MONEY 401(k)s

This Is the Single Biggest Threat to Boomers’ Retirement Savings

Roulette Wheel with ball on "0"
Alexander Kozachok—Getty Images

401(k) balances for longtime savers soared to $250,000, but many are taking big risks in the stock market.

IRA and 401(k) balances are holding steady near record levels. But certain risks have been creeping into the typical plan portfolio, which after a long bull market may be overexposed to stocks and otherwise burdened by a rising loan balance, new research shows.

The average balance in both IRA and 401(k) accounts dipped slightly in the second quarter, but continues to hover above $91,000 for the past year, according to new data from Fidelity Investments. Savers who have participated in a 401(k) for at least 10 years, and those who have both an IRA and a 401(k), now have balances that top $250,000.

Much of this growth owes to the stock market, which has more than doubled since the recession. But individual savers are stepping up as well. For the first time, the average 401(k) participant socked away more than $10,000 (including company match) in a 12-month period, Fidelity found. That occurred in the second quarter, when the total contribution rose to $10,180, up from $9,840 the previous quarter.

Yet bulging savings have tempted some workers to dig a little deeper into the 401(k) piggy bank. New plan loans and participants with a loan outstanding held constant in the second quarter, at 10.1% and 21.9% respectively. But the average outstanding plan loan balance climbed to $9,720, compared to $9,500 a year earlier. This leaves borrowers at greater risk of losing tax-advantaged savings and growth.

Plan loans are a primary source of retirement account leakage—money that “leaks” out of savings and never gets replaced. This may occur when a worker switches jobs and cannot repay the loan, which becomes an early distribution and may be subject to taxes and penalties.

Meanwhile, savers who are not invested in a target-date fund or managed account, and who have not rebalanced to maintain their target allocation, may find that the brisk rise in stock prices has left them with too much exposure to stocks. Baby boomers especially are at risk, Fidelity found. Pre-retirees should be lightening up on stocks, while adding bonds to reduce risk. But unless they regularly rebalance—and few people do—boomers have been riding the recent market gains, so they are holding an ever larger allocation in stocks than they originally intended.

That inertia could hurt boomers just as they move into retirement. During the last recession, 27% of those ages 56 to 65 had 90% or more of their 401(k) assets in stocks, which fell some 50% from the market peak in 2007. Those kinds of losses could wreck a retirement.

Could this scenario repeat? Very possibly. Nearly one in five of those ages 50-54 had a stock allocation at least 10 percentage points or higher than recommended, Fidelity found. For those ages 55-59, some 27% of savers exceed the recommended equity allocation. One in 10 in both age groups are 100% invested in stocks in their 401(k). It’s possible that these investors are holding a significant stake in safe assets, such as bonds or cash, outside their plans, which would cushion their risk. But that often is not the case.

Whether you’re approaching retirement, or you’re just starting out, it’s crucial to hold the right allocation in your 401(k) plan. Younger investors, who have decades of investing ahead, can ride out market downturn, so a 80% or higher allocation to stocks may be fine. But a 60-year-old would do better to keep only 50% invested equities, with the rest in a mix of bonds, real estate, cash and other alternatives. To get a suggested portfolio mix, try this asset allocation tool. And for tips on how to change your portfolio as you age, click here.

Read next: Americans Left $24 Billion in Retirement Money on the Table Last Year

MONEY strategy

Why Focus Is Essential to Building Wealth

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Jorg Greuel—Getty Images

Persistence is the key to any successful endeavor.

Building wealth is a process, not an event — a process that takes discipline and a long-term outlook. You must focus on yourself, not what others are doing. Work hard and maintain a consistent approach. This may not be easy, but it’s doable for most people if they choose to make a commitment and stick to it.

In the end, though, the “stick to it” part is what usually trips people up.

In an excellent post on his blog Seeking Wisdom, Jana Vembunarayanan gives a fantastic summary of how to succeed at just about anything. Here are his observations and recommendations, to which I’ve added some suggestions for applying them to your finances.

1. Recognize that it takes a long time to create anything valuable. Investing works over long periods of time. The market has never lost money over any 20-year stretch. The problem for many people is that they don’t understand their time frame. They confuse short- and long-term money and end up bailing at the worst possible moment. Finding a strategy that works, and sticking with it for decades despite the inevitable booms and busts of the markets, is not exciting. While you might feel you are missing out on the latest big thing, you will most likely have the last laugh.

