morning,” Mishin told a Russian newspaper. “We took medication, but it didn’t help.”

Russia, which has no replacement for him in the men’s short program, is now out of that contest, which should have offered one of its best chances for another gold. And they needed it. A week into the Games, Russia has only two golds and stands in seventh place in the overall medals tally, behind Switzerland. Plushenko had a chance to turn that around, but the chances of a younger skater would clearly have been better.

TIME Personal Finance

Knowing Your Net Worth Can Help You Plan

Calculating your net value will help you plan your future more productively.
Calculating your net value will help you plan your future more productively. David Emmite—Getty Images

Calculating your net worth is easy, and a valuable exercise. Here's how.

Your boss doesn’t know your value, right? But do you even know it? Most people have never taken the time to figure their net worth even though it’s a fairly simple calculation. Why not take stock now? The New Year is still full of promise.

Your net worth is what you’d have left after selling everything, paying the bills and settling all debts. Think of it as your liquidation value. The number is of keen interest to heirs trying to understand what will be theirs. But it’s useful for you as well. Calculated annually, your net worth provides the clearest picture of whether you are getting ahead. It helps gauge when you might retire and gives a roadmap to where you are losing or gaining value. That makes it easier to adjust and meet your goals.

Say, for example, your goal is to retire with $1 million. But during the worst two years of the recession your net worth—your total liquid value—went from $380,000 to $250,000. You’d understand right away that you need to adjust. Net worth hits home in a more visceral way than, say, looking only at a 401(k) statement that provides only part of the picture.

To figure your net worth you need two sheets of paper, one of them labeled assets and the other labeled liabilities. You want to add all assets and subtract all liabilities, reducing your life thus far to a single number. You can find online calculators to help. You can also see how you stack up against people your age and at your income level. For example, the median 55-year-old has a net worth of $180,125; the median net worth of households earning $75,000 a year is $301,475, according to Nielsen Claritas.

Start with assets, including retirement savings, checking and savings account balances, bonds or annuities, the total value of any stock holdings, your home and automobiles. To really fine-tune the figure include artwork, jewelry, furniture and other possessions that for most people do not move the needle a great deal. Put a value on each of these things and add them.

On the liabilities sheet, list all credit card balances, personal loans, student loans, auto loans and mortgages. Then add those and subtract it from the figure you got on the assets sheet. Voila. You now know what you are worth on paper. Watching this number from year to year shows how new debts and all spending subtract from your net worth, while general thrift, retired debts, and investments that rise pad your net worth.

The figure is not perfect. Figuring your net worth is especially difficult if you own a small business, which may be difficult to value. If you are young and in a great career your net worth might be negative—but that’s okay. Once those college loans are paid off and you get a few raises that can turn around quickly. Likewise, if your net worth takes a dip because the stock market or housing market fell, that’s not so terrible assuming you can hold on for the recovery. But it’s always good to know where you stand.

TIME Retirement

The Problem With President Obama’s ‘MyRA’ Savings Accounts

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Expanding savings opportunities makes sense. But a big issue is whether people have the means to use them.

To better enable Americans to save for retirement, President Obama said he would order a new “starter” savings plan called MyRA geared at low-income households. It’s a fine idea. But as with any personal savings account, you must be able to fund it for it to matter. That may be the biggest problem with the program.

Little is known about these new accounts. They would function like a Roth IRA, allowing savers to put in after-tax money that would then grow tax-free. They’d be available through your employer to anyone who does not have an individual retirement account or work for a company that offers a traditional pension or 401(k) plan. That comes to about 39 million households.

The big advantage is that you could open a MyRA with as little as $25 and make contributions of as little as $5, creating a regular savings opportunity that most low-income households have never had. Typically, plan administrators require $1,000 or more to open an account. MyRAs would also benefit from a no-fee structure that does not eat away at savings.

