Four Keys to a Sustainable Retirement Plan

Every year I read the annual Retirement Confidence Survey, published by the non-profit Employee Benefit Research Institute (www.ebri.org), and promptly ignore it. Not this year.

I'm such a trend geek that I've been following the survey for the past 20 years of its existence. Most of the time it tells me what I already know: Most people have some retirement savings, but not enough. Most have an idea when they want to start looking for early-bird specials at local restaurants and want to travel much more than they are now.

This year, though, I saw something different and potentially disturbing. While it was no surprise to me that millions will be retiring later than they hoped, the implications are troubling.

Only a small percentage of workers surveyed said they were "very confident" about having enough money for retirement. The 16% who were in that category nearly matched the two-decade low of 13% who answered that way last year.

For millions, this was supposed to be a bounce-back year from the meltdown of 2008--a time in which we said, "Boy, wasn't that an awful year and isn't it great how my portfolio rebounded!"

Unfortunately, retirement confidence didn't perk up with the modest resurgence in stocks last year. Many are still down for the decade when you take into account the dot.com meltdown and subsequent recession.

With medical expenses still rising faster than inflation, less than one-third of those polled are very confident they will be able to cover all of their expenses in retirement. EBRI estimated that a couple retiring at 65 and living to 95 will need as much as $550,000 just to foot out-of-pocket medical bills and premiums--and that's assuming a troubled Medicare system won't cut back benefits over time.

More disturbing findings: Some 27% say they have less than $1,000 in savings; more than half estimate their total household savings (excluding home equity and defined-benefit plans) is less than $25,000.

"A distressing number of people say they have no savings at all," says Jack VanDerhei, EBRI's research director.

While you may not fit into the no- or low-savings cadre, there will be relentless pressure on your portfolio to make up out-of-pocket medical expenses. And keep in mind that unless you have most of your savings in a Roth vehicle, you'll pay full marginal rates on withdrawals from your 401(k)-type plans. Uncle Sam will get his due--even more if Medicare needs to be propped up, which it will.

The Silver Lining
The obvious retort to all of these dark prophecies is that you'll need to save--and possibly work--more. That's the low-hanging fruit. What makes more sense is a complete re-evaluation on where you're headed and what you can do over time to get you where you need to be.

Here are some of the most powerful, yet under-appreciated themes in a sustainable plan:

• Measuring and Re-aligning Your Human Capital. Forget about stocks, bonds, mutual funds, ETFs, commodities, and real estate for now. What is it that you do best? How can you enhance and develop your existing skill base or build another skill set over the next few decades? If you're going to live longer, you'll need to refocus on your livelihood(s).
   
• Becoming a Cost Codger. As Vanguard Group founder Jack Bogle likes to remind us, "costs matter." Every commission and expense ratio on a mutual fund or ETF should be scrutinized. You get the best deals on index funds sold directly, not those funds peddled by brokers. The same goes for insurance products such as annuities and college-savings vehicles like 529 plans.
   
• Becoming More Tax Efficient. Bonds and income funds held in tax-deferred vehicles will generate less of a near-term tax bill than those held in taxable accounts. Consider morphing your individual retirement accounts to Roth accounts, if you can afford to pay what you owe the IRS for the conversion over the next two years. Roths offer tax-free withdrawals (except in a few cases). This makes most sense for those who won't need the money for at least five years. There are plenty of Roth conversion calculators on the Internet, or consult your financial or tax planner.
   
• Doing the Numbers. Less than half of those surveyed by EBRI bothered to calculate how much they will need in order to retire comfortably. Do some ballpark estimates. Every major mutual fund site has a retirement calculator. For a more detailed estimate, try the program ES Planner (www.esplanner.com).

Once you've reined in costs, reduced your tax bill, and done a ballpark estimate, you're not done. Factor in the wild cards. Are you thinking of moving or downsizing? Will you need to care for a disabled relative? You must be nimble when doing projections. Remember, a sustainable wealth plan is about having an open and flexible relationship with work, family, and community goals. Thoughtful preparation goes a long way in balancing out these competing needs.

I'd like this column to guide you in those plans and hope it plays some role in helping you plot exactly where you want to go--and then get you there successfully.

A note about me and this column
This is not a column about money. Sure, we'll be talking about wealth management, investor protection, and even retirement planning, but the real thrust of this column will be about navigating a new approach to life and wealth that's sustainable.

I won't be pitching the hottest stock, bond, or ETF, knowing that it may tank or you're buying in at the worst-possible time. I'm pretty much a passive investor who believes in cheap index funds, avoiding brokers, and being open to new ideas for lowering risk while obtaining reasonable returns.

In short, I'm interested the ecology of money--your relationship to your investments, income, and the rest of your life. What should you be doing given that you may be working in retirement, possibly pursuing a second or third career, or just living into your ninth and tenth decades?

With a gimlet eye on investor protection and a foothold in behavioral economics and life planning, I hope to give you a comprehensive take on how you can best succeed in financing what you want and need to do in life.