By Mary A. Malgoire, MBA, CFP™
October, 2006

These are questions that, until recently, relatively few Americans had to face. The combination of traditional pensions, promising a lifetime stream of income, and a seemingly sound Social Security system created for many families a safety net that required little action on their part.

For the past decade, though, that safety net has been unraveling, as more and more employers abandon traditional pensions and Social Security’s long-term prospects become increasingly uncertain.

For the most part, Americans are painfully aware of these changes, and that they are on their own for covering income needs during their later years. To build the resources necessary to see them through their post-employment years, most must rely on individual retirement accounts, 401(k) plans and other "defined contribution" plans. These plans are assisted by the government through tax benefits, and by employers, typically, through matching on other contributions. But investment decisions – and investment consequences – now fall largely on employees. Except in rare cases, saving sufficient sums for retirement is now their responsibility. Jacob Hacker’s current book, The Great Risk Shift, identifies this and many other examples of a broad trend in America toward the demise of collective responsibility for individual welfare.

For baby boomers this isn't the only compass change on their life path. These structural changes in our pension system, plus seemingly out-of-control health care costs and the prospect of bankrupt Medicare and Social Security programs rightfully instill a deep sense of insecurity about later-life financial well-being. This is true both for boomers and for those following behind them.

Practically speaking, the primary consequence of this shift from traditional "defined benefit" to "defined contribution" retirement plans is that, once retired, a paycheck-like amount does NOT automatically arrive each month. In fact many retirees, who have not built up sufficient nest eggs, face the prospect that, either immediately upon retirement or at some point later on, there will be no income at all, aside from a modest Social Security check.

At the same time, older workers who have embraced these "self-funded" pensions such as 401(k)s and IRAs, and have been maximizing their contributions to these accounts, can be pleasantly surprised to find out how large these accounts have become. This often coincides with peak career earnings and the ending of the biggest expense in the budget -- the kids. They are out of school and out the house! This is a sweet combination -- big investment balances, and lots of extra cashflow. Furthermore, the decision to slow down or retire completely is no longer governed by how many years you have with the company. This is both liberating and exhilarating!

It will be important for every American to take a hard look at where they fall on the continuum of this Great Risk Shift, as Hacker calls it, and prepare to survive it.

But how much is enough? You are not alone if you find yourself asking: Where do I want to go from here? Do I have enough money to do something else with my life? Better yet, am I completely financially secure? What does this mean for me and my spouse? So the question, "Can I retire?" and all of its permutations, seems ubiquitous these days. But the prospect of either slowing down or retiring altogether calls for careful consideration and planning. The amount of money required to finance life in retirement, especially with today’s longer life spans, is easy to underestimate. Consumers are wise to "look (carefully) before they leap."

Before making drastic changes, take stock of your situation and your options. "Taking stock" means doing what is necessary to get an independent and candid answer to the above questions. (See sidebar: Web-based Retirement Planning Tools). Perhaps the most important decision of your future hinges on getting an accurate assessment of your situation.

The process involves gathering a great deal of personal financial information as well as articulating your personal goals and obligations. Many people want only to slow down, not end their careers; others wish to be active in some other way. Some dream of building their retirement home, or moving closer to children; others want to stay put. And, what about future obligations? Spell out what you want and what you foresee as best you can.

The analysis should include a realistic assessment of how much income you can expect to draw from your assets, what your expenses are likely to be, and the extent to which you may need to supplement that income, either immediately or at some point in the future, especially given the impact of inflation.

Once wages stop, shortfalls, sooner or later, are common. The retiree finds that income does not equal living expenses. This often happens despite a reduced tax bill resulting from lower (or no) taxable wage income. Needing to draw from investments to augment income is usually not a matter of "if" but "when.” This gap between income and expenses widens over time -- even for those lucky enough to have a traditional pensions since most such pensions, and private annuities as well, do not increase with inflation, while living costs do. The crucial question is: Will existing liquid investments (stocks, bonds, cash, pension accounts, etc.) be sufficient to provide that income? Or, more to the point, am I at risk of running out of money?

If income falls short of living needs, and if what you've saved will not be sufficient to support you all the way to the end, it’s best to find out now. Once retired, options for recouping a deteriorating situation dwindle as time goes by.

But don’t give up just because the initial calculations look bleak. Surprisingly, sometimes once you understand what is contributing to the conclusion that you can't retire, some simple and often painless adjustments can shore up results dramatically. Continuing to work for just a few additional years can have a startling effect. So can converting illiquid or non-performing assets to ones that produce income, re-prioritizing spending, electing early Social Security benefits, or downsizing your residence. These are just a few possibilities. Sometimes one will do it; more often a combination is required. And not all are appropriate for everyone. Your personal game plan will hinge on your unique circumstances.

This kind of analysis will arm you with the information you need to make good decisions about how to realize your goals. The plan may mean a whole new direction, or simply a re-commitment to the current course for a while. You will know if you can quit your job and earn nothing at all and when. If this is not possible, you'll know what amounts must be earned to supplement living expenses. You should have a sense of what your "lifestyle" costs and have an idea of what adjustments you must make to pursue a different life course. These decisions are up to you. No one can tell you what is right for you.

And, what if you find your current course puts you at risk of never achieving financial security or of risking what you've achieved? Isn't this also important to know? Everyone wants to know what the future may hold for them. A good analysis and game plan will ensure that your destiny remains under your control.