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How to Get Your Retirement Back on Track

Glenn Ruffenach

If you weren't crazy about what 2011 did for your retirement finances, don't fret: The new year will offer some opportunities to get back on track.

The past year certainly didn't make saving and planning for later life any easier. The markets resumed their manic ways. Social Security and Medicare came under fire, raising the specter of benefit cuts. A stagnant housing market continued to hamper relocation plans, and older workers grappled with "staggering jobless periods," in the words of AARP. (The average length of unemployment for job seekers age 55-plus was about 52 weeks, compared with about 37 weeks for those under 55.)

No, the coming year won't solve all these problems. But 2012 should give you several chances to patch up plans for the future. Here's what to look for:
Here a Fee, There a Fee

Employers in 2012 will be required, under new Labor Department rules, to provide detailed information about the fees associated with retirement-savings plans and how expenses in various investments compare. Excessive fees, of course, can ruin a nest egg. The Labor Department offers the example of a young worker with $25,000 in a 401(k). Over the course of 35 years (assuming no additional contributions and an annual return of 7 percent), with a 0.5 percent expense ratio, the employee ends up with $227,000 after fees; with a 1.5 percent ratio, only $163,000.

The point: Spend some time with these new numbers, and at the very least, ask yourself whether a different mix of investments could reduce your expenses, says Robyn Credico, senior consultant at international human-resources firm Towers Watson. If fees across the board are inordinately high, she adds, use the information to lobby management to change savings plans. "You should be asking questions and challenging expenses," Credico says.

Lemons Into Lemonade

Yes, interest rates are low, and the Federal Reserve has promised to keep them that way, at least through mid-2013. This has prompted much hand-wringing about the (virtually) nonexistent returns on CDs and other basic savings vehicles. So take advantage of low interest rates to pay down debt, says Greg McBride, senior analyst for Bankrate.com.

Paying off debt gives you a "return" (in effect) equal to the after-tax cost of the debt. McBride cites the example of a person in the 25 percent tax bracket carrying a line of credit at 3.5 percent. To start, the real cost of the loan (after tax deductions) is 2.62 percent. For every $100 the person prepays each month, that's $2.62 less in interest that has to be paid in each ensuing year. Thus, the return on that $100 is 2.62 percent. (Not bad, considering the even more paltry yields on "safe" fixed-income investments.) If you can knock out such debts before retiring, McBride says, "that will stretch the life of your savings a lot further."

Gifts Galore

The coming year is your last chance to benefit from a big tax break: a generous increase in the gift-tax exemption. The Tax Relief Act of 2010 raised the exemption to $5 million, from $1 million, for individuals (and to $10 million, from $2 million, for couples). As such, you can give away that much without paying a penny in taxes. The catch: The deal expires at the stroke of midnight on Dec. 31, 2012. At that point, the exemption reverts to a $1 million pumpkin.

Kevin Sanderford, president of Colorado West Investments in Montrose, Colo., says he sees a steady stream of clients, particularly those with small businesses, moving assets out of their estates and setting up trusts -- or simply gifting holdings outright to children and other beneficiaries. His recommendation: Start talking with your adviser about this sooner rather than later -- not at year-end. "These are not decisions to make lightly," he says.

Medicare Money

And speaking of the Internal Revenue Service...you can take steps in 2012 to prepare for increases in Medicare taxes in 2013.

As part of health care reform, high-income households (individuals earning more than $200,000 and couples filing jointly making over $250,000) will see their tax rate for Medicare hospital insurance increase to 2.35 percent, from 1.45 percent. These households will also be subject to a new 3.8 percent Medicare "contribution tax" (again, starting in 2013) on certain investment income.

This is the kind of issue that can easily fly under people's radar, says Robert Walsh, founder of Lighthouse Financial Advisors in Red Bank, N.J. He suggests meeting with your financial adviser and tax attorney to discuss tactics -- such as recognizing gains in 2012 -- to help soften the blow to your wallet.

Staying the Course

I'm taking some license here. This point applies to 2012 and beyond. One of the most interesting studies to come out of 2011 looked at investor behavior during the market meltdown of 2008 09. The report, from Fidelity Investments, found that participants in 401(k) plans who dropped their equity allocation to zero between Oct. 1, 2008, and Mar. 31, 2009 -- and kept it there -- saw their account balances increase 2 percent, on average, through June 30 of this year. By contrast, investors who returned to equities at some point saw their balances increase 25 percent. And those who simply stuck with their allocations -- stocks included -- saw their balances jump 50 percent.

If 2011 taught us anything, it's that wild market swings are probably here to stay. If you haven't already, find an asset allocation you're comfortable with -- ideally, one with equities -- and hold on tight. Jumping off a roller coaster while it's in motion is rarely a good idea.