Early Retirement May Be Just a Dream

Jennifer Dine shares a dream with many middle-income Americans--retire before she’s 60 with $1 million in savings.

But Dine and her fellow dreamers may need to rethink their early-retirement goals, even if they save like crazy. Instead, they should consider working part time even during traditional retirement years, said financial planner Sandra C. Field.

People are living longer and Social Security payments are kicking in later. Worse, for all those Americans whose aspirations are tied to the stock market, there’s a good chance their returns over the next several years will be lower than expected. Many financial planners believed a 10% average return seemed a safe bet as recently as a year ago, said Field, president of Asset Planning Inc. in Los Alamitos. Such return predictions now appear too optimistic.

Even if Dine meets her goal of saving $1 million before she’s 60, there’s no telling what the markets will be doing when she quits working, Field said. And until her Social Security payments begin at age 67, she’ll have to rely on her savings, which could make for lean living.

“That’s a big gap of time, and if she were hit with two bad market years back to back--like now--it could be completely damaging to her portfolio,” Field said.

Though bad markets are always painful for investors, they are particularly damaging for those who are in the process of drawing money out of savings while the market is dropping, she said. Dine said she doesn’t “want to go back to work at 69 trying to find some way to make money.”

Still, the 32-year-old nurse says early retirement is important to her. After spending several grueling years working full time while going to school, she has embraced a more laid-back lifestyle, working just one or two days a week and grossing about $40,000 a year. She bought a small house in Sylmar so she could live in a rural area and still be close to her grandmother’s North Hollywood home, where she grew up.

“Nursing is so difficult physically and emotionally, I can’t see myself doing this past my 50s,” she said. “So I’d like to retire before I’m 60.

“I figure if I have $1 million I could get by because my house would be paid off by then.”

Can she save $1 million? Yes, under two conditions, Field said. She would need to save at least $1,000 a month for the next 28 years, and she would need to earn an average of 7% on her savings. Field thinks that’s a realistic expectation, given Dine’s long time horizon.

Those feeling battle-scarred by two years of stock market declines may wonder how badly Dine’s portfolio might fare if her returns proved less generous. Field said that even a modest drop in average returns would have a big effect over time.

For instance, a 7% average annual return would give Dine about $1.1 million by the time she’s 60, assuming she sticks to a $1,000-a-month savings regimen. But if her return averaged just 6%, Dine’s nest egg would shrink to $923,000. Factor in a 5% annual return--roughly the long-term return on government bonds--and Dine would have just $730,000 when she turns 60 in 2029.

To complicate matters, Dine may well live a long time after she retires. Her family has a history of longevity, with two of her grandparents living past 100. Even with her modest lifestyle, Dine would be hard pressed to make her retirement dollars stretch far enough.

What to do? Rather than retire by age 60, Field said, Dine should consider moving into a less-taxing nursing job once she hits 50, such as administration or teaching. That would make it easier for her to work part time after she retires, and it would greatly reduce the strain on her savings.

“I think most people will have to look at working part time to make additional money after they retire,” Field said.

On the bright side, Dine is firmly launched on a retirement savings plan. True, her modest mutual fund investment has lost half its value due to the bear market. But three months ago, she began putting 15% of her gross pay in a 401(k) retirement account--about $6,000 a year. And last month Dine started a Roth IRA with $1,000.

A good start, Field said. But Dine could build her savings faster if she reconsidered her present work habits. As a so-called registry nurse, Dine fills in at various hospitals whenever she chooses to work. If she works full time--160 hours a month--the registry will pay her $200-a-month health insurance.

But Dine usually works just one or two days a week and, as often as not, ends up paying for her own health insurance.

“The problem is, I can work just a few days a month and pay all my bills,” she said. “Instead of putting in extra hours, I say, ‘The bills are all paid. Let’s go have fun!”’

Dine grosses $406 for a 12-hour day. If she worked three days a week, her income would increase from $40,600 to $60,900 a year, assuming two weeks of vacation. That would allow her to increase her yearly 401(k) savings to $9,135.

That one extra workday each week also would allow Dine to take home an additional $14,880 a year, after taxes and 401(k) contributions. She could put $3,000 into a Roth IRA annually. (IRA contribution limits rise starting next year.)

In any case, she should start building an emergency fund to cover at least three months of take-home pay, Field said.

Building the “rainy day” fund is especially crucial, given that Dine has a scant $100 in savings now.

Dine has the discipline to work more hours. After she became a nurse in 1993, she went back to school to get a degree in psychology and spent four years taking classes while working full time. During that period, she also paid off her $10,000 credit card bill and the $18,000 loan on her 1994 Toyota Paseo.

“I got to worrying about my financial future, and that made me change my life,” she said. “I cut my spending and didn’t go to a mall for two years.”

Dine said she probably will follow Field’s advice and start working more.

“I know what I’m saving now isn’t enough to take me to early retirement unless I change my ways,” she said.

Once the extra pay starts coming in, Field suggested that Dine make regular $250 monthly deposits to her Roth IRA, perhaps through an automatic deduction from her checking account. That approach--known as dollar-cost averaging--will help protect her against market volatility and guard against the natural tendency to waver when the market goes down.

“I’m a firm believer in dollar-cost averaging,” Field said. “That way you won’t be tempted to time the market or maybe [stop investing] if the market is bad. If you make it automatic, it takes all the emotion out of investing.”

Field suggested that Dine seek out the highest interest rate she can find for her emergency savings, an admittedly difficult task in these times of low yields. Dine opened a savings account with ING Direct last month, lured by an advertised 4.8% rate. The rate has dropped to 4% and is likely to go lower, since most money funds are yielding below 3%.

Once the emergency fund is built up and, assuming she is fully funding her 401(k) plan and Roth IRA, Dine should invest any additional savings in a so-called balanced mutual fund, which invests in a diversified mix of stocks and bonds.

Given the uncertain outlook for the markets, Field said, it’s important for investors to be diversified. Even investors who have many years before retirement should consider adopting a more conservative stance.

“I tell my clients I’m more interested in getting base hits, not a home run over the fence, because if you don’t keep the game going, you’re out,” Field said.

“I can say that you’re young and have plenty of time to be in the market, but it can be discouraging to invest money and see it all wiped out.”

*

Jeanette Marantos is a regular contributor to The Times.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

* Subject: Jennifer Dine, 32

* Annual income: About $40,000

* Goals: To retire from nursing before she’s 60 with $1 million in savings

Current Portfolio

* Assets: $2,000 in a 401(k) account; $1,000 in a Roth IRA; $4,438 in her American Century Ultra Investor (TWCUX) mutual fund; $100 in a savings account; a 1994 Toyota Paseo

* Debt: $123,000 mortgage on her house in Sylmar, which costs $904 a month over 30 years

Recommendations

* Increase her hours from two 12-hour days a week to three.

* Consider moving into less-taxing nursing jobs after she’s 50 and work part time even in retirement.

* Start saving at least $9,135 a year in her 401(k) and plan to save $3,000 a year in her Roth IRA.

* Build an emergency fund with at least three months’ worth of take-home pay.

* Invest additional savings in a balanced mutual fund that’s half stocks and half bonds.

* Diversify her investments and consider more conservative investments, such as bonds.

Meet the Advisor

Sandra C. Field is a certified financial planner and certified senior advisor who specializes in pre- and post-retirement planning. She is the founder and president of Asset Planning Inc. in Los Alamitos.