Dec

What’s Happening Out There With Stocks Down, The Economy Down, and Retirement Looming?

By Emily

Americans face uncertainty in deciding where to go next with stocks down, and less money to invest

With bad news on the economy flying around the newsstands, through the airwaves, and across the blogosphere, it’s easy to get frozen by information and paralyzed as we wait for the other shoe to drop. It’s easy, in times of uncertainty, to rely on behavior modeled by others to help us decide what to do next.

The problem is, as I mentioned in my article on retirement planning last week, "the masses" are uneducated and/or undisciplined in their retirement preparation, and not the people to follow. When mimicking the behavior of others, it is wise to first ascertain whether your target for emulation is headed in the right direction.

Bank of America Study Reveals Economic Downturn Affects Savings and Retirement Preparedness

In a recent (November 2008) survey of 1000 Americans commissioned by Bank of America, researchers confirmed some common-sense concerns about the impact of the economic recession on our financial behavior.

60% are spending less than they did 3 months ago
51% are saving less than they did 3 months ago. 20% of Americans say they are saving "much less"
23% of respondents say the ‘impact of economic turbulence on their retirement savings’ is the issue that concerns them most.
68% of respondents with a retirement account have not withdrawn funds from their retirement accounts, but 18% have withdrawn funds prematurely, 75% used the funds to pay for credit card bills, mortgage payments and/or to cover income shortages from recent job loss.
43% of Americans anticipate more years in the work force than they did a year ago.
62% of the general public was behind or had not started saving for their retirement, up from 53% in March 2008.
68% have not changed the way they save, invest or manage their retirement investments in the last 3 months.
59% don’t know how much they need to save in order to maintain their current lifestyle in retirement.
47% of retirees believe their retirement savings won’t be enough or are uncertain of whether they will have enough money to cover their financial needs.
42% of Americans do not work with a financial advisor.

What does this data tell us? Let’s connect the dots…

Spending is down, savings and investments are down, uncertainty is up, and folks’ concern about their preparation for retirement is up.

Let’s take these issues in order.

1) Spending is Down – GOOD! Let’s keep it that way.

Personally, I think it’s good to see people reducing their spending. A credit-fueled spending blitz has fueled our economy for years. I viewed this behavior as unsustainable (How many years can you spend more money than you make before your debt comes back to bite you?) and am glad to see it on the wane. It shows that people are able to effectively tighten their belts and cut back on excesses that are detrimental to the financial health of their families.

I admit that belt-tightening Americans are not good for the economy as a whole. Overall, the American economy is better off when we all spend freely, but the individual is better off when he spends prudently, saves aggressively, and invests moderately. This blog is aimed at helping YOU – an individual person – with your retirement goals, it is not aimed at improving the American economy!

2) Savings and Investments are Down – That’s not good, but it may not be the wrong choice.

Americans may have found that they are unable to take advantage of the great investment opportunities in the stock market and real estate market now because they are cash-poor. Job loss, salary freezes, and reductions of working hours can all contribute to a smaller discretionary spending budget and create a situation in which money previously available for savings and recreational spending must now be redirected toward day-to-day necessities.

When money is tight, reducing or eliminating investment savings programs may be the best choice.

As I explain in my book, you should not be investing if you can not afford to keep your funds in a long-term investment vehicle like stocks or real estate, for at least 5 years. If you can’t afford to invest, don’t try to force the issue by putting money into retirement plans which you may have to withdraw later at a stiff penalty rate.

If your budget is uncomfortably tight right now, you may be better off keeping your emergency funds fully-funded and putting your excess savings into savings, money market accounts or short-term CD’s until you know better what the future holds for your family.

The good news, even if you can’t afford to invest now, is that in my estimate, we’ll continue to see good buys in the real estate and stock market for a while yet. My concerns, though, are that the current financial turmoil is highlighting a problem we need to address, and we’re not taking the hint by changing our behavior. The problem being – our lifestyles are too expensive relative to our income levels. We need to trim the fat during lean times, but good times or bad – our budgets should still allow room for savings and investment.

If you find yourself suffering from a temporary income reduction, it’s OK to stop saving for a little while. But consider the long-term ramifications on your retirement plan if you stop spending altogether for a period of years or months. If you are in a situation where you are so cash-poor that you may not be able to save for years, it’s time to consider a serious lifestyle change so that you can begin to put 10-20% of your income into savings for retirement on a regular basis.

If a drastic change is needed in order to this – say, starting a business, getting a second job, selling your house, or finding another way to slash costs – NOW may be the time to implement this approach. Why wait a year or two to "see if things get better?" You can be ahead of the game if you start now.

3) Uncertainty is Up – Is it safe to move, yet?

When people get uncertain, scared and worried what happens? They get scared of making a mistake, so they do nothing. They hole up and wait out the storm – waiting to make a move until it’s "safe" to do so again. That’s why, when the stock market is up, everyone jumps on board because it looks like a safe investment; and when the stock market is down, everyone bails out because they’re afraid it’s not safe.

In this case, fortune favors the bold. People who are willing to get educated, and make moves even in the face of uncertainty can often face rich rewards.

If you’re not afraid to do so, and you have the money to spare in your budget, consider this a great buying opportunity in both real estate and the stock market. Warren Buffet is.

The stock market tends to over-react and can underprice itself when people feel bearish. The stock market is very emotional. Step away from your emotions, and use your head. Look at the numbers and see where the good buys are.

Real estate is a slow-moving beast. With foreclosures up, there are lots of banks doing short sales and selling REO’s. However, no one wants to buy in a falling market and see their newly-purchased real estate continue to drop in value. To enter the market, start looking for smart deals that represent a discount off of the current market value. (If you buy a house at 80% of market value, the market can drop 20% before you’ve really "lost" anything.) Negotiate hard, and look for properties that cash flow, so you can afford to hang on in the face of a slow recovery.

4) Anxiety about lack of preparation for retirement is high.

Well, this one is not surprising. Of course people feel less prepared for retirement when the value of their retirement assets drops 20% in a matter of months. They ARE less prepared, and for those near their retirement time horizon, or worse, those who have retired in the last five years, the effects of the recent market downtown are even more pronounced.

The youngsters who have years until they retire should be jumping up and down, excited about the buying opportunity that has been presented early in their investment career. We 20-somethings should be stocking up on stocks now, in my opinion!

For the folks who are closer to retirement, the only remedy is increasing their level of savings to make up for the losses suffered in their portfolios. They’ll also want to consider re-balancing their portfolio’s to make sure their level of risk and liquidity meets their current financial needs. (E.G. Too many stocks/mutual funds makes a portfolio more volatile, and folks who are unable to afford this volatility should reduce their exposure to stocks.)

Consider professional help

42% of us are not working with a financial advisor and 59% don’t even know how much we’ll need to retire. I think everyone’s philosophy must be "I’ll just save as much as I can, and hope that it’s enough, when the time comes."

Anyone who’s studied goal-setting probably would advise against this strategy as the best way to prepare for a successful retirement?

With longer life expectancies now, why aren’t we spending more time preparing for an active retirement?

What’s the psychology or life circumstance that’s stopping us from doing what we should?

Are people afraid to go to a professional advisor for fee of bad advice? High costs/fees? Getting a sales pitch? Do we think we can do it better ourselves?

I admit that I don’t use a professional advisor because I’ve spent hours reading, talking to people, running numbers and otherwise educating myself on personal finance. I keep tabs on my numbers and am confident of where I’m going. How do you feel about your situation? I really want to know!

Emily

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