Read next: 4 Personality Quirks That Sabotage Your Savings

2. Work hard every day even if you don’t see improvement in the short term. Building your skills enables you to earn a higher income, so you can save more. Small increases in savings each year are barely observable at first, but over time you can be working toward saving 20% of a $100,000 salary, which will provide great rewards in the future. Many will give up because they become impatient with a seeming lack of progress. Accept the short-term stagnation knowing you will be rewarded with the miracle of compounded returns in the future.

3. Keep doing it consistently for a very long time without giving up. Persistence is the key to any successful endeavor. While it might satisfy a short-term urge to remodel your kitchen by raiding your 401(k) account, resist this temptation and stick to the plan. Investing is simple but not easy. Track your wealth accumulation yearly, not daily. This encourages you to build your future, not mortgage it.

4. Enjoy the process, and don’t worry about the outcome. Put things on autopilot. Set your plan to save a certain percentage of your salary, with an increase of a percentage point or two each year until you maximize your contributions. Find a few diversified, low-cost index funds, add an automatic yearly rebalance, and forget about it. Enjoy your life and ignore the daily end-of-the-world events that saturate the financial media in their quest for advertising dollars. Focus on the fact that you will be financially secure by sticking to your plan. In your free time, devote your energies to finding things you like to do. Find ways to increase your skill level and eventually make money from a “job” that doesn’t seem like work. This way to supplement your income might lead you down some surprising paths while you have the security of your savings plan at your day job.

5. Don’t compare yourself to others; instead, compare yourself now to yourself two years ago. Keeping up with Joneses is, as serial insulter Donald Trump would say, a loser’s strategy. A phenomenon called “lifestyle creep” can sabotage the best-laid plans. It means that the more you make, the more you spend. Your only accomplishment is making the hamster wheel spin faster. Don’t worry about what others have. No matter how rich you are, there will always be someone who has more than you. And such people might just be renters anyway, buying their goodies with credit cards with huge balances. Look at yourself instead. Build a disciplined savings plan, and follow it with no deviations. Competing with your neighbors over who has the most “stuff” is not a good use of your time.

As Warren Buffett once said, “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” Keep these five points in mind, and your probability of success will increase immensely. Good habits will eventually lead to superior results in whatever you do. The key is to figure out what works for you and stick to it. Your process will determine your future. Spend time developing it, and then enjoy your life.

Read next: 19 Secrets Your Millionaire Neighbor Won’t Tell You

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MONEY Savings

42 Ways to Save by Cutting Out Food Waste

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Evan Sklar—Getty Images

Start by embracing your freezer.

In a recent episode of Last Week Tonight with John Oliver, the comedian-host addressed America’s relationship with food waste. Long story short? We waste a TON of food, and we’ve got to put an end to it.

According to the NRDC (Natural Resources Defense Council), as much as 40 percent of the food produced in America gets trashed. As a country, Americans throw away $165 billion worth of food every year; individually, that comes out to about 20 pounds of food per person, per month. That’s about as close as we can get to throwing away money.

Not only are there huge environmental concerns about all that produce rotting in landfills, but the issue takes on a new weight when you take into account that 50 million people in the U.S. experience food insecurity.

Here’s How to Save Hundreds on Groceries

No doubt, you—our budget-savvy, smart shopping readers—are far less wasteful than most. But in light of the enormity of the problem, here’s an exhaustive refresher course in how to cut back on (and even eliminate!) household food waste:

At the store/unpacking at home
1. Be careful when buying in bulk (stick to non-perishable foods and home supplies)
2. Clean out your pantry and use the oldest items up first.
3. Organize your refrigerator the right way.
4. When unloading groceries, rearrange the fridge so the items that expire soonest are toward the front.
5. Don’t immediately trash food that’s past its sell-by date.
6. Print this helpful chart that details produce shelf life.

Take full advantage of fresh produce (and preserve it!)
7. Stay on top of the produce in your refrigerator, so nothing gets lost in the shuffle.
8. Eat fruit that’s in season.
9. Preserve the life of spring and summer berries.
10. Make your own jam (in 30 minutes or less)
11. Can summer’s fruits and vegetables at home and save money.
12. Don’t have the patience for canning? Try quickling! (My new favorite word.)
13. If greens wilt a little bit in the fridge, revive them in cold water.
14. Cook with food scraps.
15. Use leftover vegetables up in the crock pot.
16. Stuff zucchinis, peppers and more to turn veggies into a main course.
17. Spiralize vegetables for a healthy, hearty “pasta” dish.
18. Find new uses for basil this summer.
19. Then freeze fresh herbs to use all winter long.
20. Use long-in-the-tooth veggies in a super-easy stir-fry or fried rice.
21. Learn how to tell when an avocado is ripe.
22. And keep avocados from turning brown in your fridge.
23. Peel a mango without losing much of the flesh.
24. Brush up on our produce-saving kitchen hacks.
25. Learn to love ugly produce.

