YOUR RETIREMENT: HOW TO LAND ON YOUR FEET

Steve Griggs was feeling flush. In a perfect, late-'90s bull-market moment, his investments reached $1.6 million, mostly from the Texas Instruments stock in his 401(k). High on his luck, he retired at 50 from his job as a TI manager--planning to have some fun, try new businesses and spend time with his ailing parents. Then... well, you know the rest. TI plunged from $84 a share to $23, sending Griggs back to work. He now teaches special education in a Houston school and saves half his $38,000 salary to rebuild his nest egg. Griggs likes his job, but says, "If I had to do it all over again, I probably would not have retired."

On his drive to school, Griggs might pass the Witkow-skis, Kathleen, 61, and Ron, 53, tooling around town on their bikes. Retired for three years from technical jobs at Southwestern Bell, they garden, read, surf the Internet and practice their fox trot at a ballroom-dancing class. "We don't have to get up at 5 a.m. And we think nothing of staying up until 3 in the morning to watch a great movie," a gleeful Kathleen reports. Like Griggs, they invested their 401(k) entirely in company stock (SBC Communications), which is down a third in price. But they had a safety net: old-fashioned pensions, which they took as a lump-sum payout of $553,000. A financial planner diversified it into bonds and dividend-paying stocks to complement their cash savings and other income. Says Ron: "We're not worried at all."

Two early retirees, two similar plans, but outcomes that are poles apart. As the boomer generation leaves work, some surprising differences will emerge among people who think of themselves as pretty much alike. Some of you won't have saved enough (you know who you are!). But to a degree you may not be prepared for, your retirement standard of living will also be driven by timing, investment skills and luck. Call it the new "market based" retirement, with more winners and losers than before and a widening gap between them. The winners will enjoy good health, employer-paid pensions and health insurance, investment success and the skill to stretch their savings over a long lifetime. The losers will empty their bank accounts on medical bills, see their pensions slashed because their company failed, lose assets in divorce, retire from small companies that don't pay benefits or invest their retirement savings badly. If Social Security switches to private accounts, the gap will widen between those who make it and those who don't.

Earlier generations faced retirement risks, too, when companies failed or inflation struck. But collectively, the system strove to minimize uncertainty. In 1972, Congress raised Social Security benefits by 20 percent; two years later it passed ERISA, the law that put guarantees under shaky company pensions. Contrast that with the "ownership society" hailed today. Guaranteed pensions are on the decline in favor of investment accounts, such as 401(k)s. The age for claiming full Social Security benefits is going up, which translates into smaller checks for those who retire at 62. (Current full retirement age: 65 and 6 months, gradually rising to 67 for people born in 1960 or later.) Increasingly, boomers will be expected to live on whatever money they've saved themselves. Winners will step around the losers on the street.

Happily, you've gotten a good start. This generation is better prepared for retirement than their parents were. You're in better health, with more job opportunities and a substantially higher net worth ($239,000 at the median for people 55 to 64, says Zhu Xiao Di, a city planner with Harvard's Joint Center for Housing Studies).

But how well are you managing your money? The news is mixed. The Employee Benefit Research Institute (EBRI) recently surveyed people in the 64-to-74 age group, typically retired. During the prior 10 years, 52 percent saw their financial wealth grow by more than half. But 30 percent lost half or more of their wealth. Nearly 10 percent lost everything (mainly those with few assets). EBRI estimates that more than one third will eventually be wiped out. Part of the money went for medical bills or living expenses, but a substantial amount was lost in bad investments. A 401(k) can yield more than a traditional pension, but only if you play it right. Given control of our finances, half of us haven't a clue what to do.

Even if you're dumb about money, you might win one of life's lotteries--stock options, shares in a successful new company, a big inheritance (for "lucky sperm"). Conversely, money smarts can't protect you if your luck turns bad. Americans like to think that everyone makes his or her own fate. But some risks are out of our control, and you need to factor them into your retirement hopes. For example:

Health surprises. When Pat and Margaret --Brickman, both 62, retired four years ago, medical bills were one of the last things on their minds. Then disaster struck. Pat, a former cop with the Miami-Dade police force, needed two heart bypass operations and suffered a stroke. While their medical bills climbed toward $250,000, the police union's insurance company, the National Public Employees Trust, sank into insolvency. Collection agents for doctors and hospitals called five and 10 times a day. Eventually, the county arranged for plan members to buy other insurance. The state settled some bills, and the Brickmans are chipping away on 18 others. When they retired, their planner told them they'd die before they could spend all their money. Now they've pared expenses and worry a lot.

