10 Tough Retirement Questions

By Ellen McGirt and Andy Serwer

(FORTUNE Magazine) - William Shakespeare nailed the retirement thing, buying a country house for cash, then living off his investments until he died. When we went on the Internet to ask readers what they wanted from retirement, we found people wanted what he had - a secure stream of income (and to avoid the plague).


There's the rub: Satisfying these simple desires requires complex decisions. We want to help. Here are the ten questions that came up most often- and our answers.


How much will I need in retirement?


Ellen McGirt: The conventional wisdom is that you'll typically need 70 percent to 85 percent of your working income. But there is no one-size-fits-all answer. First, you need to consider what kind of retirement you want - and be realistic about what your resources are. Some late-blooming boomers have considerable debt; others have notions of retirement - say, that dream trip to Antarctica - that are, frankly, damned expensive.


Drew Tignanelli, a CPA and financial planner from Maryland who manages $120 million, doesn't start with a number. "I've had clients retire happily on 50 percent of their salary and others who couldn't make it on anything less than 120 percent," he says. Instead, he encourages his clients to bring their dreams into focus first and work backward from there.


"Give me as much detail as you can about your goals, when you want to retire, where and how you want to live, and what you want to leave behind." It's a complex financial stew, requiring his clients to make tough decisions on spending, saving, and risk. And the calculations need to be adjusted as times, needs, and assets change.


Guessing, which is what the Employee Benefit Research Institute says almost half of all workers do, is not a good idea.


"To meet your goals, you may need to work longer, save more, or take more risk in your portfolio," Tignanelli says. "Most people need to set priorities and make tradeoffs."

Projecting into the future is an imperfect art, which is why he suggests doing it early and often. Do-it-yourselfers will find no shortage of worksheets and online tools - T. Rowe Price has a good one at troweprice.com/ric, as does FORTUNE's corporate sibling at cnnmoney.com/tools.


For those who prefer talking about money face-to-face, consider a trip to a fee-only planner, who can help craft a plan for a flat fee (rather than one who will manage your portfolio for a percentage of assets).


SOURCES to consult: napfa.org; discovergarrettplanningnetwork.com


Where should I invest now?


Andy Serwer: Over the next five years or so, that's simple. Unlike building a wardrobe, if you are starting a portfolio, you want to invest in what is out of fashion at the moment. The least-loved sector in all of investingdom right now is a group of names most familiar to you, which is to say large-cap U.S. stocks.


Fact: The S&P 500 index has underperformed the S&P 400 mid-cap index and the S&P 600 small-cap index every single year this decade. (And over the past three years the U.S. market has been trounced - and we are talking wiped - by overseas markets.)

For a list of shunned names, look no further than the Dow Jones industrials. Remarkably, 11 of these stocks - GE, Coke, IBM, Home Depot, Merck, Dupont, Intel, Wal-Mart, GM, Verizon, and AT&T - have trailed the S&P 500 over the past five years. (The latter two telcos are down 30 percent and 24 percent, respectively.) Of course these companies have problems, but they are also out of favor.


It's almost indisputable that some of them will break out over the next half decade. Says Bob Smith, manager of the Growth Stock fund at T. Rowe Price: "Relative to the market, larger diversified companies are cheaper than they have been in the past ten years."


And no, no, no, do not bet your retirement on a tech-stock echo boom. Sure, there will always be a Google or three or four around to tantalize, but as far as a wave that lifts every ship, like the one we rode in the late '90s, get over it. That was a once-in-a-lifetime event - thank God.


For a world-changing event that is worth a flutter, though, check out those crazy foreign markets. Just about the insanest has been India. It was up 45 percent last year, then down 13 percent in the month of May. Still, Smith of T. Rowe is a believer, and in fact prefers India to China.


"The positive in India over China is that India has more dynamic companies than China," he says. "If you have a ten- or 15-year time horizon, I think owning India is going to be a really good thing. It's been volatile lately, but over the long term, if you own Bharti or Infosys, they probably offer better growth than some of the larger-cap U.S. companies." Smith also says to look to Eastern Europe for outsized gains overseas.

What about commodities?


Serwer: Yes, they've been huge winners, and a big score could set up retirement nicely. But sorry, it's late to get into this game. Up until the recent swoon, copper prices had more than tripled over four years, and silver had more than doubled in three, while everything from sugar to orange juice has pretty much followed suit.


It's only been the biggest commodity boom in 50 years, and that, says superstud investor Bill Miller, portfolio manager at Legg Mason, strongly suggests that you will be chasing a train that has long since left the station. "The time to own commodities is when they are down, when everybody has lost money in them, and when they trade below the cost of production," Miller wrote recently. "That time is not now."


Except, maybe, for oil. The notion that demand for petroleum products will suddenly dry up, or that we will find huge new supplies, or that we will suddenly - presto! - convert to alternative energy sources (with all apologies to Willie Nelson) seems unlikely at best.


Regardless of the macroeconomic environment, over time investors in Exxon seem to make out almost as well as the company's former CEO Lee Raymond. The bottom line is impressive: Since the end of 1980, Exxon has recorded a total return of 3,789 percent, compared with 1,836 percent for the S&P 500. I wouldn't be surprised if this stock and certain other oil and gas plays, such as Petroleo Brasileiro and Total (both part of our FORTUNE 40 portfolio), do well for the near future. For a domestic play, Valero, the largest U.S. refiner, had a great year and still looks awfully strong.

What if I'm getting close to retirement and don't have enough?


McGirt: The tough truth: Keep working. "By working an extra five years, it's possible to increase annual [retirement] income by 25 percent," says Andy Eschtruth from the Center for Retirement Research at Boston College. Even working part-time will allow you to keep more of your IRA assets growing tax-free.


You may be tempted to start taking Social Security the day you become eligible. Hey, you've earned it. But waiting could mean a bigger payout - an annual benefit of $10,000 at age 62 could grow to $15,000 if you hold off until age 66. The hope, of course, is that you'll live long enough for the bigger, later payout to exceed what you would have collected if you'd started earlier (to age 76 in this example).


But the peace of mind that comes with having a bigger monthly income later on, when you may need it for non-negotiable expenses like health care, can outweigh the simple math. You need to decide what's more important to you. Retirement may also be a time to think outside your zip code. A small pension and assets from the sale of a home in an expensive state like Maryland can go a long way in, say, Tennessee.

"The real problems happen," says Tignanelli, "when people don't face the facts." And real solutions begin by matching your expectations to your financial situation.


(Sources: Social Security Administration's benefit calculators, ssa.gov/planners/calculators.html; Realtor.com)


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