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Assessing The Damage To Pre-Retiree Financial Plans

Even before the financial crisis, the retirement plans of most Americans were likely to fall far short of providing adequate post-work income. But the stock market collapse at the end of 2008 may have caused the greatest pain for those who, until then, had been doing everything right. They’d calculated what it would take to fund a rewarding retirement and then they had diligently set money aside, prudently investing in a diversified portfolio. Yet within months, at least a quarter of the value of most people’s investments simply vanished. And while those with years to go before leaving work may have time to recoup their losses, those whose retirement dates are less than a decade away now face severely diminished prospects.
 
Still, there are ways to reduce the impact of the sudden market downturn. And though you could have to make some concessions to reality, the damage to your nest egg may not turn out to be as severe as it originally seemed.
 
Consider the situation of a hypothetical couple, Jack and Linda Robinson, who were doing very well before the financial bottom fell out. Both currently age 60, they had stockpiled $1.3 million prior to 2009, money they’d invested mostly in stocks, corporate bonds, mutual funds, and Treasury securities. Assuming their portfolio earned, on average, a 7% annual rate of return, the Robinsons projected they would have $2,233,642 by the time they reached age 66, when both would be eligible to collect full Social Security benefits. If they had other income for retirement and could avoid touching those funds, in 25 years, at age 85, they would have $7,055,662—a tidy sum to leave to their children. (All of the figures here are based on results from a financial software package and don’t reflect the likely returns of actual investments.)
 
But the 2008 market tailspin resulted in a loss of about one-third of the value of the Robinsons’ holdings. After a rebound during the past year and a half, the assets in the portfolio are currently worth $1 million. Assuming the same 7% annual rate of return, the Robinsons can expect to have just over $1.5 million ($1,500,730) by the time they retire at age 66. If they can leave the nest egg alone for 25 years, it will be worth $5,427,433.
 
Though that represents quite a comedown, there at least three moves the Robinsons could make to improve their situation.

1. Change the investment allocation.
If the Robinsons were willing to take on more risk and shifted their mix of investments to increase the expected annual return by one percentage point—from 7% to 8%—the results could be substantially better. Their $1 million portfolio would be worth $1,586,874 by the time they retired, and would grow to $6,848,475 in 25 years if left untouched.        

2. Work a little longer.
The couple could also decide to postpone retirement. Suppose they both stay just one year longer than they had planned at their current jobs. Assuming their portfolio earns the enhanced 8% rate of return, that extra year would enable it to grow to a value of $1,713,824 by the time they retire and to $7,396,353 after 26 years (including that extra year of working).

3. Save and invest more.
The Robinsons may be able to free up more money for investments. Suppose they can scrape together an additional $1,000 a month and earn a 7% annual rate of return. During the six years before retirement, they’d amass an extra $86,032, and in 25 years (assuming they continued to invest an extra $1,000 a month), they’d have $678,256. If they can generate a 8% annual return, the monthly $1,000 investment will produce $88,246 in six years and $769,282 in 25. 

Of course, a variety of other factors will also affect the eventual outcome for the Robinsons. Their current and future rates for federal and state taxes, inflation rates, and the possible need for withdrawals from their savings—as well as likely variations in their actual investment returns and a host of other considerations—all could play a role. The point of these oversimplified, bare-bones projections is merely to show that even if you plan to retire within a few years, slight adjustments in how you save and invest could still help you regain some of the ground you lost during the bear market. We can work with you to assess all aspects of your current situation and help you consider a range of options to prepare you financially for a comfortable life after work.
 

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
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  • Four Retirement Planning Rules Of Thumb To Bend
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  • You Know You're Getting Old When You Get RMD Notice
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  • Identity Theft : Correct Those Credit Reporting Errors
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  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
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  • Identity Theft: Everyday Prevention
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  • Identity Theft : Tips to Protect Yourself
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  • Identity Theft: Which Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
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  • What Do Rising Interest Rates Mean For Money Market Yields?
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  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Under New Law Taking Social Security at 65 Makes Sense for Most
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning



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