Your MyRA would also enjoy a government guarantee against loss of principal. The downside is that your money would be funneled into low-yielding Treasury securities and have little potential to grow enough to make a big dent in your personal retirement savings crisis—or that of the nation as a whole—until you have accumulated enough to roll it into a regular IRA where you might benefit from investments with greater growth potential.

Offering low-income households a place to save doesn’t really fix the big problem: they still must have the money and the discipline to take advantage. More than half of workers have less than $25,000 in savings and 28% has less than $1,000 in savings, reports the Employee Benefits Research Institute. And with the MyRA, you could take money out anytime without penalty. That would be awfully tempting the first time money gets tight.

The retirement savings plan represents an important first step,” says Ai-Jen Poo, director of the National Domestic Worker’s Alliance. Still, she says, “Most Americans are not able to plan for their futures because they are trying to deal with their most immediate needs, like paying their rent and keeping their lights on.”

The new accounts call to mind the so-called “catch-up” provision enabling savers past age 50 to put away an extra $5,500 in their 401(k) each year. That’s a fine idea too, but since its adoption in 2001 only the relatively well to do have used it. Let’s face it: Not many folks have an extra $5,500 lying around.

Only 13% of those eligible have made the extra contributions, according to an analysis of data provided by Fidelity Investments. That’s largely because regardless of age almost no one even contributes the maximum $17,500—already a lot of money to take out of your budget each year. For the vast majority, the extra $5,500 has proven to be irrelevant, concludes the Center for Retirement Research at Boston College.

So let’s not pretend that MyRAs will save our collective retirement dreams. They give more people more opportunity to save, and you cannot argue with that. But for these accounts to make a real difference, the folks they are meant to help most will need extraordinary willpower.

MONEY Investing

Winning at Investing Made Simple

Served on a silver platter: the right portfolio strategy and investing well for retirement. illustration: tavis coburn

Here are just a few of the ways Wall Street pros try to eke out an edge in the market. You can’t do any of them:

With a subscription to the Bloomberg online news service (price: about $20,000 a year), traders can instantly see anything from the location of oil tankers around the globe to supply-chain maps of a company’s vendors and customers.

Hedge fund managers who invest in drug and technology companies tap into “expert networks” of executives and scientists paid for their specialized knowledge. In some cases, it’s been charged, traders have also illegally gotten inside information through these contacts.

Half of stock trades are made by automated “high-frequency” programs; it takes 7/10,000ths of a second to buy or sell on the New York Stock Exchange, says the Tabb Group, down from a horse-and-buggy 10 seconds eight years ago.

You can’t get a jump on this crowd. You can’t even compete with them. Chances are, the professional managers you hire via a mutual fund, for 1% of assets or more per year, won’t be able to stay ahead either.

In October, Ray Dalio, one of the most successful hedge fund managers in the world, told a conference audience that “going forward, most investors are not going to be able to produce alpha.” “Alpha” is finance jargon for outperforming the market after accounting for risk. In truth, the search for alpha has always been something of a snipe hunt; the word was first used in a 1967 article that showed that most mutual funds didn’t deliver it, especially after subtracting fees.

Two things have changed since then: More pros admit the alpha game is over, and perhaps more important for you, investing has never been better for those willing to stop playing. In the words of Tadas Viskanta, editor of the finance blog Abnormal Returns, there’s wisdom in reaching for “investment mediocrity.”

Today, just as in 1967, most professionals can’t beat an index that tracks the stock market. “The paradox,” says Viskanta, “is that the less effort you put in, the better off you are.” And recently, he notes, perfect mediocrity has grown more attainable, as index-based investing has moved steadily closer to free.

For as little as 0.04% of assets per year — that’s $4 for every $10,000 you’ve invested — and often with no broker commission, you can buy an exchange-traded fund, or ETF, that follows most of the U.S. stock market and delivers its return.

This year’s Investor’s Guide starts from the idea that index funds and a buy-and-hold stance should be the default approach for long-term wealth builders. With that in mind, MONEY has rebuilt our basic investing tool set: Our list of recommended funds is now the MONEY 50, streamlined from 70. Not all the funds are index trackers, but the core choices are low-cost, highly diversified portfolios for the long run. For many investors, a portfolio balanced among one broad U.S. stock fund, an international fund, and one or two bond funds is all you need. The MONEY 50 makes building that portfolio easy.

