Investment Consult

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Getting retirement funds back on track

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Aug 19, 2005 <= /p>

Medical Economics

Did the market meltdown of 2000 also= melt your dreams of early retirement? Did you fall behind on your savings strategy? Have you been zapped by an unexpected setback—you develop= ed health problems, or watched a divorce vaporize your holdings?

Don't beat yourself up. You've got p= lenty of company. (To see how your retirement savings compare to your colleague= s' our latest survey on doctors' retirement funding.)

The most important advice I can give= you is, don't panic. Don't go on a financial "starvation diet" to t= ry to instantly recreate your prior financial situation. It won't work.

Here's how to get back in your finan= cial comfort zone: First, determine how much money you'll need to save to reach your goals. You can do that with your financial adviser, or, if your situation is simple, by using a retirement calculator, which you can easily find on the Web sites of many financial servi= ces firms. Once you know how much you need to save each month, develop the discipline to do it. Your choice of portfolio holdings will be vitally important, but first you need to have something to invest.

Don't count solely on your home's appreciated value to provide retirement funds. Some folks say, "Gee,= I didn't save much, but my house is gaining in value and that will give me savings." That may have been true recently, but I'm not sure you'll = be able to say that in the future.

To make saving feel like less of a c= hore, make sure your program fits your temperament. Keep your spending cuts moderate. If you're used to going out to dinner with friends three times a week, don't suddenly resolve to eat canned tuna at home every night, but = cut back to once a week, or twice a week at a less expensive restaurant. If y= our regimen bites too deeply into your lifestyle, you'll probably find a way = to rationalize giving up on your efforts.

Tell your friends about your intended cutbacks. Some of you may find this difficult, but supportive friends can help shame you if you stray from your savin= gs program.

One relatively painless savings tip = is to save the amount of your annual raise (if you get one) and continue living= on your prior income. You won't miss what you never had to spend. It often h= elps wanna-be savers to put money in separate acco= unts, each targeted for a particular purpose: one account for the kids' college education, one for your retirement income, etc. That way, you'll feel gui= lty if you withdraw money early. My clients tell me this is more effective th= an having simply one amorphous account.

Next, develop a broadly diversified investment portfolio that has the potential to provide the returns you ne= ed. Work with your financial adviser or find a model portfolio that gives you= a reasonable balance of equity mutual funds and bond funds; typically, about two-thirds in equities for a 50-year-old. It should include large-, mid-,= and small-cap funds, value and growth funds, international funds, and some re= al estate or REITs.

When planning your investments, alwa= ys choose the most tax-efficient methods. I use the mantra "Pension sav= ings above all." Contributions to your 401(k), profit-sharing plan, Keogh, IRA, or qualified pension plan are best because you're saving pre-tax dol= lars and the earnings are tax deferred.

I recommend choosing mutual funds ba= sed on their performance for the last three-to-five years, by judging returns not relative to the market, but to those of other funds of a similar asset cl= ass, such as small-cap, large-cap, etc. I also suggest you narrow the field to those funds that have had the same management team over the same span, because that enables you to more accurately judge what you're getting.

Fight the urge to invest too aggress= ively in hopes of making lots of money quickly. If your choices are far more aggressive than you're comfortable with, you'll get nervous. And if you're too aggressive and the market sinks when you need money, you'll be commit= ting one of the biggest investment no-nos: buying = high and selling low.

I'd make one exception to the "= don't get more aggressive" rule. If you've been a supremely conservative investor and have kept the vast majority of your holdings in bonds, you should find a way to get comfortable enough to put more money into equiti= es.

Once your plan is up and running, mo= nitor and measure it against your savings goals, and reward yourself if you've = done a great job. My advice—which may grate on psychologists—is, if you've reached one of your intermediary goals, buy something you consider= a treat, whether it's a modest weekend vacation or some small luxury. Just don't d= rain everything you've put away.

Finally, if you're very close to retirement age and are still way behind, think about retiring a few years later than you had planned. Or consider part-time work in retirement. On = the upside, it's good for both the brain and the bank account.

The author, a fee-only financial planner, is president of L.J. Altfest & C= o. ( www.altfest.com), a financial and investment advisory firm in New = York City, and an associate professor of finance at Pace University. The ideas expressed in this column are his alone, and do not represent the views of Medical Economics. This column appears every other issue.= If you have a comment, or a topic you'd like to see covered here, please sub= mit it to Investment Consult, Medical Economics, 5 Paragon Drive, Montvale, NJ <= st1:PostalCode w:st=3D"on">07645-1742. You may also fax = to 973-847-5390 or e-mail to: meinvestment@advanstar.com