Pension and benefit risks. Public employees' retirements are pretty safe. They leave their jobs with higher average pensions than other workers get, and taxpayers pick up any shortfalls in the plan. In the private sector, most traditional pensions are also guaranteed up to certain ceilings, but that's far from a total safety net. Just ask Karl Farmer, 56, an electrical engineer, who took a Polaroid buyout in late 2001. He was promised health benefits and six months of severance pay. Then Polaroid filed for bankruptcy and the benefits stopped. His Employee Stock Ownership Plan, worth near-ly $250,000 at its peak, paid him just $300. He received a $200,000 lump-sum pension payout, but is chewing through it for living expenses, including $400 a month for health insurance. He'd planned to pay golf. Instead, he's a mechanic at Patriot Golf Course in Bedford, Mass., earning $14.60 an hour.

Outliving your resources. For 65-year-old men, life expect-ancy runs to 81. But do you really know what that means? Half of all men are likely to die before 81, while half live on, some to 100 or more. Life expect-ancy stretches to 84 for 65-year-old women, with half living longer than that. Over such lifetimes, savings run down, especially if they're meager to start with. Social Security's special value is that it lasts. If you're 65, entitled to $1,500 a month, and live 30 years with inflation at 3 percent, your total benefit is the equivalent of $352,808 today, in cash.

Having no husband. For women, "spouselessness'' is tough. (For men, too, --but not as drastically.) Typically, a widow suffers a drop in income--losing her husband's Social Security benefit, as well as his portion of any joint pension they received. Single women often labor at mediocre wages, so they can't put a lot of money aside. Divorced women may have kids at home without enough support. Carole Engeman, 67, works at a small roofing company in Cleveland. She's happy there, which is lucky because she can't afford to retire. Two of her grown children live with her--a daughter in school (paying nominal rent) and a married son recently unemployed. "Kids sometimes need help," she says. "People like me do the best we can."

Retirement timing. You probably think that you can decide how long you'll work ("I'll work till I drop"). But exits often come upon us unawares. Nearly 40 percent of retirees left for reasons beyond their control--mainly, illness, disability or job loss (downsizing, plant closing, getting fired).

Investment luck. Good investing depends partly on using your common sense to diversify among U.S. and international stocks and bonds. But what if you have no common sense (or forget to practice it when stocks run up)? What if you blank on investing and turn to an adviser? A good one can save you; a bad one may wipe you out.

Skills aside, success also depends on market conditions in the few years right after you leave your job. If the markets move up, you can draw on the gains to pay your bills while leaving your capital intact. If the markets tank, your withdrawals will slice your nest egg even more--leaving you with less to build on when prices turn back up. Timing is all, and you're not in control.

When dealing with so much uncertainty, your best defense is having a pot of spare money on hand. Pat Brickman, the Miami cop, raised his automatic savings deduction to $200 from each biweekly check ($5,200 a year) when he was 51 and left it there until he retired at 58. Margaret worried that there wouldn't be enough left to pay the bills but, she says, "there always was." That's the magic of sliding money into savings before it hits your checking account. Your life somehow fits around the cash you have, even without budgeting. All the retirees NEWSWEEK spoke with wished they'd started saving money earlier, even just $20 or $50 a week. If you haven't increased your IRA or 401(k) contributions lately, do it now.

After saving more money, here's how to prepare, for both the best and the worst:

Pay off your house. Getting rid of the mortgage was "the first step, the acid test," Ron Witkowski says, because it showed that he and Kathleen had the discipline to save. Most of our interviewees lived in paid-up homes, and are glad of it.

They appear to be throwbacks. Mortgages are in style among retirees today. About 39 percent of people 65 to 75 are carrying loans against their homes, compared with only 28 percent in 1989, says Harvard's Zhu. Home values have soared, so even with higher loans, today's seniors possess more home-equity wealth than prior generations. But they also need higher retirement incomes to make their payments--one of the reasons more older people are working today. They're not locked in. If forced to retire, they could sell the house, pay off the loan and buy something smaller for cash (assuming they have enough equity left). In the end, however, income and asset security lie in a paid-up house, combined with a home-equity line to tap for emergencies.

