Anyone expecting a resolution to our economic and political problems is, with all due respect, angling for a role in a very nasty reality TV show. It might look a lot like a remake of Groundhog Day. Nothing seems to change as we relive, over and over, the dreams and disappointments of a business cycle stuck firmly in neutral.
Your life, however, needs to move ahead. 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:
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Understand your new reality. The future will not be like the past. At best, many experts agree, it will take at years to recover investment, housing, and employment losses. Even then, expect the next set of high-water marks to be lower than what they were in the past. This may mean that your future standard of living is going to be lower than you hoped, or lower than it was a few years ago. If you've done your own personal math about future income levels and spending needs, pay attention to what it's telling you and recalibrate your lifestyle.
Rejigger your financial plan. Take your revised (and honest) outlook and use it to build a new financial plan. You may have an adviser to help you, and there are also lots of helpful online tools. Check out the websites of the big retirement and self-directed investment companies—Fidelity Investments, T. Rowe Price, Vanguard, Morningstar, and others. Before you act, make sure you take the time to assemble accurate information. How much are your debts, really? What's the precise balance of 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 your 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.
Seek lower investment fees. Mutual funds have not won many friends in recent years. Customers have lost confidence in investment markets in general. And they've tired of paying stiff fees for management expertise that often seems no better than investing in an index fund with no active management oversight and very low fees. If 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 you from inflation. The economy has been so weak that even huge government deficits and essentially free money from the Federal Reserve have not sparked inflationary pressure. But growth elsewhere in the world or unforeseen shortages of key commodities could change matters. Consider diversifying your holdings into stocks or mutual funds that offer some inflation protection. 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. 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 healthcare cost increases. You should also consider converting part of your holdings into an annuity, although you might want to hold off for a while. Low interest rates today make it tough for insurance companies to offer attractive terms on traditional fixed annuities. A fundamental appeal 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 the company sells annuities to a large group of people, it can afford to offer terms that are more attractive than you could get on your own.
Twitter: @Phil Moeller