Yet even if you decide to stick with a simplified strategy, that doesn’t mean every investment puzzle you’ll face has been solved. The stories in this guide will help you think through your approach to the three biggest questions you still face as you save for retirement.

Question No. 1: Buy and hold what exactly?

You can build a simple portfolio for any level of risk. Stretching for high returns? You could put all your money in the Schwab U.S. Broad Market SCHWAB STRATEGIC T US BROAD MKT ETF SCHB -0.6438% , or crank up risk and return potential further by adding funds like Vanguard Small-Cap VANGUARD INDEX FDS VANGUARD SMALL-CAP ETF VB -0.6142% or Vanguard FTSE Emerging Markets VANGUARD INTL EQUI FTSE EMERGING MARKETS VWO -0.3911% . Need safety? Stash more in Vanguard Total Bond Market VANGUARD BD IDX FD TOTAL BOND MARKET BND 0.0365% or iShares Barclays TIPS Bond ISHARES BARCLAYS TIPS BOND FUND TIP -0.1019% to add inflation protection.

These funds make security selection automatic, but they don’t help at all with the question of how much risk you want to take. The standard rule of thumb says you should start out with a high allocation to equities and gradually “glide” that down as you age. These days fund companies often focus less on their stock-picking prowess and more on designing all-in-one “target date” funds that do this asset allocating for you. Yet as you’ll see in “How much should you hold in stocks?,” the theory and practice of lifetime asset allocation are all over the map.

Question No. 2: What if high stock and bond returns are really over?

If you’re a just-own-the-market purist, you don’t ask if stocks are cheap or expensive. You assume it’s too hard to outwit the hive-mind intelligence of the crowd. Over the short run that’s almost certainly true. But there’s evidence that the price of stocks relative to measures of their value like earnings and assets can provide a clue about returns over the course of a decade.

Stocks are now priced at about 21 times the five-year average of their earnings. According to research from the Leuthold Group advisory firm, when the market’s price-to-earnings ratio is between 20 and 25, over the next 10 years stocks have delivered an annualized return of only 3% after accounting for inflation.

Combine that with a gloomy outlook for bonds. Current yields are an indicator of future returns, and with the 10-year Treasury at 2.8%, you may be lucky to carve out 1% after inflation. “Stocks, Bonds? In 2014, Think Cash,” will help you think through your strategy so that you can thrive in a world where today’s high-asset prices could repress tomorrow’s returns.

Question No. 3: Can I ever do better?

Maybe. Even some advocates of index investing say there may be ways to outperform. But the extra bump doesn’t come from tearing into company balance sheets or, as famed Fidelity manager Peter Lynch used to say, “buying what you know.” It comes from “tilting” a portfolio of hundreds of securities to take advantage of anomalies that have shown up in historical stock returns.

One is the value effect, the tendency of stocks with low prices relative to their earnings or asset value to outperform over time. Likewise, there seems to be a small-company premium. For a shot at earning these boosts, you don’t buy a portfolio of 40 or 50 small-caps or bargain stocks. Instead, you buy an index or index-like fund that gives more weight to such shares.

You’ll need nerve: Larry Swedroe of Buckingham Asset Management, who recommends tilting, says the strategy trailed the S&P 500 badly in the late 1990s; in the past decade, though, an index of small value stocks earned an extra 2% annualized. “You have to be able to live through it,” he says.

“The New Faces of Stock Picking” profiles a pioneer in low-cost, tilted portfolios as well as other quantitatively driven thinkers searching for ways investors can carve out advantages. Instead of hunting for the inside scoop, they crunch data and use insights into investors’ behavioral blind spots. A caution: Now that star fund managers have faded, Wall Street is cranking out lots of ETFs. For every robust new idea, there’s likely to be a dozen more that are nothing but savvy marketing tied to a hot short-term trend.

