Tips for Worried Pre-Retirees

Excerpt from Safe Money in Tough Times by Jonathan Pond

December 15, 2010

We were doing all the right things to prepare for retirement, and then, in a matter of a few weeks, we lost the equivalent of the last seven years of retirement plan contributions. It’s so depressing. We’re not sure we’ll ever be able to afford to retire.

The worldwide economic meltdown has affected everyone, but none so severely as retired people (see Chapter 25) and pre-retirees—those who are within a decade or so of retirement. It’s no surprise that many pre-retirees have concluded that the combination of severe stock market losses and the prospect or reality of unemployment has seriously impeded their retirement plans. This chapter will show various ways in which a worried pre-retiree can move from despondency to renewed confidence that he can achieve the kind of retirement that he had envisioned. While your immediate concern may be recouping the losses in your retirement nest egg, there are many other considerations that will influence the kind of retirement you will enjoy. They are discussed in this chapter. There is hope!

RECOUPING INVESTMENT LOSSES
The extent of your investment losses depends largely on the percentage of your money that has been invested in stocks. How you will fare in the future will also most likely depend on how you diversify your investments. Your most likely impulse—to get out of stocks altogether—will probably turn out to be the worst way to invest for retirement in the future. While common wisdom suggests that the closer you get to retirement, the more conservatively you should invest; a more relevant consideration is how long you’re going to need the money to last. Whether you’re a year or a decade from retirement, you’ll need your retirement money to last for decades, during which time your cost of living will double, if not triple. It’s highly unlikely that retirement money that is invested solely in interest-earning securities will help you keep up with inflation throughout your retirement years unless you need to withdraw only a very low percentage from your retirement nest egg—no more than 2 to 3 percent. Most retirees need to withdraw more, and that’s why they need the long-term growth potential of stocks for at least a portion of their retirement portfolio. Part III covers the topic of investing, and the guidance given there applies just as much to preretirees as it does to people in other age groups. While on the subject of investing, resist the temptation to lower the amount of money you’re contributing to your retirement savings plans. While reducing the amount you put away during a market slump may seem to make sense, by forgoing your contributions, you’re also forgoing current and future tax benefits. If you worry that the money you add will lose value, put it into something that won’t lose value—a money market fund or stable value fund, for example. (see pdf for complete article)