Your Money: Keeping It Safe by Money Magazine Staff
Wednesday, October 8, 2008provided by
Scared
yet? The Dow Jones industrials suffered a decline of more than 875
points on Monday and Tuesday, and Federal Reserve Chairman Ben Bernanke
predicted that the global financial markets crisis is likely to
restrain the economy well into next year.Americans' retirement plans have lost as much as $2 trillion in the past 15 months, according to Congress' top budget analyst.It's
okay to feel the fear. But it's not okay to react to it. Panicking and
making big changes in your accounts is likely to do a heck of a lot
more damage than a recession ever could.Sticking to some tried-and-true principles can help you get through the bad times with your sanity and your savings intact.
"Don't panic, stay the course," said Allan
Roth, a financial planner in Colorado Springs. "If you can't be right
at least be consistent. We're allowed to feel the emotions, but how we
react to them is going to be far more important than any short-term
swings."
An Early StartIf you're just
starting to think about saving for retirement, don't delay. Despite the
upheaval of the past few months — and the past few weeks in particular
— it would be a mistake for someone in their 20s or 30s to hold off on
investing now.The key here is the long-term prospects for
stocks. Ultimately, stock values hinge on the productivity of U.S.
workers and the earnings power of American companies. And it's not as
if those engines of long-term growth are about to disappear.The
country may need some time to work through the detritus of the housing
bubble and lending excesses. And stock returns could very well be
anemic as that happens. But history shows that some of the best
long-term gains go to investors willing to buy stocks when they're
reviled, as in the years following major setbacks like the 1929 crash
and the 1973-1974 bear market.Of course, the long view may not
seem particularly relevant to you at the moment. But remember: the
money that you contribute to accounts such as a 401(k) is going to be
invested for many years.The real question isn't whether you
should be contributing to a 401(k). It's how you should be investing
the money you contribute, as well as the money that's already there.If
you're in your 20's or 30s, you still want most of your 401(k) money in
stocks, say between 80% and 90%. That may be a tough sell emotionally
in these uncertain times. But the important thing isn't what your
401(k) is worth over the next few years — it's what its value will be
in 2040 and beyond.
Mid-CareerEven if
you're older, you should still think of the money you're contributing
now as a long-term investment. But you also need to give some
consideration to preserving the assets you've already accumulated.That
means dialing back your stock exposure somewhat, although you don't
want to hunker down completely in bonds and cash. Lightening up on
stocks will give you more short-term stability. But if you get too
conservative, you run the risk of stunting the eventual size of your
nest egg — and your lifestyle in retirement.But before you go
tinkering around with your portfolio, keep in mind that while bear
markets can hurt a portfolio, how you react to downturns can make
matters worse, said Roth. He points out that investing in stocks when
they're hot and then running to bonds when they're not has a name:
performance chasing."When you move in and out, you're actually
increasing risk while decreasing your returns," Roth said. Over time,
market timing can cost investors around 1.5% a year in returns,
according to Roth.
'The Danger Years'The
decade before you quit the work force, along with the five years
immediately after, is the most sensitive period in an entire lifetime
of retirement planning. The saving, investment and career decisions you
make during this time will dictate in a major way whether you'll spend
the next 30 to 40 years enjoying the life you've always looked forward
to or eating the early-bird special at Denny's."It's natural to
have a queasy feeling at this time in your life, wondering if your
retirement will happen as planned," says Joseph Chadwick of the
Longevity Alliance, a financial services firm that specializes in
retirement products. "But there's no need to panic."Stocks held
for the long term can be counted on to bounce back eventually. But if
you need to sell shares just as they're dropping in value — exactly the
scenario many newly minted retirees have faced recently — you run a
sharply higher risk that your money will someday run out. That's
because when the market does recover, you'll have less money invested
to benefit from renewed growth.Fortunately, there's a minor tweak that can dramatically cut your risk.Typically,
to ensure your nest egg lasts as long as you do, you should withdraw no
more than 4% of your savings for living expenses in your first year of
retirement. In year two, you might take a little more to account for
inflation.The bear-market adjustment? Give up on the inflation increase until stocks recover.A
study by T. Rowe Price concludes that this simple step cuts the odds of
running out of money over a 30-year period in half, from 22% to 11%, on
a sample portfolio invested 55% in stocks and 45% in bonds.Worried
that forgoing your inflation raise will bust your budget? Pull a Brett
Favre and go back to work part time to make up the "lost" income. You
probably won't need to put in more than a few hours a week — a 3%
increase on a $75,000 annual withdrawal equals only $200 a month.
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