How to get your retirement plan back on track

CHICAGO Tue Jan 15, 2013 5:52pm EST

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CHICAGO (Reuters) - Unemployment can throw a wrench into even the best retirement plan -- especially for older workers in their peak earning and retirement saving years.

Now that the employment picture finally is starting to improve, older workers who have been through the wringer of joblessness face the task of getting those plans back on track.

More older workers are back on the job. The percentage of 55-plus Americans out of work for 27 weeks or more fell to 48.7 percent in December, down from 53.5 percent in November. The unemployment rate for workers over 55 stood at 5.9 percent in December, considerably below the 7.8 percent for all workers.

Near-retirees struggling to recover from a bout of joblessness may be better off than they think. Their retirement account balance is likely near its lifetime peak and probably has grown modestly while they were out of work -- unless they had to make costly withdrawals for expenses.

There are two other important levers that can be pulled: working longer and shaving projected retirement spending.

"Don't despair if you've been through a job loss in your late fifties or early sixties," says Christine Fahlund, a senior financial planner and vice president at T. Rowe Price.

Instead, it's a good time to find a sharp pencil -- or even better, a well-built online retirement planning calculator -- and do some what-if projections. Recalibrate those big three variables that can help get you back on track: saving rates, retirement dates and your spending needs in retirement. And be as specific as possible.

"When you're younger, you can use rough rules of thumb -- you don't need to do a lot of precision fine-tuning," says Steve Utkus, director of the Vanguard Center for Retirement Research.

"But at age 50 or 55, you need to be more precise about the variables that you control. If you've had a difficult time during the recession, a combination of saving more, working a little longer and slightly reducing your expected standard of retirement living will get you to a reasonable plan."

THE SAVING CHALLENGE

You may have fewer years left to contribute to a retirement account, but your savings have been earning a return even if you've been out of work -- assuming you didn't need to raid it to meet living expenses.

An analysis by T. Rowe Price of a hypothetical retirement saver undergoing a three-year period of unemployment found that it's very possible to get back on track. The analysis looked at a saver who started saving regularly -- and aggressively -- in her 20s, with a goal to retire at age 65 and replace 75 percent of pre-retirement income (50 percent from portfolio savings, and another 25 percent from Social Security.)

She could still get close to her goals, either by accepting a slightly lower percentage of income replacement (48 percent), or by boosting contribution levels to 18 percent (from 13 percent prior to her lay-off) for her remaining years of work.

In 2013, retirement savers can contribute up to $17,500 to 401(k), 403(b) and most 457 plans; if you're 50 or older, you can make additional "catch-up" contributions of $5,500 to workplace plans, or $1,000 to an individual retirement account.

WORKING LONGER

Working longer -- even just a few years -- can play a big role in helping restore retirement security. Staying on the job means more years contributing to a retirement account, fewer net years of drawing down savings to pay living expenses, and most important, the chance to boost annual Social Security benefits.

"The ability to take Social Security later is one of the most valuable assets Americans possess," says Vanguard's Utkus. "You get about 8 percent more for every year you wait -- it's the cheapest way to buy a lifetime better annuity income. Waiting even two years will pay dividends over decades of retirement."

It's more difficult to count on working longer as part of a retirement plan, Utkus concedes, since the risk of job loss is always present. "You need to assess the labor market," he says. "Am I in a marketplace where there are opportunities to shift into other kinds of work if necessary, perhaps even something part-time? Does your employer offer flexible work arrangements?"

RE-THINK SPENDING

Re-tooling spending plans also can play a meaningful role without sacrificing much in the way of lifestyle, Utkus says.

He notes that working households typically spend a lot on "outsourced services" that they may be able to take back in-house in retirement-- everything from house cleaning and landscaping to the cooking that others do when you dine out.

"If you're trying to get a plan back on track, take a really careful look at what you spend," says Utkus. That's not to say you shouldn't ever eat out, but maybe you can do it once or twice a month rather than twice a week."

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Follow us @ReutersMoney or here. Editing by Linda Stern and Dan Grebler)

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