Top adviser Jonathan D. Pond tells how to ensure your financial security

Even though many Americans are working past age 65 to bolster their savings and investments or just to remain active, others are retiring early — either by choice or circumstance. The number of retirees is expected to mount now that baby boomers have started turning 62. But many are not prepared for the challenges or realistic about the financial considerations and assumptions that will determine how comfortable their retirement will be.

Critical factors you must consider to prepare for your retirement…

  • Life expectancy and portfolio performance. Many retirees underestimate how long they will live and overestimate how much their investments will return annually. A Fidelity Research Institute study found that a 65-year-old man has as much chance of living to age 95 as dying before age 70.

    • What to do: To be financially safe, I tell my clients to expect to live to age 95 — and to expect a 6% annualized return on investments, based on a mix of 60% stocks and 40% bonds and other interest-earning securities.

  • Inflation. Based on historical inflation trends, people who retire at age 60 are likely to experience an 80% rise in living expenses by age 80. Those who retire at 65 will probably experience a 60% increase.

    • What to do: To calculate your income needs, figure inflation could average 3% annually. Then withdraw an annual amount in the early years of retirement — say, 4% of savings — that is enough to meet your income needs but is below the assumed growth rate of investments. That way you won’t drain your assets too quickly.

  • Taxes. Don’t expect your tax bite to decline sharply in retirement — it probably won’t. Keep in mind that you will pay income tax on withdrawals from traditional 401(k) accounts and IRAs.

    • What to do: Expect your taxes to drop by no more than 10% — and realize that they even may increase.

  • Expenses. My retired clients find that each year, they spend 75% as much as they did in their final working years. Will your investments generate enough income to fund that spending?

    • What to do: Assume that you will spend at least that much, and shape a financial plan that provides enough income to support that spending. Important: Don’t leave out big-ticket expenses that still will pop up, including replacing your car, large-scale home repairs and dental work.

  • Health insurance. Unless you get an early retirement package that extends your company’s health insurance coverage until you become eligible for Medicare, you will need to factor in premiums for an individually purchased policy if you retire before age 65.

    • What to do: Consider obtaining temporary insurance through the stop-gap federal program COBRA… check with state programs… or look for private individual coverage with high deductibles to lower premiums.

  • Part-time work. Finding satisfying work to supplement your income can be challenging, once you fall out of the loop in your lifelong profession. And if you do find work, the extra income may mean reduced benefits from Social Security and/or higher income taxes.

    • What to do: I tell my clients who are considering retirement to assume that they won’t find part-time work to bolster their income and to map a financial plan that doesn’t count on extra income.

  • Retirement savings. The longer you put off drawing on investment accounts — assuming that they gain value — the more income you will eventually be able to draw each year. And because of compounding, the longer you wait, the more this effect accelerates.

    • Examples: Assuming an annual rate of return of 6%, if you work an extra two years before starting withdrawals, you can increase the amount of income you draw annually by 10%… if you wait an extra three years, by 25%… and if you wait an extra five years, by 40%. This assumes that you would use up all of your money by age 92.

    What to do: Put off retirement until your accounts are big enough to support your spending needs.

  • Social Security. The earlier you start taking Social Security payments before you qualify for the full monthly base amount — which could be as late as age 67, depending on when you were born — the lower your monthly checks will be. They could be as much as 30% lower. Any future cost-of-living increases to Social Security checks also will be lower, because they will be calculated from a lower initial benefit amount.

    • What to do: Unless you really need the money or are in poor health, it’s often better to delay starting benefits until you reach full retirement age.

  • Early retirement incentive package. Your pension usually is based on the average of what you earned in the last few years of your employment. Even if your employer’s early retirement incentive plan adds bonus years of employment and bonus years of age to your pension formula, it usually won’t make up the difference between your average salary for your last five years and the presumably higher average salary you would have earned for your last five years if you had continued working.

    • What to do: Be careful not to overestimate the value of an early retirement package. You may want to consult a financial adviser for help analyzing the package.

    RETIREMENT CALCULATOR

    My favorite Web-based retirement calculator is free at www.analyzenow.com. What you will find: Free on-line information that helps you determine when to begin taking Social Security payments, how much to allocate to different investment categories, how much you need to save for retirement and how withdrawals from your retirement accounts will affect your taxes. It was created and is run by Henry K. Hebeler, a former chief economic forecaster for The Boeing Company.

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