Debt Limits and Deficit Deal Havoc: Five common sense rules for retirement investing during uncertain times

Markets go up one day and down the next.  Along the way there are concerns about the economy, employment, housing, or the current domestic and international debt issues, and on and on.   With all the noise out there and saving strategies and options, it can be pretty confusing.  What should one do to get to through these times and get to the finish line with healthy retirement savings?

As you consider the different tools available to you including 401(k)s, IRAs, investment and saving accounts, you may be thinking, re-thinking and over-thinking what moves to make.  As you do, I suggest a common sense approach supported with sound research and historical data as a prudent starting point no matter the times when seeking answers to the following questions:

1. How much do I need to put aside for retirement?  Most experts agree that you need to save somewhere between 10-15 percent of your salary for your entire career to have a comparable income during your golden years.  The fact is we live longer, we are active longer, and as we all know, healthcare costs have consistently gone up faster than inflation.  As I mentioned last time, make sure you’ve created an emergency fund and keep high expense debt at bay so you can commit to this level of saving.
2. How much do I put in stocks vs. bonds or cash?  A general rule of thumb to start as you consider your long-term goals is using your age as a guide for how much to have in stocks versus bonds. For example, if you are 40, you’d put 60 percent in stocks and 40 percent in bonds – a 60/40 split.  If you plan to work longer or your family is known to live beyond 90, you may want to adjust accordingly.
3. When markets drop will they always recover?  Unless you believe world economies are set to stop growing and won’t come back, markets can be expected to recover. To be certain, there are no guarantees with the markets. But, let’s just say most believe in American ingenuity to create and build, which ultimately leads to growth.
4. I have money on the sideline, when should I get back in?  This question is really about market timing or just call it what it really is:  luck.  So how do we help manage the possibility of bad luck? If you’re a soothsayer and were lucky enough to pull out of the markets in good times and bought during down times, you’d have remarkably good results and probably aren’t reading this.  But most people get very worried in bad times and often get out of the markets to “cut their losses.”  Unfortunately, they tend to be significantly worse off than those that keep their money in the market through these periods.  Consider this:  those who stayed in the market through good and bad times over the 20 year period from 1988 to 2008 earned an annual return of 8.43 percent and that’s not including dividends.  In comparison, 401(k) savers that pulled out of stocks and missed the 30 best days over the last 20 years only experienced 0.59 percent annual growth. 
   
   The point is that no one knows when the big ups or downs are coming, but it generally happens over short periods of time.  We do know that historically (since 1929 before the Great Depression) stock funds have on average delivered around ten percent growth a year, bonds five percent and cash two percent.  You probably also know that the past ten years, stocks weren’t even close to the historical averages. 
   
   Here’s a plan.  Once you’ve determined how much to put in stock and bond funds, take the amount you have on the sidelines and divide by twenty-four.  Once a month, reinvest this amount back into your chosen funds over the next two years.  This way you won’t have put too much risk on timing the best or worst time to get back in, but spread the risk out.  This offers you a better opportunity to buy on average at a lower price than “going for it all” on any given day.  When the markets are down, your money will buy a greater quantity of shares. When the markets are up, your money purchases fewer shares. This is called dollar-cost averaging and helps diversify this risk.
5. I’m near retirement, what can I do to make it through the ups and downs?  No one is too worried about things during the good times.  But what if things go south?  Even if you’re over 60 years of age, having some broadly diversified stock funds in your portfolio is generally a good thing. Most people expect to live 15 to 40 more years after they retire giving them time to ride out a downturn.  Here’s an important tip.   It’s a really good idea for you to have stable, revenue generating assets beyond your investment portfolio (for example, an emergency cash reserve in a high interest savings and CD accounts) to cover at least five years.  This will help your stock holdings persevere a down market that may present itself at an inopportune time.  It may help you sleep a lot better at night too.

Hope these perspectives help put together a plan that’s right for you and sets you on course to reach your goals!