So, what do you do now? With portfolio and home equity values having fallen by 1/3 or more over the past year, many planning for or already in retirement are asking this painful question as they hope to enjoy their “Golden Years.” Sadly, over 65% of workers age 45+ expect to delay retirement and work longer as a result of the current economic turmoil.
Even before the economic meltdown, psychologists have long described retirement as one of the top 10 “Life Stressors”. This is due to the obvious financial and emotional challenges that must be addressed. Arguably, our current economic dilemma may have moved this up the scale considerably.
There are a number of key strategies that can make a significant difference as you plan for or re-evaluate your retirement during these tumultuous times:
- Review Your Living Expenses: Categorize your outflow into three groups; 1) Survival, i.e. food, housing and health care that are essential; 2) Desired, which are discretionary lifestyle extras like entertainment and vacation; and 3) Legacy, which include gifts and inheritances to others. This prioritization will be valuable should your income decrease and as a basis to project your retirement needs.
- Don’t Time the Market: While tempting, studies show that timing only accounts for 1.8% of total portfolio performance (adapted from Financial Analysts Journal, May-June 1991). Another study by ICMA-RC1 showed that if you missed just 10 of the top performing days over the 20-year period (8/1991-8/2011), your portfolio would have underperformed by over 3.5% per year! Remember, by the time you see performance, it is usually too late.
- Re-Balance Your Portfolio: During any business cycle, there are winners and losers. Make sure your investments are balanced and diversified according to your risk tolerance, timeframe, growth and cash flow needs.
- Be Skeptical of Doomsayers: Especially during tough times, prognosticators abound. Economics is a ‘soft’ science at best wherein even the brightest Nobel Laureates are wrong a significant percentage of the time. There is an old saying, “put 5 economists in a room and you’ll get 10 different opinions.”
- Seek Objective Expert Advice: Many blame Wall Street’s “sales” mentality for some of its economic woes. Just as surgeons don’t operate on family members themselves, it is good to have an outside opinion. Get advice from an independent Certified Financial Planner™, who has no bias from their employer’s proprietary products. A “client-centric” model that focuses on your needs first and foremost, and integrates investments with the rest of your financial picture, may be the best road to success.
- Update Your Retirement Plan: Everyone can benefit from having a plan that can provide lifetime income and establishes the feasibility of their retirement goals. If you don’t have one, get one. If you have one, update it to see what adjustments may be needed. Remember, those who fail to plan, plan to fail.
- Consider Getting a Second Opinion: Just as in medicine, a qualified second opinion can never hurt even if you believe you have all your bases covered.
- Dollar Cost Average: If you have extra cash, consider investing a specific amount each month. If you are eligible for a 401K or other retirement plan through your employer, keep funding it. The DCA automatic process is a disciplined method that helps you buy fewer of the expensive shares and more of the cheap shares as markets fluctuate. While no guarantee, it can, over time, mean a lower average cost and the potential for more profit.
- Keep the Long Term Perspective: Despite the persistently high unemployment figures, recent economic data suggests we are not likely to hit another recession. The reality is that we are coming off the worst downturn in almost a century. As such, the recovery will take time. Just as when we were in the midst of the “good times” and no end seemed in sight, it is tempting to see the “tough times” as going on forever. The unprecedented, world wide government efforts to stimulate our economies will pay off and we will get through this.
- Remember the Pendulum Principal: Investor behavior is prone to excesses and deficiencies much the way a pendulum often over-swings its mark. One need only look at the current near-zero or negative yields on Treasury Bills to realize that the flight to safety may be overdone. Just as we had the “Tech Bubble” and the “Real Estate Bubble,” we are likely in the midst of a “Panic Bubble.” Resist the temptation to “follow the herd” in making emotional decisions that you may regret later.
The irony is that people are not naturally wired for investment success; they typically sell low and buy high because of emotional reactions. Study after study cites this as the number one factor in explaining why individual investors chronically underperform the markets. It is another reason why it is critical to have an objective plan that can provide guidance during unnerving times.
Investors are reminded that dollar cost averaging (DCA) and diversification does not assure a profit and does not protect against loss in declining markets. Since DCA does involve continuous investments in securities regardless of fluctuating markets, investors should consider their willingness to continue purchases during market downturns.
This information is not considered a recommendation to buy or sell any investment.
Written by
Mitchell E. Kauffman, MBA
Certified Financial PlannerTM
Masters of Science in Financial Planning
Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.
Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.
Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara Community College, and Pasadena City CollFor more information, visit www.kauffmanwealthservices.com or call (866) 467-8981. Kauffman Wealth Services is an independent Registered Investment Advisor and serves clients from two office locations: 140 South Lake Avenue, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108. Securities offered through Raymond James Financial Services, Inc., member, FINRA/SIPC.
1 Stocks are represented by Standard & Poor’s Composite Index of 500 stocks, and unmanaged index that is generally considered representative of the U.S. stock market. Past performance is not a guarantee of future results.
