Re-evaluating Your Retirement Game Plan

Remember when your broker pulled you aside and showed you that neat, reassuring table of data proving how you could retire before becoming an octogenarian?

Rip it up--if you're planning on retiring anytime soon.

The past decade's bull run lulled most people into thinking financial security during retirement was all but certain. Hold a diversified portfolio of stocks and boost your allocation to bonds as you near retirement age and you would be able to coast into your golden years. But then the financial collapse of 2008 hit, wreaking havoc on the best-laid financial plans.

Year-to-date, the stock market is down 40% and it's back to the drawing board for boomers and their advisers when it comes to retirement. With that in mind, Forbes.com called up financial planners, wealth managers and accountants to get a sense of what they're telling their clients as they navigate these tough times. The bottom line is that to secure a worry-free retirement, it's critical to re-assess and re-calculate your retirement strategy right now, after the storm.

First, determine your retirement income needs. How much are you going to spend every year when you do retire? What are your expenses going to be? Once you arrive at a number, you will have a sense of the resources you'll need in order to live out your golden years in comfort.

There are a couple schools of thought about how to determine that magic number. It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're seeking advice from, they may say it's anywhere from 60% to 80%.

Alternatively, some advisers say the simplest way to figure out retirement income needs is to figure out how much you spend every year now, and then back out all the costs associated with the working world: dry cleaning expenses, gas or commuting expenses and lunch money.

Other advisers find fault with this method.

"The back-out part makes me nervous,"says Kacy Gott, a wealth manager at San Francisco-based Aspiriant. "Yes, you don't have the daily commute, but most people we meet have plans for an active retirement. They will be traveling more, visiting the grandkids. The food costs will end up being the same."

Gott says to figure that, in retirement, you're going to spend just as much as you do now. "You should not assume that you will spend less in retirement, unless you plan on moving to a location that has a lower cost of living," he says.

Leonard Wright, who is chairman of the Personal Financial Planning Committee of the California Society of CPAs, agrees.

"People may think they need 60% to 80%,"he says. "But many people really need at least 100% of what they were making before. All these new expenses kick in, like prescription medication and travel. My clients are spending the same amount. The idea that they will spend less, from my perspective, is a bit of a challenge. I think you need to take what you're earning today and understand that you will require that in retirement."

T. Rowe Price and other fund firms offer a nifty calculator that you can use to figure out some of these tough questions. The Retirement Income Calculator will help you determine how much you have available to spend each month in retirement, how likely it is that your savings will last throughout retirement and even options to offset shortfalls.

Another important question to answer as you design a retirement strategy is this: figuring out how much you'll need to save. Christine Fahlund, a senior financial planner at T. Rowe Price, says you need to save at least 15% of your salary every year in order to retire with some cushion.

But while it's all well and good to know what the smart saving rate is, it's also difficult for some people to sock away that much. They know they should save 15% of their salary but they also have all kinds of bills that need to get paid each month. The answer, says Fahlund, is to save just a bit more each year than the one before.

"The easiest way is to increase that savings rate incrementally,"she says. "Make a deal with yourself that you will increase your contributions a tiny bit every year. Go from 8% one year to 9% the next."

Wright says that it's even smarter to live off 80% of your income, if possible, and then save and invest the rest. Hopefully you work at a place where you can take advantage of a 401(k) or other defined-contribution plan. If you're employed by a firm that doesn't offer you a 401(k) then you can and should contribute to an IRA, up to the maximum, say advisers.

It's also important right now to rebalance your portfolio, which is probably terribly out of whack. Imagine you had a 70/30 portfolio split between stocks and bonds, respectively. The 70% allocation is probably down 30% or 40% while the bond allocation has fared better, especially if it was government debt. To bring the portfolio back to its appropriate allocation, you would now sell bonds and buy stocks, which also will enforce the discipline of buying low and selling high.

"This is not the time to retrench and pull back,"says Gott of Aspiriant. "This is the time to rebalance and go back into equities."

Finally, if this downturn has taught investors any lesson it's the importance of staying flexible when it comes to retirement planning. It might feel comforting to have it all planned out ahead of time, to set in stone the exact year you will retire, the exact age you'll be when you exit the rat race for good. But markets like the ones we're now experiencing make that kind of timeline very hard to stick to, says Fahlund.

She says it's more prudent to work hard at planning your retirement, but to forget adhering to some strict timetable of when that retirement will actually happen.

"With markets like these, you don't know what year will be the most auspicious to retire. We don't know when rebounds happen. So stay flexible when it comes to your retirement and retirement date. You then won't be as disappointed if you do need to delay it."