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Market Gyrations Raise Questions For Pre-Retirees

Even the most optimistic financial prognosticators will acknowledge that the current economic environment isn’t likely to dramatically improve over the next few months or perhaps even years. In the meantime, we will have to deal with some of the traditional elements of a recessionary period such as rising unemployment and creeping inflation—not to mention the continued volatility of the equities markets.

What’s more, critical economic events aren’t limited to happenings here at home. We’re truly living in an era of a global economy. This has never been more evident than when prices can rise and fall daily based on blips on the radar screen from abroad.

Of course, what goes up must come down and probably back up and then down again. Eventually, the markets will return to a period of greater normalcy.

At this point, you should analyze your personal situation. Most importantly, as you look ahead to retirement, will you have time to recover from the damage suffered due to the economic downturn?

A lot depends on your stage of life. If you’re fresh out of college or have been working only a few years, you should just keep saving and investing. You’ll see other times like these, and they needn’t divert you from your long-term financial plan. Similarly, there’s no need for drastic measures if you’re midway through your career. But the closer you are to retirement, the more difficult it may be to shrug off current troubles. Losses now could reduce your income and standard of living when you leave the work force. That may be particularly true if you’re in your late 50s or early 60s and plan to stop working full-time within a decade.

Consider this hypothetical example:* You are age 62 and plan to retire in three years. Before this bear market, you and your spouse had invested aggressively in stocks and managed to build a $1 million portfolio. But now the value of your holdings has dropped to $750,000.

If you go ahead with your retirement plans, what will your financial situation be when you’ve reached age 75? Assuming a robust 8% annual return and no withdrawals, your $750,000 nest egg will grow to $2,039,718 in 13 years. If your portfolio had still been worth $1 million, you would have accumulated $2,719,624 by age 75—or $679,906 more than if you hadn’t been hurt by the recent downturn.

But that’s not all. Chances are, you’ll be living off some of your savings, and the IRS will take a healthy cut in taxes. All that money flowing out will further erode your savings, and your recent losses may mean you’ll eventually run out of funds.

What can you do now to improve your retirement prospects? Consider these ideas.

Increase your savings. During the final decade before retirement, you may be finished paying for your children’s education but still at the peak of your earning power. Now is the time to save, save, save. You and your spouse should max out your retirement savings at work. And don’t hesitate to add to IRAs and taxable accounts as well. Investing when the market’s down could multiply gains during the inevitable recovery.

Reconsider your investment mix. In general, a properly diversified portfolio minimizes your downside risk. When you’re younger, you can afford more risk and thus can allocate more towards stocks. But as you approach retirement and have accumulated a large savings, asset protection takes priority. If you have most of your money in stocks, you should look to shift your allocations more into bonds or cash. However, keep in mind that you might not want to become overly conservative just the market has dropped significantly or you’ll miss any rebound.

Look again at your retirement date. Waiting a few more years to retire, or even working part-time during retirement, could help you bolster your savings and keep your investments working to make up for recent investment losses.

In times of market uncertainty, it is important to focus on your long-term plan, rather than day-to-day market fluctuations. Call us to develop a new financial plan or to re-work your current one. We can help you evaluate your financial situation and goals for the future and ensure you are on path to a long, satisfying retirement.

*These figures are for illustrative purposes and are not indicative of any particular investments. The quoted 8% hypothetical return may be higher than you should expect for a diversified portfolio of stocks and bonds. A 6-7% annual return may be a more reasonable presumption.

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

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