"How am I going to retire now?"
That question has been on lots of people's lips since, oh, the first week of October or thereabouts. An awful lot of paper wealth has evaporated since then, even for those who weren't in Mr. Madoff's Magical Money-Munching Machine. Madoff's scheme has captured the big headlines lately, but even investors who thought they were doing everything right have seen holdings in recently well-regarded stocks like Apple (NASDAQ:AAPL), General Electric (NYSE:GE), and American Express (NYSE:AXP) dwindle to disturbing degrees.
What about your 401(k)? The mutual fund industry and its vaunted active management didn't escape the market meltdown, either. Morningstar (NASDAQ:MORN) -- another well-regarded stock that got clobbered -- noted last month that every domestic and international equity fund available in the U.S. had lost money over the last year. Every one. That's more than 11,000 funds!
It's probably small comfort, but if you're nearing retirement age and worried about your nest egg, you're clearly far from alone. But will you all have to work until you're 90?
Not necessarily.
It's up to you
Let's get this out of the way right now: Unfortunately, there's no magic way to restore your missing paper wealth, aside from investing well and waiting for the market to do its thing. That will take a while. I have no special tricks up my sleeve to speed up the process, and I advise you to be very wary of anyone who claims to have an easy answer.
But there are a number of ways you can buy time for the stock market to do its thing without knocking your retirement plans too far off course. Moreover, you can speed up your recovery by structuring your portfolio to take maximum advantage of the market's eventual upswing.
To get a sense of where you're at, confront the numbers: Draw up a lean but realistic post-retirement budget, and compare it to your anticipated income sources. Add them all up -- Social Security, pension payments, interest or annuity income, and anything else that comes to mind. How big is the annual shortfall? Is it bigger than 4% of your current nest egg?
If so, you'll need to reduce spending, increase your income, increase the size of the nest egg, or all of the above.
The three goals
There are three goals to this plan, all interrelated. We want to:
- Buy as much time as we can to rebuild that nest egg;
- Invest to take maximum advantage of what the market gives us;
- Reduce spending where possible.
Last one first: There's lots of advice out there on reducing spending, particularly in retirement, so I won't rehash it at length here. Some key considerations: Can you move to a smaller house, or a cheaper part of the country? Keep that old car longer? Cut expenses in other ways?
Cutting expenses -- now and in retirement -- helps you buy time. Of course, the biggest way to buy time is to work longer, and that may need to be a serious consideration for you. Working longer increases the amount you can save now, and the amount of your eventual pension and Social Security payouts later -- all good things.
As depressing as "work longer" may sound, keep in mind that it isn't forever -- delaying retirement by just one or two years can add significantly to your eventual monthly income. And while you're working, you can keep contributing to your 401(k). Even if your employer has suspended its match, as Motorola (NYSE:MOT), FedEx (NYSE:FDX), Eastman Kodak (NYSE:EK), and many others have done recently, you can still contribute as much as $22,000 in 2009 if you're over age 50 -- money that will come in handy later.
Another advantage of buying time: By pushing off the day when you'll have to tap the stock portion of your investment portfolio, you give it more time to grow -- and the market more time to recover. Work another year, cut expenses, and tap the CDs and bonds you have first. It could be five years or more before you have to sell any stock, and by then, you may see a nice recovery.
Of course, you'll maximize your recovery by investing well, starting right now. Making the most of your retirement investments requires a solid asset allocation plan, a realistic understanding of risk, and the ability to evaluate the pros and cons of the investment options available to you. Even if you were doing "pretty well" until recently, there's almost always room for improvement.
Of course, this is why some people hire professional investment advisors. But before you make that expensive commitment, take a free trial of the Fool's Rule Your Retirement newsletter service. You'll find great advice on maximizing your income in retirement, how to make best use of the investment options found in most plans, and some of the best asset-allocation guides I've ever seen.
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