Cracking your nest egg

Kiplinger's Personal Finance Magazine, Oct, 1998 by Ronaleen R. Roha

After years of investing for retirement, don't blow it when it comes to investing in retirement.

You don't see long lines of retirees queuing up for scarier-than-ever roller coasters that spring up every year at competing theme parks around the country--such as Worlds of Fun's latest scream machine, in Kansas City, Mo. The Mamba takes riders 200 feet above the ground, then hurls them down at 75 miles an hour. That's followed by a 184-foot ascent--and a 60-mph corkscrew.

Sounds sort of like that scary ride on Wall Street. Standard & Poor's 500-stock index of big-company stocks rumbled up 22% in the first six and a half months of the year, then tumbled 10% in less than a month. The Russell 2000 collection of small stocks rose 20% between early January and the end of April, then plunged 18%.

Is it any wonder that people who are retired or close to it may be a bit queasy about the thought of strapping any part of their retirement nest egg onto that roller coaster?

But don't step out of line.

Regardless of the market's inevitable misbehaviors, the long-term nature of investing in retirement still means that a healthy--even heavy--investment in stocks is the key to preserving financial security for the rest of your life.

Maxie Nameth, 60, a corporate pilot living in Boynton Beach, Fla., is a true believer. Ever since he bought his first mutual fund shares 30 years ago, he has poured all of his savings into the stock market. His fidelity to stocks--and participation in every 401(k) plan he has been eligible for--has paid off. He and his wife, Teny, 58, have accumulated a nest egg of more than $900,000. And that's after their stocks took a $70,000 beating this summer that pushed them below the million-dollar mark.

Bloodied but not bowed, Nameth saw the market drop as an opportunity to hunt for bargains. The years of experience and success have given him a quiet serenity about market stumbles. "Now if I was going to cash out tomorrow and spend it tomorrow, it's a big deal," says Nameth, reflecting on the loss. "But I'm not going to do that. I'm not going to use a lot of this money until I'm 70. I'll just ride it out."

At the same time, this push-the-envelope investor realized as he approached 60 last year that it was time to build a bit of protection into his portfolio. That's when he began to switch part of his investments into bonds, according to the plan he devised with financial planner Neal Slafsky of Fort Lauderdale. But not too big a chunk. For Nameth, the goal of having about 25% in bonds is pretty conservative. "You can't get conservative too early," he says.

Experts agree wholeheartedly. In the past, conventional wisdom suggested that retirees follow two basic precepts: Switch your investments from stocks to safe, income-producing securities, such as bonds and CDs, and never spend your principal. Baloney. Today, for many retirees, especially younger ones, following either dictum could lead to financial calamity.

The new reality is that retirement is getting longer, perhaps 30 or 40 years or more, as more people retire earlier and lifespans steadily increase. Over such a long period, running from the possibility of stock-market risk by investing in fixed-income securities guarantees that you'll run straight into the risk of inflation.

"Inflation is your enemy, even if it's not hyperinflation," warns financial planner Deena Katz of Coral Gables, Fla. If, for example, prices rose at a rate of 3% a year, the cost of living would double in 24 years; at 5%, it would take only 14 years.

How much do you need?

A key to making your money last is knowing how long it has to last--a guesstimate, at best. A 65-year-old man today has a life expectancy of about 16 years, according to government tables, and a 65-year-old woman, about 19 years. But these are average figures. Lots of people live longer, which explains why retired Boulder, Colo., financial planner Michael Stein, author of The Prosperous Retirement: Guide to the New Reality (Emstco Press, $19.95), suggests adding 50% to average life expectancies as a margin of safety. Rozanna Patane, a York Harbor, Me,, planner, figures her clients will live to age 100. "People used to laugh at me," she says, "but now more are starting to wonder whether that is enough."

By the time you hit retirement, you should have a pretty good handle on how much money it takes to live the way you like. Nameth figures he and Teny will do fine on about 80% of preretirement income, but the old rule of thumb that retirees can live on 70% to 80% of preretirement income doesn't work for everybody.

Retirement spending, especially in the early years when you're active and healthy, often pushes a budget above preretirement levels. Travel expenses may go up. Medical-insurance costs may soar if you retire when you are too young for medicare and you have no employer-provided retiree health benefit.

Other expenses may go down. Job-related costs will disappear, including the portion of your salary you're now shoveling into retirement accounts. Your mortgage payments may end, too. Will you drop or cut back on life insurance?