Work longer. The age you retire is your "primary portfolio decision," says economist Eugene Steuerle of the Urban Institute. The longer you work, the fewer assets you'll need, at any level of spending. An early departure requires bigger bucks.

Consider the Schroder brothers, who, like Karl Farmer, spend most of their retirement days on golf courses. Pat, 62, quit his TV ad-sales job five years ago, and plays almost daily. He built his current lifestyle on a $12,000 pension, $16,800 from Social Security, an Individual Retirement Account (IRA) now worth more than $1 million and a wife who earns "well into six figures." Meanwhile, Mark, 53, does maintenance work on a course while others golf. He quit a warehouse job at Procter & Gamble at just 46, with nearly $700,000 in P&G stock. His financial adviser diversified his money into other investments, which Mark thought would set him up for life. But his regular withdrawals, plus some poor stock choices (WorldCom, Cisco Systems), have slashed his savings in half. What looked like a fortune actually wasn't enough. Mark's advice? "Work till you die."

Manage expenses. "Those who pitch their standard of living one degree below their means will be OK in the long run," says planner Matthew Kelley of Broomfield, Colo. "Overspenders have trouble retiring."

Manage your kids. "The retirement failures I've seen have almost always been related to overspending or to bailing out kids," says planner Kathleen Day of The Enrichment Group in Miami. Some parents support adult children who live better than they do. Some drain their savings for children with serious illnesses or problems with substance abuse (note to yourself: buy health insurance for any child who can't afford it). Some will back any business venture, even if it's a lousy idea, or pick up restaurant checks that the kids should be reaching for. "It's an ego thing," Day says. If your assets look too meager to retire on, take your children off the dole--and don't feel guilty about it. They'll get by.

Do a retirement calculation. Half of all workers 45 and up haven't even made a stab at figuring how much money they'll need when they retire, EBRI reports. That's a calculation you ought to make before reaching "company buyout age" (50-plus). Typically, those who do the math get a reality shock, and raise the amount they save. Calculators abound on the Web. A good, simple one: the Ballpark Estimate at www.asec.org. When projecting future investment returns, don't be tempted to bump up the numbers just to make the calculation look good. That's like seeing a shadow in your lungs and asking the doctor to touch up the X-rays.

Manage your assets to last for life. You thought saving was hard? Wait until you try to figure out how to make your money last for life. For success, nothing matters more than the rate at which you dip into your savings to cover your expenses. It's your key decision--far more important than how much you allocate to stocks or bonds. You're generally safe if you spend no more than 5 percent of your financial assets the first year you retire. After that, take just enough to cover each year's inflation--say, an additional 3 percent. If your investments lose value, take less (and postpone your vacation). Minneapolis planner Jerry Wade advises his clients to "stress test" their investments once a year, to see how long their money will last at various withdrawal rates.

For a free estimate of how much you can afford to spend from your savings every year, check out T. Rowe Price's online Retirement Income Calculator at troweprice .com. For $500, you can get a personally tailored plan.

See a planner. Beverly Glass, 65, a former chief news assistant for the Lexington, Ky., Herald-Leader, got a buyout offer four years ago. Her first thought? "Oh, goodie!" Her second: what did her accountant and longtime financial adviser think? They both told her she could afford it, which gave her the confidence to jump. With Social Security, pensions from the newspaper and her late husband, $130,000 in investments she doesn't have to touch, and new, blond highlights, she figures she's set. (There are always those pesky health risks, but that's what her untouched investments are for.)

Retirement preparation is my Number One reason for seeking advice. Find a planner who charges for his or her time (not one who sells products). Get a savings and spending projection, so you'll know where you are. Your planner should also show you, in numbers, what could happen if something went wrong--a possibility that do-it-yourselfers rarely consider, says Ray LeVitre of Net Worth Advisory Group in Salt Lake City. You don't have to plan for the worst, but it's helpful to know where it lies.

Who'll be the luckiest retirees? Those who underestimate their resources, says Miami planner Day. Then, when you lay out your options, you'll have fallback positions built in. And, on the upside, more possibilities than you thought. You can't control everything in this new market-based retirement world. But the more attention you pay to risk, the better your chance of winding up on the winning side.