The downturn has stopped accelerating, stocks have perked up, and the banking system is healthy enough to withstand more economic adversity (with a manageable amount of additional taxpayer money). Economic reports are being sifted for signs of "green shoots" that signal economic recovery. On a personal level, it's time to come out of our bunkers, survey the damage, and get on with our lives. In financial terms, picking up the pieces may not be a pleasant exercise, especially for people in or near retirement age (or what they had hoped would be retirement age). But it needs to be done, and here are six steps to follow:
Understand your new reality. The future will not be like the past. At best, many experts agree, it will take at least two years to recover market losses, and it could take a decade if the recovery is slow. Most retirement-plan participants are not investors--they're savers. These investors never intended to actively manage their 401(k) and IRA holdings. Instead, they aimed to buy and hold, watch their investments grow over time, and then use the resulting nest egg to support a pleasant and lengthy retirement. Even during the worst of the market meltdown, the big mutual fund companies report that retirement-plan participants kept their funds in place and continued making contributions. Now, it's time to take a clear-headed view of account holdings and make a realistic judgment of your new retirement glide path. ING has an easy-to-use calculator,and there are lots of others. Their underlying assumptions may differ, so use a few to develop a consensus outlook that feels right to you.
Rejigger your financial plan. Take this outlook and use it to build a new financial plan. You may have an adviser to help you, but again, check out online resources. Before you use any of them, take the time to assemble accurate information. How much are your debts, really? What's the precise total in your retirement plan? How much do you pay for car, home, life, health, and other kinds of insurance? How many years do you have left on your mortgage?
Adjust your risk profile. Retirees and people nearing retirement have learned a harsh lesson about the risk of owning equities: They can slip substantially. Don't be wowed by forecasts of big potential investment returns. Do the homework to understand the risk profile of such investments. A portfolio with 100 percent stocks will always have a higher return trajectory than one with more conservative holdings. But it will carry more downside risk, and that may mean it's not right for you. [See 4 Myths About Target-Date Funds.]
Seek lower investment fees. Mutual funds have not won many friends during the past two years. Their customers have lost a lot of money and funds are on the hot seat in Congress for poor disclosure of their fees. Ironically, market losses and departing customers have depleted some fund assets so much that their fees—expressed as a percent of assets—have actually been increased. That may be their problem, but it shouldn't become yours. Look for low-fee funds, including ETFs, that minimize active management and focus instead on matching various market indexes. If you your current fund manager is charging too much, consider another provider. Perhaps it's time to roll over balances from older retirement plans into a self-managed IRA. You'll have plenty of company: the big self-directed investment companies have reported hefty boosts in account holders.
Protect yourself from inflation. The odds are high that we will have a bout of serious inflation in the next several years. Government deficits and essentially free money from the Federal Reserve are designed to help restart the economy. But they also may be planting the seeds of future price increases, and healthy economic growth is likely to bring about an inflationary harvest. Consider diversifying your holdings into inflation-favored stocks or mutual funds. Treasury Inflation Protected Securities, or TIPS, are recommended as well, particularly for older investors.
Evaluate longevity protection. Seriously consider long-term care insurance. Extended nursing home stays and expensive home-based care can devastate your resources, and deplete the estate you'd hoped to convey to your heirs. But take care. This is a complicated product that can be expensive, particularly if you take advantage (which you should) of inflation-protection features to guard against future health care cost increases. You should also consider converting part of your holdings into an annuity. The trigger date should be when you reach the age when sharp market losses would seriously damage your retirement plans (that's already happened for many of us). It's no accident that Social Security has been the retirement star of the past two years. People love guaranteed income, and that's what annuities offer. Annuities can be complex, high-fee money pits. But they can they work wonders if used in the right way. The core value of annuities is that your initial contributions build up tax-free inside the account and later provide streams of income that are guaranteed by the issuing insurance company. The downside is that your annuity contributions usually remain with the insurer, even if you die at a young age. But it's this trade-off that makes annuities particularly appealing. The issuing insurer knows that some of its annuity customers will stop making payments or die at young ages. Because it sells annuities to a large group of people, the company can afford to offer terms that are more attractive than you could get on your own.
There is a specific type of annuity designed to directly protect people from outliving their money. It normally does not begin making payments until the age of 85 but offers very attractive terms for people who survive that long.