Investing may be simple now, but you’ll still need the discipline not to chase the latest market beater, plus the patience to stick to a long-term strategy even when it’s out of favor. Simple? Yes, but not always easy.

OWN THE WORLD, FOR NEXT TO NOTHING

You can build a solid portfolio with just three investments. Here are examples using ETFs and index mutual funds:

The ETF route:

Schwab U.S. Aggregate Bond SCHWAB STRATEGIC T US AGGREGATE BD ETF SCHZ 0.2607% : 40%
Schwab U.S. Broad Market: SCHWAB STRATEGIC T US BROAD MKT ETF SCHB -0.6651% 40%
Schwab International Equity: SCHWAB STRATEGIC T INTL EQUITY ETF SCHF -1.5326% 20%

The index fund route:

Vanguard Total Stock Market Index: VANGUARD INDEX FDS TOTAL STK MARKET PORTFOLIO VTSMX 0.2797% 40%
Vanguard Total Bond Market Index: VANGUARD BD IDX FD TOTAL BOND MARKET BND 0.0365% 40%
Vanguard Tax Managed International VANGUARD TAX MANAG DEVELOPED MKTS INDEX FD INV VDVIX -1.2133% : 20%

Either way you go, your costs will be far, far less than most active fund managers charge…

Annual fee:

ETF portfolio: 0.05%
Index fund portfolio: 0.08%
Three average active funds: 1.22%

… and you’ll be diversified across the globe.

Number of stocks:

ETF portfolio: 3,144
Index fund portfolio: 4,823
Three average active funds: 289

SOURCE: Morningstar

MONEY health insurance

What’s Next for Retiree Health Care

Fewer companies are offering retiree health care benefits. Even if you get benefits from a former boss, you'll see some changes. Photo: Shutterstock

When it comes to getting health coverage from your old boss, the landscape is changing fast, and not just for early retirees.

Companies have been cutting back on retiree health benefits for years. Indeed, the latest survey by the Kaiser Family Foundation (KFF) found that among large firms with employee health coverage, just 28% offer some form of retiree benefits, down from 66% in 1988. Among smaller firms, help is even scarcer.

Disappearing corporate benefits is one reason the new public exchanges created by Obamacare will be such a boon to early retirees. But even for seniors who still get help from a former boss, change is afoot, no matter your age.

Here’s what to watch for:

Early retirees: If the public exchanges succeed, firms that offer pre-Medicare coverage may give those ex-workers funds to buy a policy on one, says Tricia Neuman, director of KFF’s Program on Medicare Policy. Employers are taking a wait-and-see approach, but that could change fast.

Retirees 65 and up: About a third of Medicare recipients have supplemental coverage from a former employer, says Neuman, and some of them are already seeing changes. Several major companies, recently IBM and Time Warner (MONEY’s parent company), are shifting retirees 65 and older from company-run plans to private exchanges operated by benefit consultants and insurance brokers.

On a private exchange, you’ll be able to pick supplemental Medicare coverage from a host of options, using funds your employer contributes to a tax-free health-reimbursement arrangement, or HRA.

For now, companies making this shift aren’t necessarily cutting back on how much they’re spending on your health care, says Paul Fronstin, a senior research associate at the Employee Benefit Research Institute (though IBM capped its contribution years ago). But how you’ll fare over time will depend on the employer subsidy keeping up with premium hikes, says John Grosso, health care actuary at Aon Hewitt. If not, you’ll pay more.

You or your parents may leap at the chance for more choices, or be overwhelmed by the sign-up process. It’s similar to open enrollment, but with potentially more options.

“Make use of all the tools out there,” says Sandy Ageloff, Southwest health and group benefits leader for Towers Watson, which owns Extend Health, the biggest private exchange. Tools include phone counseling at the exchange; the typical initial call runs about 80 minutes, Ageloff says.

