Retirement on Hold:
October 8, 2001: 7:00 a.m. ET
A Texas couple wanted to retire in three years. Now they're not sure they can.
By Jeanne Sahadi
Rethinking retirement plans - Sept. 19, 2001
Moneyville: See if you’re on track to meet your early retirement goal
NEW YORK (CNNmoney) - This year's sliding stock market was already putting retirement plans to the test. But Wall Street's performance since Sept. 11 has pulled the emergency brake on a lot of dreams.
Debbie and Mike Shelton are just two people who have begun to do some recalculating in recent weeks. To be sure, the Texas couple are still doing pretty well living as ex-pats in London: They make $260,000 a year working for a natural gas company, and their employer foots the bill for their housing, their children's schooling and their car.
But they've also made sacrifices. Debbie, 44, and Mike, who turns 50 in November, put in 13-hour days and sorely miss family time with their two children, ages 8 and 9. That's a big reason they both want to retire early and return to their home state of Texas. They had been planning to do so with a $4 million nest egg - enough for a new home, 2 new cars, and a $150,000 a year in income.
But by Sept. 21, at the end of one of the worst weeks on Wall Street, their $2 million portfolio had shrunk to $1.7 million. And despite the fact that they have been investing $160,000 a year for several years, their overall portfolio is worth roughly $200,000 less than what they put in.
That's a far cry from the late 1990s when their money was growing 18 percent a year. Back then, Debbie said, "Early retirement looked not only possible, but just around the corner."
Keep a cool head, make hay of losses
The downturn offers a few lessons for those wanting to leave work before their senior discounts kick in. Fortunately, for many, early retirement is still a possibility - if not quite as early as some people were hoping for.
"You've got to have perspective," said Jim Flewelling, coauthor of The Idiot's Guide to Retiring Early. "It's awfully hard to look out of the deep hole you're in. But outside of that hole there's a future. ... Sooner or later (the market) will come back."
It's awfully hard to look out of the deep hole you're in. But outside of that hole there's a future.
Jim Flewelling
Coauthor, The Idiot's Guide to Retiring Early
Until then, make sure you're diversified enough to benefit from upward trends and to buffer yourself from steep drops. Review your asset allocation and make needed adjustments gradually.
"You don't want to make a wholesale change in your portfolio just like you don't want to make a wholesale change in your life," Flewelling said. "Panic is the biggest thing we have to worry about in our investing."
If you're really nervous and haven't been working with an investment professional, consult a fee-only financial planner who will take an objective view of your situation.
Also, take advantage of capital losses on investments, which offset capital gains. For example, certified financial planners David Caruso and Don Boegel recommend that the Sheltons start applying their $200,000 loss now. Investors can only claim $3,000 of capital losses plus the amount they have in capital gains in any one year, but unused losses may be carried over to future tax years. Given how much the Sheltons lost, "they may not have to pay taxes for five to 10 years," said Caruso, coauthor of Let's Talk Money.
Planning for the unknown
Of course, the hardest part of early retirement planning is making sure you don't outlive your money.
You won't if your earnings rate is equal to or greater than your withdrawal rate, Caruso said.
Assuming an annual return of 8 percent on your investments and 3 percent inflation, you'll net 5 percent. So for every $1 million you have invested, you can withdraw 4 percent to 5 percent a year, or $40,000 to $50,000, without worrying about running out of money.
The Sheltons want to live on $150,000 a year in retirement - so, by that estimate, they need to amass a nest egg of $3 million.
It's unlikely they'll be able to generate that amount in the next three years, Caruso said. But if they're willing to work part-time in retirement and can earn just $50,000 a year, that's the equivalent of replacing $1 million in assets, he noted.
Cash is great, but not to excess
Beyond having enough to live comfortably, the Sheltons also want to pay $700,000 in cash to build a house on their property in East Texas and to buy two cars when they retire. Subtracting that amount from their $1.7 million portfolio today, that means they only have $1 million to build on for their retirement income.
Boegel understands their desire to be debt-free in retirement, but thinks they ought to reconsider their plans to pay cash for a home. After all, mortgage interest is deductible, he said, and they'd be better off leaving the money they would spend in the stock market.
Similarly, he and Caruso are concerned because the Sheltons have 29 percent of their portfolio in cash, forfeiting some good buying opportunities given stocks' recent drubbing.
Adjusting goals
If they wanted, the Sheltons could retire in three years if they were willing to ratchet down their retirement income needs. But they're more determined to live as they have planned. "We know what we're working toward. We'll just work longer," Debbie said.
It won't be too long. In just five years, if they average a 7 percent annual return on existing assets and continue investing as much as they have been, they're likely to have a $3.5 million nest egg, Boegel said.
They can take comfort, too, in knowing that they are way ahead of the game despite a punishing market. Like others who are viable candidates for early retirement, they're disciplined and have options. Said Flewelling: "If you got to this point, you were probably doing something right." |
