Last year's stock market nightmare had a big impact on everyone's savings. Despite the fact that stocks have risen over 50% from their lows, the S&P 500 is still off more than a third from its 2007 highs. While anything's possible, there's no guarantee that we'll see the market recover back to those record levels anytime soon.
But the uncertainty over the stock market doesn't mean that you're helpless to get your retirement savings back into shape. Whether you're close to retirement or still have decades of work to look forward to before you call it quits, following a simple plan will help restore your confidence in your investments and your financial future.
Step 1: Set the right target.
Notice that the first step toward implementing a successful retirement plan is not to start saving money. Although you'll obviously need to find sources to fund your investments, it's best to take a step backward to assess what your goals and dreams are.
One simple way to establish an initial target is to estimate how much money you'll want to spend in retirement. The further you are from retiring, the harder it is to gauge exactly what your expenses will likely be. But start with your current spending level, take out or reduce line items that you'll no longer need to spend when you're not working, and then add a budget for whatever new activities you plan to take up after you retire.
Once you have that monthly figure, multiply it by 300. That will tell you how big a nest egg you'll need to support monthly expenses, as long as you're comfortable using the 4% withdrawal rule.
Obviously, that's an oversimplified way of setting a target. The more details you can add, the more accurate a picture you'll get of where you need to be. Regardless, having at least some idea of your goal will help you track your progress a lot more efficiently than just randomly counting your net worth.
Step 2: Find smart investments to match that target.
Now it's time for the reality check. Compare your current assets with your target and see how big a gap there is.
What you do next depends on what stage of life you're in. If you plan to stop working in the next few years, large gaps will be tough to fill. Although you might be tempted to be extremely aggressive with your investing style to try to catch up quickly, that plan can backfire if you get hit by another bear market. The better choice is to pull from both ends to get those numbers closer together, by boosting savings and investments as well as cutting projected expenses. And although spicing your portfolio with a small amount of high-growth stock prospects won't threaten your nest egg, you'll probably want to stick with secure, high-quality blue chips like Procter & Gamble
On the other hand, if you have awhile to go before retiring, the extra time gives you more flexibility. Depending on how much you can set aside, this table can help you make the best decision:
|
Situation |
Strategy to Follow |
Some Ideas ... |
|---|---|---|
|
Can only invest a little |
Maximize returns with large allocation to small- and mid-cap growth stocks. |
Marvel Entertainment |
|
Can invest a substantial amount |
Balance risk and return with more stable large-cap stocks combined with bonds, REITs, and cash. |
Chevron |
|
Already near or above target |
Keep conservative mix of assets; consider raising target. |
Diversified stock funds and ETFs, bonds, REITs, and cash |
Step 3: Keep checking.
You're not done yet! Even once you get a plan going, you'll constantly have to revisit it as the markets change. If you earn better returns than you expect, for instance, you can either push your goals higher or reduce the risk in your portfolio. Tough times may encourage you to boost your monthly savings if possible to make up a projected shortfall.
When it comes to creating a plan to restore your retirement savings, you have lots of choices. After going through these steps, you should be able to come up with one that works well for you.