MONEY early retirement

Planning To Retire Early? A Second Paycheck Comes In Handy

In the 1980s, Kevin Howard started buying houses, fixing them up, and renting them out. That rental income let him leave his job at 55. Sam Comen

No question, picking up a part-time gig after you walk away from 9-to-5 work will ease the pressure on your finances. And that’s the plan for many: Three-quarters of workers believe they will have a job in retirement, a May Gallup poll found.

It’s not just about the money. In a survey of 44- to 70-year-olds by the second-act job site Encore.org, a third of those who want to work part-time cited enjoyment as the reason.

But reality doesn’t match expectations. In EBRI’s 2013 Retirement Confidence Survey, only 25% of retirees report ever having worked for pay after calling it a career.

Would-be retirees are often unrealistic about landing meaningful part-time work, says Colorado planner Leitz. Lining up a 15- to 20-hour-a-week job sounds great, but there aren’t too many stimulating and well-paying jobs in professional fields that allow that. “Flexibility is great for you, but not really for employers,” says Leitz.

What to do

Go for projects, not a job. Even when firms don’t want a 20-hour-a-week senior staffer, they still may have high-level work that needs to get done. Set yourself up to be the consultant they hire, says Dick Dawson of CareerCurve, a coaching firm for 55-plus workers.

Start where you’re known: your old workplace and your network. Keep going to industry events and seek out contractors who do similar work and may hear of jobs they can’t take. Visit elance.com and peopleperhour.com, which match employers with freelancers in fields such as marketing, writing, and design.

Make your hobby pay. Working doesn’t have to mean sticking with the same career. Before retiring at 58, Susan Morgan Hoth was a high school teacher in Richmond who spent summers painting silk scarves. As she approached retirement, she started selling her scarves online through sites like Etsy.

Her business nets about $4,000 a year, enough to let Hoth, now 64, splurge more. “It helps me afford things I would not spend money on otherwise,” she says.

Similarly, you might find that a part-time retail job that matches your interests — in a golf shop, say, or a health-food store — is all you need to pad your income. Discounts on greens fees or organic granola are an added bonus.

Don’t get too comfortable. A lot can happen over 40 years, from a financial pinch to boredom. So even if you don’t work out of the gate, keep yourself employable. That means maintaining professional credentials, following changes in your industry, and staying in touch with former colleagues.

Think way ahead. Many early retirees plant the seeds for a second paycheck well before retirement. One way to do that is by investing in rental real estate. Hearts & Wallets found that 27% of those who successfully retired before 62 went that route.

Rental income is what made it possible for Kevin Howard, 57, to leave his full-time job as a procurement manager for Boeing two years ago. In the mid-1980s he began rehabbing and renting out houses. The properties — three in Seattle, where he lives, and one in his former hometown of Houston — provide half his annual $140,000 income (the rest is a pension and savings).

Still, “I don’t want to fix plumbing as I get older,” he says. He plans to sell his Houston house soon and the others within five years.

Now, instead of working on aerospace projects, Howard is learning to play the standing bass. He’s clocked 14,000 miles in 26 states on his motorcycle, and takes his VW Vanagon camper to blues festivals.

“I worked for 30 years,” Howard says. “I want another 30 years doing the things I want to do.”

MORE: New rules for early retirement

Rule 1: Early retirees: Don’t fear losing your health insurance

Rule 2: Getting ready to retire? Save more, spend less

Rule 3: Use your home to boost retirement savings

Rule 4: Get the first decade of retirement right

 

MONEY retirement planning

Early Retirement: Why You Must Get The First Decade Right

How you allocate your portfolio and monitoring the market is crucial to maximizing your long-term income. Photo: Shutterstock

You should fear a bear.

The S&P 500 has turned in 16% average annual gains over the past three years, propelling the typical 401(k) balance to a record high this year, Fidelity reports. For workers 55 or older, it’s $255,000, nearly double what it was in March 2009, the depths of the bear market.

