Money & Finance

Changes in employment status can change retirement plans

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 After 18 years in the airline industry, David Kish was downsized out of his job in 2005 long before he planned to retire. He tried selling real estate for about three years, but it wound up costing him way more than he made.

Today, at 63, the Carnegie resident has dropped entirely out of the workforce and taken an early retirement, although he would like to work longer and build up more savings.

"We try to have a dream or goal, and sometimes life changes them," Mr. Kish said. "This was one of those changes."

Mr. Kish and his wife Rose, 62, have had to downsize their lifestyle and become more frugal. Their financial planner, Michael Freker of AXA Advisors in Carnegie, has helped them create a budget and showed them how to maximize the income and retirement savings they have.

"Because of the unemployment rate being higher, it’s more of the norm today to have people with great jobs that may have been downsized due to the economy," Mr. Freker said. "They may be in between jobs longer than they expected.

"It may be difficult or impossible to save while out of work," he said. "But they need to do a reality check to see where they are and then keep a tighter control on their expenses."

With the national unemployment rate at more than 9 percent and more workers out of work for longer periods of time, many employees’ saving for retirement have had their income interrupted.

A new study by T. Rowe Price analyzes the potential longterm impact on retirement income from savings interruption and how to get back on track, assuming these savers expect withdrawals from their nest egg to provide half their retirement income at age 65.

The study assumed that a hypothetical retirement saver earned $40,000 at age 25; received a 3 percent raise each year; and contributed 13 percent of her salary, including her employer match, toward retirement.

At this rate, she would accumulate $500,000 by age 65, assuming a 7 percent annual return and 3 percent annual inflation. However, if she experienced an interruption in income and did not raise her contribution rate above 13 percent afterward, her retirement outlook would change.

According to T. Rowe Price, if she delayed retirement savings until 26, she would only be able to replace 48 percent of her salary at age 65, and the longer she makes no contributions, the harder it will be to catch up.

For example, if she did not start saving until age 30, she could only replace 39 percent of her pre-retirement salary from her portfolio at 65. To replace 50 percent of her salary at that point would require her to save 17 percent for retirement instead of 13 percent of her salary each year.

"If you start by building a savings cushion early in your working career, it gives you more flexibility in the future," said Stuart Ritter, a vice president and certified financial planner at T. Rowe Price in Baltimore.

"If you are relying on making up low current savings in the future, you have taken away your flexibility in the future," he said. "If you start saving early and do it regularly, if an interruption in income happens, you are in a much better position to deal with it."

While the T. Rowe Price study concludes that retirement savers face the biggest impact when their contributions are interrupted early in their careers, other financial advisers say older workers are more vulnerable to interruptions.

"The older we are, the more we make," said John Graves, managing partner of The Renaissance Group in Ventura, Calif. "The kids are out of the house. College is paid for and we have more discretionary income, so we tend to save more later.

"The last 10 years is when we save as much as 75 percent of our entire retirement savings," he said.

A report recently published by the Transamerica Center for Retirement Studies focuses on the impact of unemployment and underemployment on saving for retirement.

Among its finding were that more than one-third (36 percent) of displaced workers reported having less than $10,000 in total household retirement accounts. To cover expenses, many have tapped their savings (50 percent), used their credit cards (32 percent), and taken withdrawals from their retirement accounts (22 percent).

Losing a job can push retirement further down the road unless the worker’s retirement account can increase significantly or he lowers his expected income in retirement.

The most important thing unemployed workers can do to salvage their retirement plans is to avoid withdrawing funds from their retirement plan, if possible. That way, their retirement assets have a chance to grow even if they are unable to contribute more.

One key benefit of a retirement plan is the time value of money, said Tom Foster, vice president and national spokesman for retirement plans at The Hartford in Clinton, Conn.

"The longer the money sits there, the more it will accumulate and give you more in your plan to support your lifestyle in retirement," Mr. Foster said. "The compounding component is lost if you start taking money out.

"If you touch the retirement asset, there are a lot of factors to consider," he said. "You will have to pay taxes on the money and possibly a penalty. By withdrawing the money, you are helping today but hurting tomorrow."

We try to have a dream or goal, and sometimes life changes them. This was one of those changes."

(c)2011 the Pittsburgh Post-Gazette 

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