Few events create more havoc with a retirement plan than a steep financial loss immediately preceding or following the date you quit working. Suddenly you have to square 30 years of future expenses with a greatly diminished stockpile of assets. The recent washout has been enough to send some new retirees back to work at least part time and to persuade prospective retirees to put off their plans for a few years. So, yes, times are certifiably tough for this group. I don't mean to discount that. But the news has been so bad lately that every retiree may be fearing all is lost. Yet despite this pervasive sense of dread, here are three reasons things may not be as dire as you imagine.
You lost less than you think.
The stock market may be down 40% this year, but your portfolio has other assets too — or at least it should. Balanced funds that hold bonds and cash along with stocks are down just 29%, according to mutual-fund tracker Morningstar. And many retirees looking to minimize risk wisely hold a smaller percentage of stocks than the average balanced fund (and also may own insured bank CDs). Which means a more typical experience for them is a 20% loss, says Gregg Fisher, president of Gerstein Fisher, a financial adviser in New York City. That's not fun, but it's nowhere near as bad as the headlines.
The worst is over.
I can't say that with any certainty, of course. Plenty of people believe that we are headed for the worst recession in 70 years and that it will be years before it lifts. But if you start measuring from the beginning of the subprime debacle, we're already 16 months into this mess; we're at least four months into what could be the most serious and worrisome phase of the downturn. So the clock is ticking. Yes, there will be more bankruptcies and bailouts and job cuts. Yet no less an investor than Warren Buffett is making stock investments now, planning to be there for the long haul. The stock market is closely tied to the economy, even though the two often run in very different directions. The market is always looking ahead six to nine months and is a gauge of what investors collectively believe will be the situation far into the future. That's why stock prices began to slump well before the recession was in full bloom. It also means that now, just as economic woes seem the most dire, the market could be close to focusing on the recovery and moving higher.
But even if that's not the case, selling after such a big drop makes no sense for most people. Dozens of studies have shown that if you wait for confirmation that a recession has ended before you buy, you'll all but miss the corresponding rebound in stocks. One model dating back to 1926 shows that a high-quality portfolio of just 60% stocks (and 40% bonds) returns an average of 11% per year in the first five years following a trough in the economy. That may be all you'll need to get even.
You need less savings.
For starters, prices are being slashed on everything. And if the current malaise drags on, it will take a major bite out of inflation — one that could literally offset the decline in your portfolio. "The real enemy of retirement is inflation," notes Fisher. He points to this model: Say you have a $2.5 million nest egg that is growing 7% a year. In one scenario, you have no extraordinary economic events and normal long-term growth that produces inflation of 4% a year as you age from 65 to 95. In the second scenario, a severe recession knocks your portfolio down to $2 million. But because of the crisis, over the next 30 years inflation averages just 2%. In both cases, you withdraw $100,000 a year to live on, and you adjust that number for inflation every year. By the time you're 95, the smaller nest egg has become the larger one — $567,000 vs. $335,000. Maybe that will help talk you in off the ledge.