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Business Officer Magazine

Years in the Planning

For updated financial advice factoring in recent declines in investment portfolios, Business Officer consulted Dan Keady, director of financial planning for TIAA-CREF, an investment products and financial services company (

By Sandra R. Sabo

For updated financial advice factoring in recent declines in investment portfolios, Business Officer consulted Dan Keady, director of financial planning for TIAA-CREF, an investment products and financial services company.

Q: What's the most common mistake people make when planning for retirement?

A: Often, people don't plan for their asset allocation from a long-term perspective. They might simply make their picks based on what returns look good at the time. For example, if there's variation in the market, especially a substantial downdraft, they may want to put everything in stocks, move assets to cash, or make other rash moves.

Having a plan for asset allocation helps people avoid overreaction or just plain paralysis. It enables them to maintain a diversified portfolio over the long run. With a plan in place, you're less likely to jump in and out of investments, a practice that can be very detrimental to building wealth.

Q: Given today's tougher economic climate, what has changed about retirement planning?

A: People are looking at more than the balances in their 401(k)s or 403(b)s and getting back to focusing on planning their income streams. They want to know, “What is my monthly check going to be?” At TIAA-CREF, for example, we've always promoted the thought “annuitize to need,” or give yourself a guaranteed income floor-what's known more technically as “lifetime annuity income.”

With many people now in charge of their own pensions, it's important to have a source of guaranteed income. When used as one of several “pockets” of retirement money, annuities provide a base of income that can't be outlived, with opportunity for growth and liquidity from other pockets.

The prevailing attitude used to be, “If I average good returns, I don't need to save that much.” As a nation, we tended to believe the status quo would continue and [consequently] hadn't been aggressively saving. Now people are acknowledging that they need to save more of their income for retirement.

The TIAA-CREF Institute just completed a survey of about 1,300 clients, age 50 and older, which asked for their reactions to the recent market downturn. In the first quarter of 2009, approximately 20 percent reported that they increased their retirement contributions, compared to about 10 percent who decreased their contributions. Also, about one third of the people surveyed had changed their investment allocations.

Q: What's the most important step to take at each life stage?

A: It's important to get a head start, so your money has a long time to grow. All things being equal, if you start early you'll end up with more savings for retirement than someone who waits until later.

If you're in your 30s, even if there are a lot of conflicting goals for your money, start making small contributions to your retirement account. In these days of declining returns, you might be tempted to stop contributing altogether; that can be a big mistake in terms of plain math. Having talked to many of our clients who kept making their retirement contributions during the market downturn of the 1970s, I can say that doing so has really worked out well for them.

By the time you reach your 40s, your income has probably increased. The amount you put aside for retirement should increase as well. At this point, you might also look into establishing a health-care account, where you put aside money to grow, tax-deferred, to help pay for postretirement health-care expenses.

In your 50s, it's time to do some serious planning. You need to start thinking about the emotional part of retirement—what you envision retirement looking like for you—as well as looking at the numbers to ensure you're saving an appropriate amount. Your plan should address post-retirement health-care expenses, which can be substantial. Even if your employer provides generous postretirement benefits, you'll still have to pay all the deductibles, the costs of services that aren't covered, and miscellaneous charges.

Q: Women are more likely to leave their careers for periods of time to raise children, act as family caregivers, and so forth. In what ways can women manage their retirement accounts to make the most of these times when they won't be making contributions or receiving company matches to their accounts?

About two thirds of [survey] participants remain on track to retire as planned—probably those who were diligent savers and had diversified portfolios.

A: Women have several options for allocating money when they take breaks from their full-time careers. If they are working part time or have access to other funds, they can invest in a Roth IRA that will later provide tax-free retirement income. At the same time, they need to manage the funds they've already put into retirement accounts, paying attention to risk tolerance but also understanding the need to invest a portion of assets in stock accounts for growth potential as part of a diversified portfolio. Also, women may be able to save for retirement during breaks in employment through a spousal IRA, if eligible, or by investing in an after-tax annuity.

Another fact of life is that women generally live longer than men—often into their 90s. Probably the best advice is for them to start saving for retirement as early as possible through an employer-sponsored plan at work that will reduce taxes now and build tax-deferred savings for retirement.

Q: If the market downturn has forced people to delay retirement, how much longer might they need to work to regain their financial goals?

A: That's hard to say without doing the numbers for an individual: How much do they spend? How does their portfolio composition factor into that? What's their savings rate? As a first step, various online tools can help people look at their situation and assess whether they need to work, for example, two or three more years before retiring. Online tools, coupled with objective advice, can help determine if you are on track to meet your goals.

A lot of people are good at analysis and can run their own numbers to determine the right time to retire. But it can be hard to be objective when it's your own retirement you're talking about. We encourage our clients to work with a financial adviser who will take their individual circumstances into account and use sophisticated probabilities to ensure they're on the right path to receive a stream of retirement income they cannot outlive.

According to our survey, a substantial minority of TIAA-CREF participants—about one third-have delayed the planned date of their retirement. Still, that means that about two thirds of participants remain on track to retire as planned-probably those who were diligent savers and had diversified portfolios. Of course, they may still need to make adjustments during retirement, maybe spending somewhat less or saving more.

SANDRA R. SABO, Mendota Heights, Minnesota, covers higher education business issues for Business Officer.

Go back to main article, "Take Two" by John Ostrom, or proceed to Playing Another Role—For the Time Being” by Sandra R. Sabo.