What stocks have in store now is crucial for early retirees, who might be inclined to count on continued high returns out of the gate. But stocks are looking expensive. Based on a conservative price/earnings ratio developed by Yale economist Robert Shiller, which uses 10 years of averaged profits, stocks are forecast to return 5% a year over the next decade. That could include down years as well.

Here’s why the market matters so much. Early on in retirement, you tend to spend more freely, as you can finally do all the things you were too busy to do when you worked: travel, eat out more, or indulge a costly hobby.

After you hit your mid-70s, your outlays start to drop, even when you take health care spending into account. People 65 to 74 spend 37% more than those 75 and older do, according to the Consumer Expenditure Survey. Retire young, and you’re starting those free-spending years early.

At the same time, crafting an income is trickier. Not only can’t you take Social Security until age 62, you’ll lock in a higher payment if you wait until full retirement age to claim (66 for a 60-year-old today; 67 for those born in 1960 or later). If you’re eligible for a pension and collect before 65, you’ll have to settle for as much as 30% less. So you’re especially dependent on your investments for income.

What to do

Hold out for a bigger check. As you navigate these bridge years, you’ll be better off if you can rely on your own resources first.

For every year you delay taking Social Security until age 70, you’ll collect an 8% bigger benefit. From then on, you can enjoy an annuity payment, in essence, that’s indexed to inflation. That’s worth waiting for.

Be willing to change. With bond yields low, a portfolio withdrawal rate that starts at 3% and adjusts for inflation is considered safer than the traditional 4% rule, says retirement researcher Wade Pfau. And that’s for 30 years, not the 35- or 40-year time horizon of an early retiree. For that, a safer rate dips to a measly 2.6%.

When you’re living entirely on withdrawals, 2% to 3% won’t cut it (unless you’ve saved a lot of dough). Simply boost your withdrawal rate, though, and you run a high risk of running out of money.

A 60-year-old couple earning $120,000 today a year and hoping to live on 70% of that, say, would have to withdraw 7% initially from a $1.2 million portfolio. But even if they cut back to 4% when full Social Security kicks in at 66, the chances of their money lasting until 90 drop below 50%.

To improve those prospects, get by on less. If the 60-year-old couple can live on 60% of their income, they can drop their withdrawal rates to 6% before claiming Social Security, then 3%, doubling their shot at success.

Crucially, if you allow yourself a higher withdrawal rate early on, you must cut back when Social Security kicks in. And since your spending patterns and market returns will undoubtedly vary, stay flexible. “This isn’t something you do once and forget about,” says planner Schroeder. “You need to review your income plan at least annually.”

Fear the bear. The other challenge is how to allocate your portfolio. In provocative new research, Pfau and Michael Kitces, director of research at Pinnacle Advisory Group, make the case for starting retirement with just 20% in stocks and gradually buying more over time. Do this, and chances are you’ll stretch out your savings a few more years and, more important, protect yourself from crippling anxiety and steep losses at the outset.

If a bear strikes early, you preserve capital and buy stocks on the upswing. If you retire into a bull market, you will miss out on some gains. But your overall odds are still better. “Heads you win, tails you won’t lose,” says Kitces.

Shifting money into stocks as you age may be too counterintuitive for you to pull off. A 50% or 60% stock stake that you gradually trim is also a good approach, says Vanguard investment research analyst Colleen Jaconetti. “In 2008, if you had been 50-50, you’d be ahead of where you are now,” she adds.

You’re walking a fine line. It’s hard to make your money last without the higher returns stocks can provide. But you need to preserve what you have. A bull market later won’t make up for early losses, says Jaconetti.

MONEY Retirement

Use Your Home to Boost Retirement Savings

Do you dream of leaving full-time work behind at 60, or even sooner? In MONEY’s 2014 Retirement Guide, you’ll learn the five essential rules for pulling off early retirement — rules built on tough lessons from recent years and new thinking about investing.

Rule 3: Be grateful, not greedy, about your gains

The housing market’s recent recovery may be one of the things that’s giving you the confidence — and the wherewithal — to retire ahead of schedule. Home prices in 20 major metro areas are up 12% over the past year, the biggest gain since 2006, according to the widely followed S&P/Case-Shiller home price index.