Don’t leave pantry staples hanging
26. Use every last bit of peanut butter in the jar (hint: our trick involves your morning oatmeal!)
27. Soften brown sugar that’s become rock hard—in seconds.
28. Revive stale bread with a little water and heat.
29. Keep an eye out for fruit powder.

Love your leftovers
30. Have a little yogurt left in the tub? Use it in a frozen treat.
31. Cook soups that freeze well.
32. Seriously, in general, embrace your freezer.
33. Learn the best ways to freeze produce, chicken, ground beef, bread and more.
34. Come winter, use frozen vegetables.
35. Bring restaurant leftovers home for a second meal or snack.
36. Pass on what you can’t use with these smart apps (check out #3).
37. Get creative with leftover ingredients.
38. Use up leftover chicken.
39. …and leftover turkey.

…and more
40. Invest in kitchen gadgets that make food prep easy.
41. Grow your own garden! And if you have a bumper crop, share it with neighbors.
42. Consider composting.

This article originally appeared on ALL YOU.

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MONEY IRAs

This Is the Biggest Mistake People Make With Their IRAs

piggy bank under spider webs
Jan Stromme—Getty Images

Too many investors view IRAs simply as parking accounts for their rollover 401(k) money.

Millions of American have IRAs. Some people, like me, have multiple IRAs, but hardly anyone makes regular contributions to these accounts. According to a recent study by the Investment Company Institute (ICI), only 8.7% of investors with a traditional (non-Roth) IRA contributed to them in tax year 2013.

The Employee Benefit Research Institute’s IRA database, which tracks 25 million IRA accounts, estimates an even smaller percentage of investors contributed to their traditional IRA accounts—just 7%.

The problem, it seems, is that many people have come to see IRAs as a place to park money rather than as a savings vehicle that needs regular, new contributions. Most IRAs are initially established with money that is rolled over from an employer-sponsored 401(k) when a worker changes jobs or retires.

As savings options, IRAs are inferior to 401(k)s, which typically offer employer matches and a tax deduction for your contribution. With IRAs, the deduction for contributions is more limited. If you are already covered by a plan at work, you qualify for a tax deduction to a traditional IRA only if your income is $61,000 or less. Moreover, the contribution limit for IRAs is low—$5,500 a year, or $6,500 if you’re 50 and older. By contrast, the contribution limit for a 401(k) is $18,000 this year ($24,000 for those 50 and older).

Still, traditional IRA accounts will let your money grow tax-deferred; with Roth IRAs, you contribute after-tax money, which will grow tax-free. Adding an extra $5,500 a year to your savings today can make a sizable difference to your retirement security. Even if you don’t qualify for a deduction, you can make a nondeductible contribution to an IRA. (Be sure to file the required IRS form, 8606, when you make nondeductible contributions to avoid tax headaches.) Still, as these new findings show, most people don’t contribute new money to any IRA.

I get it. I have two traditional IRAs from rollovers and have been making the mistake of not contributing more to them for years. Since my traditional IRAs were started with a lump sum, I mistakenly viewed them as static (though still invested) nest eggs. If I had thought of them as active vehicles to which I should contribute annually, I would be on much firmer footing in terms of my “retirement readiness.” (I also have a SEP-IRA that I can only contribute to from freelance income, and a Roth IRA which I converted from a third rollover IRA one year when it made sense tax-wise to do so, but also now can’t contribute to. No wonder I find IRAs confusing.)

The ICI’s report suggests that very low contribution rates for IRAs “are attributable to a number of factors, including that many retirement savers are meeting their savings needs through employer-sponsored accounts.” But that explanation is misleading. Even those lucky enough to have access to 401(k)s need to have been making the absolute maximum contributions every year since they were 23 years old to feel confident they’re saving enough.

IRAs are a valuable and often overlooked part of the whole plan—and for many without 401(k)s, they are THE whole plan. There has been a lot of attention on improving 401(k) plan participation rates by automatically enrolling employees. But only recently has there been more focus by policymakers on getting people to contribute to their IRAs on a regular basis, including innovations like President Obama’s MyRA savings accounts and efforts by Illinois and other states to create state savings plans for workers who lack 401(k)s. These are worthy projects that need an even bigger push.

