Don't Give Up on Your Dreams Yet

2008 ruined a lot of investors' plans. Yet while those big dips on your brokerage statements have scared you to death, the real question remains: What do you have to do to get yourself back on track to meet your financial goals?

Many of those who were closest to retirement suffered the most, as they already had substantial assets at risk when the bear market hit. On the other hand, those with decades of work left to go before they planned to retire will find it easier to make the adjustments they need to make in order to reach their original target.

Running the numbers
To show exactly what happened, let's look at some simple numbers. If you wanted to have $1 million saved by age 65 and you started working and saving at age 25, then you'd need to invest about $285 each month for 40 years and get an 8% return on your investment.

So say you did that, and then at some point in your career, your portfolio took a one-time 40% hit -- similar to the haircut the market received in 2008. What changes would you have to make to still reach that $1 million goal? You'll either have to save more or earn more on your investments. Here are some figures:

As you can see, for someone just getting started with their investing, a 40% loss obviously makes a noticeable difference, but it's not insurmountable. As you look at older investors, however, it gets more difficult to catch up after a big drop. With just five years to go before retiring, anyone who had 100% of their nest egg in stocks will find it next to impossible to save enough to meet their original target.

Why it isn't quite that bad
The savings model described above looks scary, especially to those close to retirement. But while the news isn't great, those who have time to take a long-term perspective with their investments can take some solace in one fact: Higher returns may be ahead.

This depends on how you view the current economic crisis. If you see it merely as a bump in the long-term road -- just as the 1987 crash proved to be -- then stocks may well get back on their former track once we solve the problems we're facing now.      

So if you felt comfortable projecting a fairly conservative 8% growth rate over 20 years when the S&P 500 was at 1,500 in late 2007, you would have anticipated the S&P reaching a dividend-adjusted level of about 7,000 for the index by the end of 2027. Measuring that from today's level of about 840, a rise to 7,000 over about 19 years would be an annual average return of about 11.8%.

How will you get there?
You're already seeing some of that enhanced return in dividend-paying stocks. Take a look at what's happened to yields on some stocks between late 2007 and now:

Sources: Yahoo! Finance, Dividend Investor. Current yield as of Jan. 14.

Many stocks have seen big moves up in their dividend yields. So even if stock prices grow at a fairly slow rate, those higher dividends could add a couple of percentage points or more to your overall returns. And as the first chart shows, that higher performance could get you much of the way back toward your financial goals -- if you take the time now and adjust your investments accordingly.

The hit that most of us have taken in our portfolios hasn't been fun. But it doesn't have to derail your finances forever. By taking what steps you can to shore up your finances now, you'll put yourself in a great position to take advantage when more prosperous times return.

For more on helping your portfolio recover, read about:

• Why now isn't the time to sell.
• You could score big in today's markets.
• Did you miss the best day to buy?

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