Getting Back on Track
This is only the fourth time in U.S. history that there have been back to back losing years. In the previous three bear markets the following year showed significant upturns.
- 1933 up 54%
- 1942 up 20%
- 1975 up 37%
To restore your nest egg you must either save more, invest smarter or work longer. For younger workers this downturn created an opportunity to snap up stocks and mutual funds at bargain prices. For those 50 to 70 years of age, one in five had to postpone retirement or pare spending. What can you do?
Hang tight
It is nerve-racking to watch your investments decline in value. The silver lining for those who stayed in the market over the last three years is that they were able to snap up bargains along the way. Make sure that you are reviewing your portfolio and are diversified among your selections.Tilt toward stocks
It is estimated that we will need between 70% and 80% of our current income to live in retirement. That translates into a savings rate of 8% to 12% of current income. The stock market has historically averaged 10% while the bond market historic average is 6%.
Tax savings
Eric, works outside the house and contributes to his retirement plan at work. Sally, Eric's wife, is a stay-at-home mom and contributes to a traditional IRA. Eric has the immediate advantage of tax deferment, but because Sally does not have a company plan available to her she will be able to deduct a portion of her IRA savings from the couple's taxes each year. This way both Eric and Sally are saving what would have gone to Uncle Sam and letting Uncle Sam's money work for them.Move to the sidelines
For those investors who pulled out of the market as it declined, it might be really tempting to jump back into the market all at once, but that is a risky plan. Consider where you are in your retirement planning stage. As you approach retirement you need to concentrate more on reducing your risk. If you choose to move money back into the market, do it slowly (dollar cost averaging).Get back on track
Bear markets, unemployment, divorce, caring for an elderly family member, cost of college, etc. can all take a toll on our savings. To get back on track, you will have to evaluate your current and future situations. There are many on line financial calculators to assist you in the number crunching. Make sure that you consider your entire financial picture: current retirement savings, equity in your home, current debts that will disappear before retirement and long term debt that will go beyond retirement. Maybe you can retire earlier than you thought or maybe part-time work is a necessity in retirement. Paint the big picture and then…..cross the finish line.