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 next: Americans Left $24 Billion in Retirement Money on the Table

MONEY Spending

Why You Should Spend More Money in Retirement

illustration of senior couple taking money out of purse
Jason Schneider

Money worries can make you unnecessarily frugal. Here's how to overcome them.

You’ve saved up money your whole career. So in retirement, don’t deny yourself the pleasure of spending it.

Not a problem, you think? Actually, it can be. In 2014, 28% of people 65 and older with at least $100,000 in savings pulled less than 1% from their accounts, reports the research firm Hearts & Wallets. That’s well below the 4% that many financial planners say is safe.

Misgivings about spending play a big role, says Hearts & Wallets partner Laura Varas. In focus groups, retirees described big spenders their age as irresponsible and expressed shame about their own spending. And as people age, they tend to get more emotional about complex money decisions, says Christopher Browning, a financial planning professor at Texas Tech University: “No one gives you instructions on how to turn your savings into income. It can be a paralyzing process.”

First determine if a shortage of money is the problem rather than an inability to spend. The tool at troweprice.com/ric can help you figure out whether you indeed have enough funds for a good retirement. Then, if it’s worry that’s stifling your spending, try these steps to put yourself at ease.

Make Your Own Pension

Living off a steady income stream, not portfolio withdrawals, can boost your confidence about spending. A Towers Watson survey found that retirees relying on pension or rental income are less anxious than those who live off investments. Don’t have a pension and don’t want to be a landlord? You can create regular income by buying an immediate fixed annuity. A 65-year-old man who puts $100,000 into one today, for example, would collect about $500 a month for a lifetime.

Add up your monthly fixed costs, such as a mortgage and health insurance. If that amount exceeds your Social Security and any other guaranteed income, fill that gap with an annuity. (Get quotes at ImmediateAnnuities.com.) Granted, if you’re hesitant to spend money, you may be hesitant to lock up funds in an annuity. If so, annuitize a fraction of your money and add more once you’re more comfortable with the idea.

Bucket Your Money

Should you not want to tie up any money in an annuity, you can get comfortable about spending by dividing your portfolio into accounts for different needs. Browning suggests sorting your savings into three buckets. One provides income for everyday expenses over the next few years, the second is for fun pursuits, and the third is for future needs: day-to-day living, emergencies, and bequests.

Put the first two buckets in secure and liquid investments: money-market accounts, CDs, or high-quality bonds. The bucket for later years can have stock holdings for greater long-term growth.

Once that’s done, you can start collecting income—a paycheck for retirement. Set up a regular transfer from a money-market account that’s in your first bucket—enough to cover, with Social Security, monthly bills and usual expenses. Then relax and enjoy.

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MONEY Financial Planning

What Every Married Couple Should Understand About Community Property Laws

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Hero Images—Getty Images

5 must-know facts about marital property.

So Jennifer Garner and Ben Affleck are splitting up. It’s a sad story (hey, I like Ben and Jen both), but there’s an interesting lesson for all of us in this news: That they agreed to divide their assets amicably (or so we are told) and mediate their divorce. This type of adult behavior is indeed rare in a split.

More importantly, they resided in California – it’s one of a handful of community property states, which has an effect on your finances as a couple (or to-be-former couple).

Community property statutes date back to when the U.S. annexed the southwestern states when it was Mexico’s territory. The states adopted the communal rules of family, a traditional approach to property rights that was based more or less on a homemaker and a working spouse (here’s a current list of community property states).

Community property is simple: Most assets accumulated during marriage are split equally between the spouses, no matter how they were earned. I am not a lawyer so I don’t give legal advice, but I am educated in this area and have been involved with divorces informing clients of what the general community property laws mean for them. Every state that has this law is different, so check with your state for specifics. Keeping that in mind, here are five must-know things about community property.

1. Retirement Accounts

Even though they are accumulated separately, they are considered community property and divided equally between spouses. Social Security is an entitlement account and is handled differently.

2. Inherited Money Is (Usually) Separate Property

Inherited money is usually considered separate property, but there is a catch. If the money is used to purchase other assets after the inheritance or new assets are generated, then it can be considered community property.

