What to Consider Before Making the Retirement Decision

Tom Dickinson is 57 years old and wondering how much longer he should work.

The Arlington resident has 31 years of service as a federal government employee, so theoretically, he could retire within the next few years.

Realistically though, given that the stock market has wreaked havoc on almost everyone's retirement savings accounts, he's not sure a few years is doable.

Here's his financial situation: His wife, a part-time management consultant, plans to continue working for a while, providing a small but steady income. His 21-year-old daughter is graduating from college this year. His 17-year-old son is starting college in 2010. Dickinson and his wife have money set aside for those expenses in a 529 college savings plan. The couple has a mortgage but no credit card debt and no car loan. In retirement, they hope to travel twice a year -- domestically and overseas. They don't aspire to such lofty goals as owning a vacation home.

Much of Dickinson's retirement savings is in a Thrift Savings Plan (TSP), which is essentially a 401(k) for federal government employees. He also has a pension and will collect Social Security once he reaches 62. His TSP money is allocated as follows: 80 percent in government bonds, 10 percent in corporate bonds and 10 percent in stocks. But he's starting to second-guess his investment decisions.

"I don't know if that's any good," he said. "Now is a good time to buy, everyone says. But at this point should I take more risks because the market is down? What should my allocations be? How should I best ride out the current storm given my stage and my career?" Beyond his portfolio, he is wondering: "Should I find another job outside government? Or can I retire and pursue other outside volunteer and personal interests?"

Stop panicking, said David Petersen, president of Financial Services Advisory in Rockville. He has this reminder: "The Dickinsons are young and have many years ahead of them at a time when the world is experiencing the worst economic tsunami ever," he said.

Should he find another job?

Most don't realize that once the retirement shingle is hung, returning to the workforce at a desirable compensation is difficult," Petersen said. "Follow his gut, wait and be confident his resources are in place before retiring or changing jobs."

Denise Leish and Peg Downey, certified financial planners and partners in the firm Money Plans in Silver Spring, also weighed in. They pointed out that as a federal government employee, Dickinson is in pretty good shape. "Tom will earn a generous pension," they said.

His pension could possibly be similar to his net pay, they said. Because the Dickinsons' only debt is a mortgage, and they have already set aside money for their children's education, they are in a sound financial situation.

As for his investments, the planners thought that he should stick with his conservative investments. "Assuming Tom has gotten to this point without much exposure to stocks, there does not seem to be a need to go into the stock market now. If he is planning on a near retirement, then he would not have enough time to make up losses," Leish and Downey recommended in an e-mail.

That said, if he plans on leaving behind money for grandchildren or increasing his standard of living, then playing the market might be necessary. He could do that through dollar-cost averaging, or buying stocks a bit at a time.

But if he doesn't need to live a more extravagant lifestyle and doesn't feel like playing the market, then he should stick with the investments he has. To help with other financial aspects of his life, he should consider refinancing to take advantage of the low mortgage rates, Leish and Downey said.

And here's something else to mull over if he is under the CSRS program, which is the former retirement system for federal employees and provides a more generous pension: Maybe he should stop his contributions to the TSP and instead make contributions to the Voluntary Contribution program open to federal employees. Such contributions earn market-rate interest, which is tax-deferred and can be withdrawn at any time. At retirement, the contributions and interest can be used to buy an additional annuity, Leish and Downey said. Annuities are like pensions; they allow for the retiree to get a regular payment for the rest of his or her life. Whatever Dickinson decides to do, Petersen said, he should build up his liquid savings outside the TSP.

Even if you're not close to retiring, building up your liquid savings is a prudent thing to do anyway.