In seven of those markets, values are higher than or nearing their pre-crash peak, says David Blitzer, managing director at S&P Dow Jones Indices. American homeowners have seen their equity rise more than $2 trillion in just the past year, according to the Federal Reserve.

Alas, you can’t count on a housing boom to keep padding your net worth. With rising mortgage rates and tepid economic growth, the pace of price gains is expected to slow. “A year from now home prices will be higher, but half the double-digit gains we’ve seen,” says Blitzer.

You need to set realistic expectations for what your home can do for you, and plan prudently with what you have. That might mean leaving your old digs behind.

What to do

Lose two bedrooms. Moving out of your home of decades can pay off in two ways. By selling into a strong market now and buying a smaller house, you can lock in your good fortune, letting you add to your savings or wipe out any lingering debts.

Related: How much house can you afford?

Plus, if retiring early means learning to live on less, there’s no better way to do that than to cut your housing costs, which typically eat up 40% of retirees’ budgets, according to the Consumer Expenditure Survey.

Get out of town. Only 10% of retirees pick up stakes, though boomers look to be a bit more likely to relocate than previous generations were. In a 2012 AARP survey, two in 10 boomers said they planned to move in retirement.

“Boomers are different,” says Fred Brock, author of Retire on Less Than You Think. “They are willing to move to cheaper parts of the country.” With families more mobile, he adds, you don’t need to be tied to one place to stay near your kids.

Join this minority and move to a town with lower property taxes and lower living costs, as well as cheaper homes, and you can leverage your profits even more. That’s what Sheri and Bill Pyle did when they sold their three-bedroom Cape Cod outside Chicago for $185,000, paid cash for a $128,000 four-bedroom ranch in Tennessee, retired a home equity line and car loan, and added $30,000 to their savings.

And though their income is less than 40% of the $126,000 they used to earn, their cost of living is so low that they are able to get by on their combined Social Security, leaving their $400,000 in retirement savings to grow for now.

Their property taxes plummeted from $7,000 to $500 a year. Milder winters mean their heating bills are a third of what they used to pay. “We could never have done it if we stayed in Chicago,” says Sheri.

Beware the trap of leisure fees. Whether you downsize locally or across the country, it’s crucial that you don’t simply trade maintenance costs for steep association fees.

“I see a lot of people who move into a new home for retirement, and their cost of living goes up, not down,” says Colorado Springs financial planner Linda Leitz, national chair of the National Association of Personal Financial Advisors.

When Gundy and Karen Gunderson retired in 2007, the Seattle couple bought a home in a gated country-club community in Las Vegas. But they were surprised at how quickly the costs added up. Gundy, 66, a former commercial airline pilot, and Karen, 67, a homemaker, estimate they were spending $1,000 a month on dues for the private golf course, tennis and fitness classes, the club’s restaurant minimum, and maintenance on their pool and lawn.

Related: 10 Best Places to Retire

“We ran the numbers and knew we had to make an adjustment if we wanted our money to last,” says Gundy. So this year they downsized a second time, to a Henderson, Nev., retirement community overlooking two public golf courses. Now all they pay is a $93 monthly association fee.

Invest in staying put. All this said, what if you really don’t want to leave your home? At a minimum, early retirees told us they avoided carrying a mortgage into retirement, as 30% of retirees do.

While you’re still working, invest in improvements that will cut costs later, like replacing old appliances and drafty windows and upgrading your heat and electrical systems. “If you’ve been in your home a long time, there’s a lot you can do to make it less costly,” says Stillwater, Okla., financial planner Louise Schroeder.

