Just when some people's finish line to the rat race comes within reach, along comes a bear market to trip up their plans.
But the drop in the financial markets, especially during the past two weeks, doesn't necessarily mean people about to retire need to work indefinitely, say experts. They recommend focusing on Individual Retirement Accounts, commonly known as IRAs, and even a creative twist on Social Security.
"A summary of the entire strategy is, don't pay taxes now; pay taxes later," said James Lange, a local certified public accountant and attorney with Lange Legal Group, Squirrel Hill. "And accept the Roth IRA, whether you're in the (wealth) accumulation stage or the distribution stage."
"Since the market is down, now is a great time to do a Roth conversion," said Lange, author of "Retire Secure! Pay Taxes Later," which sold 100,000 copies and reached No. 1 in the retirement planning category at Amazon.com. Lange just finished its second edition, updating tax law changes, which will be published in February.
Bob Sekerka, 70, a physics and mathematics professor at Carnegie Mellon University, was going to retire at the end of the year, but had second thoughts by summer.
"I saw the economic situation and how I'd be drawing down so much on my (retirement) account," said Sekerka, of Oakland. Instead, he will teach at least through next spring.
Sekerka said he and his wife, an attorney, "should do better later and share in the good times." For now, they remain "invested fairly aggressively," being about 75 percent in stocks. But they expect to shift more money to fixed-income investments when they get closer to retirement.
IRA accounts can be constructed from fixed-income investments and many other vehicles, including certificates of deposits. But Lange's advice pertains mostly to those IRAs invested in securities, which represent the volatility that's giving investors headaches these days.
How can IRAs help in a market where the Dow Jones industrial average dropped from about 11,000 to about 8,000 within three weeks?
A traditional IRA may buy more securities, as the market is down and the investment capital is pre-tax dollars. A Roth IRA might even be better, said Lange.
In a Roth conversion, the person pays taxes on the amount moved to the Roth. The tax liability depends on one's income-tax bracket. So, it's better to convert the Roth after retirement, when the person is presumably in a lower tax bracket.
"If the market goes up later, the amount in the new Roth IRA account will grow income-tax free," he said. "And when you or your heirs make withdrawals from that Roth IRA, it will be income-tax free."
For example, a traditional IRA that was worth $100,000 a few years ago might have declined in value to $80,000 today, meaning there's no taxable gain. Then, if that $80,000 is switched into a Roth IRA and increases to $120,000 in two years, the gain is tax-free because those are the rules of a Roth.
Had the money stayed in an IRA and the person in a 25 percent tax bracket withdraws all $120,000 two years from now, he would pay $10,000 in taxes.
One caveat, said Lange, is that those with gross income above $100,000 must wait until 2010 before they can convert a traditional IRA to a Roth IRA.
Lange also allows for the fact he is not an expert money manager. So, what if the market doesn't recover in the next year or two, but continues to fall in a long, nasty recession?
"You can undo your Roth conversion," he said. A person who converted a traditional IRA to a Roth in 2008 has until Oct. 15, 2009, to reverse the switch. (The deadline always is Oct. 15 the following year.)
Social Security represents another little-known tactic, said Scott Burns, author and chief investment strategist at AssetBuilder, a financial advisory firm in Dallas.
Most people already know their Social Security benefits will be greater if they retire at 65, rather than early retirement at age 62. It's worth about 8 percent more per year's delay in filing for Social Security. But what people don't know, he said, is that an early retirement is reversible.
That is, a person at 65 who had retired at 62 can, if they have the money, pay back to the Social Security Administration what they've received since age 62. But then, that person starts receiving monthly amounts 8 percent greater than what they were, plus gets a credit for those taxes paid on the benefits for those three years.
"The reality is that you get your money back in 12 1/2 years," said Burns. "But typically, a 65-year-old person is likely to live another 18 years."
About 40 percent of U.S. retirees who receive Social Security benefits derive 90 percent of their total income from those benefits, said Burns. Benefits were paid to 256,415 people in Allegheny County, and almost 2.44 million people in Pennsylvania, in December 2006, said latest figures from the U.S. Social Security Administration.
Burns also suggests inflation-protected long-term Treasury bonds. Created in the late 1990s, such vehicles are indexed to the consumer price index, currently about 2.8 percent, plus a slight premium.
For example, such a 10-year bond currently is paying 3.08 percent, and a 20-year is paying 2.99 percent, he said.
"This is inflation protection guaranteed, without giving up current yield," said Burns.
Someone with a side business, such as freelancing or consulting, has a lesser-known retirement vehicle to tap too: the one-person 401(k).
"It's like a regular 401(k), but for someone who's is self-employed or who earns money outside their regular job," said Lange.
A person can contribute as much as $20,500 a year pre-tax, plus as much as 25 percent of the self-employed business' net income. The one-person 401(k) does not require the business to be incorporated, he said.
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