3. Businesses You Own

This is considered community property. This one can get ugly since the value is split with the spouse. It may be tough to raise the cash to pay the spouse. Imagine also having other shareholders involved or partners! It can get complicated. Talk to an experienced attorney about getting a spousal exclusion to those assets (like a postnuptial agreement). This is a very overlooked area in planning.

4. Prenuptial Agreements

It may seem sad that a contract for the possible end of a marriage is made before the marriage commences, however this is the contract that will effectively stand up in court against the community property laws. Since this is a true contract, it should by all rights be a pre-division of assets. If you move from a state without community property laws to one that has them and there is a prenup in place, that is usually still binding.

5. Property Acquired Prior to Marriage

Assets accumulated prior to the date of marriage are considered separate property, but there is a catch. Make sure you detail those assets and valuations before the date of marriage. Remember I mentioned retirement accounts? Take inventory of your stuff prior to the marriage date. This will avoid the cost of a forensic accountant trying to figure out what belonged to whom.

As you go through a divorce, and after it’s final, it’s also important to check your credit to make sure all accounts you’re responsible for are being reported accurately. You can get your free annual credit reports from each of the three major credit reporting agencies from AnnualCreditReport.com.

These are some of the basics, but it is not comprehensive. What ultimately happens though if a divorce suit is filed? Well, like the Garner-Affleck story, as long as both parties agree to the terms, community property laws may not come into play since there is an agreement. If not, then a judge in a court may ultimately decide on the division of assets based on state law.

If you are a person with a simple or complex wealth plan and are getting married, or remarried, and you live in a community property state, consult a Certified Financial Planner (CFP) or a family attorney to get good advice about your situation. You may not want to think about your marriage ever ending — nor the laws that apply if it ever does. However, you might one day be faced with the inevitable, so it can help to make sure you are ready for it.

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MONEY Family

The Hidden Upside to Living With Mom and Dad

Recent college grads may think living at home is less than ideal, but it has its advantages.

CNN’s Christine Romans thinks it’s the perfect solution. If you’ve just graduated from college, there’s a good chance you’ve got at least a little bit of debt. Romans advises you to take a year at home to save up money, start paying off your loans, and get on your feet financially. But don’t stay forever, she says. Make a plan – you can even sign a contract – with your parents on what responsibilities you’ll take on, and how you plan to be out of the house before two years are up.

Read next: Why Millennials Are Better Off Waiting 10 Years to Buy a Home

MONEY 401(k)s

Americans Left $24 Billion in Retirement Money on the Table Last Year

stacks of cash on table
Sarina Finkelstein (photo illustration)—Getty Images (2)

The average worker is missing out on more than $1,300 a year. Make sure to get your share.

Personal savings rose last year, as conscientious workers reined in their spending. But a smaller portion of those savings were stashed in employer-sponsored retirement plans, new research shows. This and other recent findings suggest that the much-vaunted 401(k) match may not be the silver bullet for retirement savings that is widely presumed.

Personal savings jumped to 5.5% last year from 4.6% in 2013, according to data from Hearts and Wallets, a financial research firm. In the same period, average household savings allotted to employer-sponsored retirement plans fell to 22% from 29%. Among households eligible for a plan, only 56% participated, down from 60% the previous year.

Partly due to such behavior, Americans leave a staggering $24 billion on the table every year simply by not contributing enough to get their full employer match, according to a study by Financial Engines, a 401(k) advisory firm. Last year about a quarter of employees failed to collect their full match. The average worker missed out on $1,336 a year in free money—over 20 years, that can add up to $43,000.

The matching contribution is so ineffective at boosting savings that one third of eligible workers past the age of 59 ½ fail to take full advantage, research out of Yale and Harvard shows. That’s an especially dismal showing because these older workers can make penalty-free withdrawals from their plans.

If a 401(k) plan match is free money, why don’t more people take advantage? Inertia explains a lot. That’s why so many employers are switching their plans to automatically enroll new workers and automatically escalate their contribution rate. Another issue is that some workers don’t believe they can get by on less than their full take-home salary, and so they do not enroll or opt out of the plan if they have been automatically enrolled.

Typically, those who miss out on the match tend to be low- and middle-income workers. Ironically, this group would benefit the most from participation because the match would represent a bigger percentage of their income. A typical middle-income worker would more than double his or her annual savings just by raising the contribution rate to get the full match, Hearts and Wallets found.

In the end, the biggest beneficiaries of the 401(k) match are highly motivated savers, who tend be the most highly compensated. That’s why some policy experts and academics have raised questions about the fairness of corporate tax policies that encourage employers to offer a match. Maybe better public policy would be to redirect those tax dollars toward fixing Social Security, which benefits the low-income households least likely to save on their own and who need help the most.