MORE: New rules for early retirement

Rule 1: Early retirees: Don’t fear losing your health insurance

Rule 2: Getting ready to retire? Save more, spend less

Rule 4: Get the first decade of retirement right

Rule 5: Retiring? Time to look for a part-time gig

MONEY

Getting Ready to Retire? Save More, Spend Less

Do you dream of leaving full-time work behind at 60, or even sooner? In MONEY’s 2014 Retirement Guide, you’ll learn the five essential rules for pulling off early retirement — rules built on tough lessons from recent years and new thinking about investing.

Rule 2: Early retirement means tradeoffs, now and later

Funding your retirement, never a breeze, has become tougher in this economy. Interest rates are hovering near historic lows, and bond guru Bill Gross recently warned that low rates may persist for decades. So what you can earn on low-risk cash and bonds will remain paltry.

Wade Pfau, a researcher and professor at the American College of Financial Services, has calculated sure-fire retirement savings rates in this rate environment.

If you hope to retire at age 65 and start saving at 35 — when baby boomers typically began, a May 2013 Bank of America Merrill Edge survey found — it’s 15% to 19% a year. Move your retirement date up by five years, and those rates go to 23% to 29%, Pfau says.

You probably can’t hit those daunting targets year in, year out. So the trick is to gain ground when you can — and be willing to make the math work by living on less.

What to do

Buckle down. You can catch up with bursts of savings — often easier once big expenses like college or a mortgage fall away.

According to retirement research firm Hearts & Wallets, saving 15% or more of your income for eight to 10 years — early or late in your career — can ensure that you save enough to retire comfortably at 65. Such power saving is common among early retirees too, says Hearts & Wallets co-founder Laura Varas, but the rate is 25% or more.

Related: 10 Best Places to Retire

Calvin Lawrence was able to retire from his job as executive director at Corinthian College in Chesapeake, Va., four years ago at 59, even though he hadn’t gotten serious about retirement planning until after he divorced at 50.

At that point he had about $200,000 set aside. With his two children out of college (and out of the house), tuition and other child-care bills were gone. And a promotion had boosted his pay by $20,000.

Even though he made $110,000 a year, “I lived like I earned $50,000,” says Lawrence, now 63. “I found that I don’t need to spend a whole lot of money to be happy.” The result: He built his savings to $800,000.

Put windfalls to work. Whether it’s an inheritance or a bonus, a windfall can make the difference between leaving early and working until 65.

When Bill Balderaz, now 39, sold the social media marketing business he founded in 2011, he and his wife, Christina, an elementary-school teacher, put themselves on the road to retirement in their fifties. With profits of a few hundred thousand dollars, the couple wiped out the big expenses that often make saving for the future hard — paying off the mortgage on their home in Upper Arlington, Ohio, and setting aside public school college tuition for their kids. The rest went toward retirement funds, which now total $600,000.

Related: Will you have enough to retire?

Just as critically, they didn’t ratchet up their spending. “We didn’t buy a Mercedes or build a new house or send our kids to private schools,” says Bill, now president of Fathom Columbus, the online marketing firm that bought him out.

He still drives a 17-year-old Toyota Tacoma pickup truck. In the market for a boat for the family — the children range from 10 months to 11 years — he bought a decade-old 18-footer off Craigslist for $9,000. A similar new one would have cost $27,000. “We live like the acquisition didn’t happen,” Bill says.

Set low expectations. To get away with saving less, commit to living on less. Planners typically suggest you aim to replace 70% to 80% of your pre-retirement income, which doesn’t amount to a dramatic lifestyle change once you eliminate the money you were saving, Social Security taxes, and commuting costs.

If you can make it on 50%, you need to save 11.8 times your income by age 60, vs. 17 times if you hope to live on 70%, says Charles Farrell, CEO of Northstar Investment Advisors.

As you’ll see in rule No. 3, housing could be the key to doing this. Plus, “people who want to retire early are usually already living well below their means,” notes Farrell. “This might not be a big change.”

MORE: New rules for early retirement

Rule 1: Early retirees: Don’t fear losing your health insurance

Rule 3: Use your home to boost retirement savings

Rule 4: Get the first decade of retirement right

Rule 5: Retiring? Time to look for a part-time gig

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