Plan ahead to ensure a comfortable retirement

Q: My husband and I get so much conflicting advice on saving for retirement, and we find ourselves reading so much material that it is difficult to sort out the important factors. Could you please briefly summarize the things we should be thinking about most?

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A: We have long known that there are two keys to making retirement assets last: asset allocation and managing your stream of withdrawals. But the choices are many and varied. How can you increase your own chances of retirement success? Here are some pointers:

Keep a lid on withdrawals. Research shows the magic number is 4 percent. If you keep your annual withdrawals below that, your money has a good chance of outlasting you. Remember, though, that the balance is a moving target — 4 percent of a $500,000 balance is $10,000 less than 4 percent of a $750,000 one.

Work longer. If 4 percent isn't enough to live on comfortably, think about working — not forever, but for a few years. A few extra years in the workforce gives your portfolio added time to grow and reduces the number of years you will need to draw on that money.

Have a cushion. Two to three years' worth of living expenses in a money-market fund or short-term bond fund means you won't have to sell investments when they're down.

Allocate wisely. The solution isn't ever to have 100 percent of your assets in equities, nor is it to have 100 percent in treasuries and cash. The solution, of course, lies somewhere in between.

Jean Chatzky’s Bottom Line
This week: The need for an emergency cushion
Other than death, most financial emergencies are temporary. Layoffs, disabilities, even stays in a nursing home tend to last months, not years. Your goal ought to be to have a sufficient amount in savings — liquid assets that you can draw on if need be — to get yourself through those times.

In fact, the insurance industry forces you into paying for them yourself by incorporating into its policies waiting periods before coverage kicks in. Opt for a shorter waiting period (30 days rather than 90, for example) and you'll pay much more for coverage at first.

These are all reasons why you need to have an emergency cushion (three to six months' worth of living expenses to tide you over these difficult times).

Having such a cushion is step one of protecting your other assets, because it means you won't have to borrow from your retirement plan or pilfer your cash-value life insurance policy or take out extra debt against your home in order to get through a troubling period.

Jean Chatzky is the financial editor for “Today,” editor-at-large at “Money” magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2004. For more information, go to her Web site, www.JeanChatzky.com.