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Your Retirement... Will it be Fact or Fiction?

By Charles Hopkins Published 06/1/2006 | Finance
It becomes more apparent each day that inflation has crept back into our lives even though government statistics may not support this viewpoint.

Rather, it's the real world cost of food, drugs, fuel, utilities and education that indicate the inflationary trend.

If you're like most Americans, your retirement account hasn't grown much over the last 5 years. In fact, it's been pretty flat. Many of us have vivid memories of the dot.com crash and the huge plunge in our 401(k) plan and IRA valuations. For one brief year, it looked like we might be on the road to recovery. But, this simply hasn't happened to any significant extent.

About 25 years ago, if you worked for a reasonably good sized company you could expect to receive guaranteed monthly income from your employer's defined benefit plan. As you approached retirement, it was relatively easy to predict the amount of money you would receive from the plan, which, by the way, was funded totally by your employer.

When 401(k) plans were introduced to the workforce many employers saw an opportunity to shift the liability of retirement income away from the company and onto the employee.

From the employer's point of view this was sensible because the cost of funding defined benefit plans had become prohibitive. From the employee's standpoint the subtle transfer of responsibility from employer to employee was lost in the excitement of reducing their taxable income.

Today, most people who are planning to retire count on a combination of their 401(k) plan, their IRA, social security and (if they're lucky) some supplemental mutual fund accounts. Typically, little thought or effort has gone into coordinating the effectiveness of these resources. That is, until it's too late!

If you are planning to retire any time soon, make sure you understand and account for the reality of inflation. You may want to address this yourself... or maybe you will hire a financial planner. Regardless, make certain inflation is factored into your equation for future income requirements.

The combination of higher inflation plus flat stock and bond markets can devastate your standard of living. While it's true some investors will find a way to beat market indices, the average guy or gal will have a tough time.

When you reach age 62, you're entitled to receive social security. Although the amount you receive is lower than what you get at "normal retirement," nevertheless it is guaranteed income that should be part of your overall plan.

If you withdraw monthly income from your IRA or 401(k) plan, be prudent in the amount you take out. For example, not too long ago, it was reasonable to withdraw 8.0 percent because the annual investment return typically averaged 10.0 percent or more.

Those days are gone... at least in the foreseeable future. So, plan for withdrawals of only 5.00 or 6.00 percent because your account likely will not be able to average more than a total return of 7.00 or 8.00 percent annually.

Many who own real estate and took advantage of refinancing their homes have just come off a joy ride. Hundreds of millions of dollars have been regurgitated through the economy as people chose to use their home equity to pay off debt or satisfy some extravagant desire.

For those who did not refinance and have diligently managed to pay down their mortgage, an additional option for retirement income might be the reverse mortgage. Under the right circumstances, this ability to get money from your home without assuming personal liability could be an important part of your retirement resources.

When it's time for you to retire and receive income, maintain a balance between fixed (guaranteed) and that which can adjust to inflation. This might be as simple as using social security for the fixed portion (this does adjust somewhat for inflation) together with a mutual fund account that continues to grow in order to compensate for the actual increase in your cost of living.