Of course, any changes to tax policy aren’t likely to happen soon. All the more reason to make sure you are saving enough to get your full 401(k) match. Chances are, you won’t notice the difference in your take home pay—it helps that you get a tax break on the amount you sock away. To see how stepping up your savings will get you closer to your retirement goals, try this calculator.

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MONEY financial advice

Vanguard’s Founder Explains What Your Investment Adviser Should Do

Jack Bogle, founder of the mutual fund giant, shares what makes an investment adviser worth paying for.

The life of a financial adviser can be very tricky. Many of them believe that leaving a client’s investments alone is the best option, but when, year after year, clients come in asking what the best course of action is for their money, what do you tell them? Jack Bogle, who 40 years ago founded the mutual fund giant Vanguard (it now has about $3 trillion of assets under management), explains exactly what a financial adviser should do and what a financial adviser should say.

Read next: Jack Bogle Explains How the Index Fund Won With Investors

MONEY Savings

This Is The Biggest Threat to Your Retirement Number

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Image Source—Getty Images

The one thing that can suddenly derail your retirement strategy altogether.

The idea of coming up with an exact number for how much you need to save for retirement is an attractive one for savers. By drawing a visible finish line for your retirement savings, a retirement number can be the foundation of your financial planning throughout your career.

In coming up with a good estimate for a retirement number, it’s crucial to understand how having a bad market in early retirement can have a huge impact on the viability of your entire long-term retirement strategy. If you don’t take this risk into account, it could pose a threat to the accuracy of the retirement number you’ve spent a lifetime seeking to reach.

How a bad market early in retirement can snare you
In coming up with a viable retirement number, the ideal situation is one in which you can weather the worst future conditions the financial markets can throw at you. Much of the time, planning for the worst will leave you in far better shape than you expected, as worst-case scenarios don’t occur very often. Yet if you truly want a retirement number that maximizes the probability that your money will outlast you, you can’t afford to ignore realistic future scenarios, no matter how improbable they might be.

In doing research on the retirement-number question, many experts have noticed that the most difficult situations retirees face occur when a major market correction occurs soon after a person retires. Even when overall average annual returns over the long run are similar, a retiree who suffers poor performance early in retirement has a much harder time preserving his assets than one who’s fortunate enough to avoid bad markets until later on. Indeed, in some cases, even a retiree who has ahigher average annual return in retirement still ends up worse off if the worst years come early on.

Experts call this problem sequence-of-return risk, and the problem stems from the fact that retirees need to take withdrawals from their savings in order to cover their living expenses in retirement. In simplest terms, bad performance early in retirement forces you to “sell low” by liquidating investments at fire-sale prices to cover your required withdrawals. If poor initial returns last long enough, then you won’t have enough money to enjoy the full benefit of any future rebound in the financial markets.

2 ways to protect against this retirement-number risk
In response to sequence-of-returns risk, financial analysts have come up with conservative rules of thumb such as the well-known 4% rule to help savers build more secure retirement nest eggs. Using historical data that suggests a typical balanced portfolio with stocks and bonds can make it through tough market conditions for a 30-year period as long as you start out taking no more than 4% of your initial portfolio value, coming up with a retirement number is simple: Just multiply your expected annual income needs in retirement by 25.

However, there are several problems with that approach. First, many people have a hard time saving 25 times their expected net spending in retirement. Also, some believe the 4% rule could be problematic in a low-interest rate environment, because low initial bond yields leave the income-generating side of the portfolio weaker than usual.

An alternative approach uses a different way of thinking about retirement. The benefit of the 4% rule is that it aims to provide exact expectations for what you can safely spend. Yet in reality, most retirees aren’t terribly comfortable continuing to spend at heightened levels when the markets move against them, and they instead look at ways to economize and spend less. Adapting the 4% rule to allow for reductions in withdrawals during lean return years is an idea that has been floating around for years, and research suggests that if a retiree can handle volatile markets by cutting spending, it can reduce the needed multiple of annual expenses from 25 down to 20 or lower.

Stay safe
With markets at high levels now, those who have recently retired are understandably nervous about the potential fallout from sequence-of-returns risk. Your best defense against this risk is to find ways to be more flexible with your financial needs. If you can build in some resiliency to changing future conditions, you’ll be much more likely to aim at a retirement number that will get the job done.

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