Despite recent upticks, the stock market is still at the level it was about ten years ago and few investment advisors expect it to rise any faster than it's been climbing recently.
That means if you were hoping to retire on the returns you were expecting you've got a long way to go before those investments recover the losses from two bear markets and a recession in the past ten years.
Some economists have termed this the "lost decade" which sounds a lot like the great novel and film "The Lost Weekend," in which an alcoholic struggles with blackouts from a weekend of binge drinking. In fact, you could say that financially speaking, we're all emerging from a lost decade feeling somewhat dazed and confused over how to recover trillions of dollars in lost retirement savings.
After all, didn't Wall Street go on its own risk-taking binge with its extreme over-leveraging that eventually led to a credit crisis and the worst recession since the Great Depression? And now that the economy and the markets are on the road to recovery after hitting bottom, perhaps the rest of us can begin our own financial recovery process.
Let's face it, if you're five or even ten years from when you once hoped to retire, your portfolio is going to need a lot longer than that to recoup all those losses.
So what can we do?
For the answer, I went to the masters of dealing with blackouts and binges, the grand-daddy of all 12-step programs Alcoholic's Anonymous and used their model for recovery. These include simple basic actions anyone can take starting today to put themselves back on the road to financial security.
Step 1.The first step in any 12-step program is to admit there's a problem. It's time to get real and have a sobering conversation about your finances, your longevity, your health, your investments, your house and your risk tolerance. Most importantly, you need to know where your money goes and to do that you have to begin tracking expenses. Write down every expense you have for the month from your mortgage and car payments, your health care costs, food expenses, entertainment, down to your daily cup of coffee. Make a note every time you spend money and what you spent it on.
Step 2. Take this list and create a budget that helps you set priorities about what needs to be paid each month versus what's left over for discretionary spending.
Step 3.Create an emergency fund so that you are prepared for anything from a job loss and long term disability to divorce, death of a spouse or even another recession. Put away enough to cover six months of expenses just in case something keeps you from earning an income.
Step 4. Take control of your debt. Understand that not all debt is the same. Mortgages and home equity loans are still tax deductible so you may want to pay down other debt first such as credit card debt. Pay more than the minimum on credit card balances each month to retire that debt early. Curb your enthusiasm for spending money on things you don't' need and focus on spending more time with family and friends.
Step 5. Re-envision your retirement and that includes when you plan to retire, where you plan on living in retirement and what you plan on doing during that phase of your life. To do anything, involves saving for retirement. Use your workplace retirement plan or open an IRA. Many people don't think they can afford to save for retirement when they are living from check to check. But consider this. Contributions to a 401(k) plan or an IRA are often pre-tax dollars and some even include a company match. Put them together and you can start saving for retirement for a lot less than you think and in a way in which you may not even notice.
Step 6. Create a plan for the future by setting realistic goals and then figuring out how much money you will need to achieve them. Everybody needs a financial plan, but very few people actually have one. People spend more time planning for vacation than on their financial future. There are on-line calculators that can help give you an idea of how much some common goals, such as retirement, might costs and a financial advisor can help you figure out how to get there.
Step 7. Managing your valuable asset, your home. Owning a home is a great way to increase your financial security. You can use equity in your home to get a loan, to make a down payment on your next house or even create an income stream with a reverse mortgage if you want to spend your remaining years there. If you need money, you can always consider downsizing. That's what corporations do. Or you can always make improvements that will increase the home's value. So make sure you keep up its maintenance and its value.
Step 8. If you have children or grandchildren you want to save some money for college. The cost of college continues to rise each year but there are ways to prepare the expense of tuition with plans that allow tax-free growth as long as the money is used for qualified education expenses. For retirees, contributing to grandchildren's 529 plans may be a great way to transfer assets tax free.
Step 9. Be properly insured to protect all that you've achieved. Health problems, accidents or liability for someone else's accident can take a much greater financial toll than you realize. Insurance helps protect you financially and gives you peace of mind that, even if the unexpected happens, your family will be able to continue the lifestyle to which they've become accustomed.
Step 10. Invest smarter in order to build the financial security you'll need to prepare for your financial goals such as retirement or college tuition. By investing smarter, we mean that, unless you have unlimited resources, you will probably need sound investments with proper asset allocation that matches your risk tolerance. Take advantage of any tax deferred investments such as a 401(k) or an IRA. If you in or are nearing retirement it may be time to become more conservative.
Step 11. Consider long term care to cover those expenses not covered by Medicare or Medicaid. The key with long-term care is that if you wait until you need it to get coverage, it will be very expensive, and that's if you can even find a policy. The younger you are when you get long term care, the less you will pay per year. But if you start too young, you'll be paying for an unnecessarily long time before needing it. So you may want to wait until you are in or near retirement.
Step 12. Find a professional financial advisor to help navigate the often complex world of finance and investing. A trusted advisor can give you the right information and guidance based on knowledge and experience you probably don't have. Always make sure you understand how your advisor will be paid before agreeing to their services. You don't want to be surprised by a larger than expected fee or any hidden fee that might outweigh the value of the advice.
