How to Fix Your Retirement Plans After the 2008 Financial Wreck

Retirement savings of many people declined significantly during the 2008-09 financial crisis. Wise investment of remaining and future savings, and finding even more savings than previously planned will be needed to realize your retirement hopes. Here are some suggestions for getting back on track.

Difficulty: Moderately Challenging

Instructions

1. Make sure your retirement accounts offer the best opportunity to grow your savings. If your employer has a 401K or similar plan with matching contributions, add savings up to the match limit. It will be hard to find a better deal than getting free money! But investment choices are often limited in these plans, so additional savings should be put in an IRA account which offers a broad range of high quality investments. Several mutual fund and brokerage companies meet this requirement and also have no-fee IRA accounts.

2. The most difficult issue is deciding how to invest your savings. Financial advisors had recommended having most in stocks for people more than ten years from retirement. This may still be reasonable, because down markets provide potential for good future returns. But putting more than 75% in the stock market, as some did, may not be prudent. Decide what percent to invest in stocks based on your risk tolerance, age (less as you approach retirement), and stock selection confidence.
   
   What should be done with the remainder of your portfolio? High quality bonds are commonly relied on for preserving assets with modest gain. Well-managed and broadly diversified bond mutual funds are good choices. Other types of investments such as real estate and commodities should be considered only if you have good understanding of these markets. When you are undecided about how to invest some of your savings, keep it in short term interest bearing funds until good opportunities are found.
   
   Pay attention to investing costs. Commissions, fees, mutual fund loads (large charges when bought or sold), financial advisor costs, and taxes reduce realized returns.

3. Research specific investments which are available in your accounts to identify candidates to buy. The search feature on the website of your IRA account company is handy for screening mutual funds. The Morningstar website is a good source of independent information. If your IRA account company offers free professional guidance, get their input on allocation and investments. Fill the allocations you determined in Step 2 with investments you rank highest, making sure to diversify as much as possible (accomplished most conveniently with mutual funds).

4. Determine how much to save each year. I have developed a simple method to calculate this, presented in my website (sites.google.com/site/ezlifesavingplan). A step by step procedure guides your estimation of inputs for retirement expenses and income. The effect of inflation is taken care of if the amount of savings added is increased each year by the same percent as the increase in cost of living, and EZLifePlan results are calculated on this basis. The big uncertainty is the future performance of your investments, and the amount calculated to be needed annually is extremely dependent on this factor. As investment return goes up, the amount to be saved each year goes down. Many retirement planning websites and books have assumed annual investment gains of 8 to 11 percent. Historical returns were in this range before 1999, but have been much lower since. It would be advisable to plan more conservatively than suggested using pre-1999 results. You should determine how much to save using a return estimate which is reasonable for the type of investing you plan to practice. If you intend to be very conservative, expect gains to be about the same as inflation. Sound, diversified investing should yield several percent more.

5. If you had intended to add less to retirement savings than the calculated need, find ways to decrease spending so you can save more. It's not pleasant to face giving up things you want, but the alternative of an unpleasant retirement is much worse. So be creative and you'll be surprised how much spending can be reduced. Saving less for college and weddings for kids may need to be considered. Perhaps Junior would decide that two years at the community college and finishing at a state university looks better than Stanford if he knows he will be responsible for costs above what you decide to contribute for his education. Similarly, Susie may decide to have a less extravagant wedding. If more saving is needed after cutting the budget as much as possible, look at possibilities to significantly increase the rate of saving in the future (for example after the mortgage is paid off and cost to raise kids is finished). EZLifePlan2 handles this type of multi-stage planning.

6. Monitor your progress. If prospects for one of your investments dims, replace it with one with good potential. Periodically adjust your allocations to maintain the percentages in each investment category near the level you have determined. For example, if the stock portion increases significantly, sell enough to reduce it back to the desired percent and use the proceeds to supplement a category which is below its allocation. This sell-high, buy-low rebalancing forces you to lock in some of your profits in overheated markets and take advantage of opportunities in down markets. Finally, take satisfaction that you've done all you can and focus on the good things in life.