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Retirement Planning: What to do Now and Afterwards September 30, 2008

Posted by retirementwithaplan in retirement.
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Retirement Planning: Your Retirement Plan; Your Time Frame; Your Elected Officials

By Paul Petillo


It is a true I-told-you so moment. And although I will pass on the opportunity – I have had so many over the past eight years, but due to the economic policies of the current administration, what has happened in the past several weeks only has created panic among investors, those planning for retirement or currently retired. This is not good for anyone. Here’s how to stay focused on your retirement or investment goals and understand what your options are from this point forward.

Investor Panic

It is only right that the stock market took a 777-point nosedive as information on the House vote became news. If there is anything investors understand, it is what could happen if something isn’t done. There has not been any improvement since that vote on the selling techniques needed to calm a roiling market place. And probably, by the time you read this, the vote will have been taken, the markets will look as if they have recovered and we will soon forget about this ugly moment in investor history.

But the aftermath will linger. Outside of the US, investors are beginning to wonder about whether the debt they own, namely US Treasuries, will still be worth what they paid for it. Most of these investors, the ones who helped fuel the problems we now have – and because of the risk they sought were actually blamed by the mortgage bundlers for their actions, are what is most worrisome.

Henry Paulson has done a poor job selling the idea because he knows two things that he does not want to say into the microphone or to Congress. The first: no matter how much you dislike this shift in power to the president’s cabinet, his successor better be a really smart guy. His investment skills at vetting good investments from bad will be tested, scrutinized, criticized and ultimately held accountable for the potential profits that some have said are in store for the taxpayer.

The second topic he seems loathe to address is the warning that Congress shouldn’t consider this matter over – so don’t close that checkbook. Not just yet anyway. Each day that trickles by increases the chances that Main Street will be hurt more than they will be. Not have been; will be. We have not even begun to feel the breadth and depth of the upcoming recession.

This recession will begin to take shape in a much more tangible way as credit card debt begins to default. This will literally stop consumers, what few there seem to be outside the grocery store and the gas station, and force them to re-evaluate how they spend money, what they use that money for and whether they need to spend at all. If you think investors are panicking now, wait until payroll obligations are not met (this is usually financed with short-term overnight commercial paper) and the earnings numbers and projections begin to filter their way into the upcoming earnings season.

Retirement Planning for Those with a Ten-Year Horizon or Less

You are in deep trouble. This is not the kind of trouble that can be easily fixed. If you are currently on a fixed income and are reliant on your pension, 401(k) or individual retirement accounts to fund your day-to-day, the recovery will not be swift enough to keep you from spending the remaining balance in your portfolio.

There are several factors that could help you but these also require that Congress be as creative as they are capable of being. For instance, the tax holiday that the Republicans seem to want to attach to the bill or subsequent rescue packages should be directed at the current group of retirees. By eliminating the tax obligation on all retirement income, this would add a tangible boost to portfolios that were hurt deeply by the past several weeks.

The Pension Benefit Guarantee Corporation, the folks who insure the value of pensions could take current retirees and those about to retire n the next five years, and guarantee the full amount that the plan promised. Congress could begin to make the pension plan a much more viable alternative for companies to begin to offer their employees alongside the self-directed plans currently in place.

In the short-term though, retirees can only hope that the credit markets begin to flow. This will spur a recovery much sooner before your local taxes begin to rise (municipalities will be unable to borrow through municipal bonds because they will be unable to find underwriters) along with insurance premiums as insurers begin to evaluate the credit-worthiness of not only the businesses they insure, the average policyholder.

In the very short-term, do not act as if this will not have a long-range effect on how you live. Stop spending. Revisit your budget and consider how much it will take to scrap past this mess, which, by every indication I can see, will last better than a year.

Retirement Planning for those with more than Ten-Years to Retirement

This may sound counterintuitive, but keep your plans funded. Those plans include your self-directed plans at work along with your emergency funds at home. From a purely marketplace perspective, there will be many more up and down days in the future and no investment is better suited to achieve any kind of diversity better than the mutual funds you use. No need to restructure your portfolio now. That time has passed.

The fund managers are hoping that you do not run for the doors. This spurs a selling that is not only bad for the markets, but it also creates more selling than otherwise would be necessary to correct the markets. As the markets plunge, the last thing a fund manager wants to do is sell shares as it falls and be forced to do so not because they want to decrease a position. They do not want to see that money go to the exiting investor. In the best-case scenario, money should be pouring in.

Stop funding college. As hard as this may seem, this type of marketplace cannot support both your retirement and your child’s future. You have to think about you. If you have an extended family, you can expect some hardship to befall someone in the immediate vicinity. Are you prepared to subsidize or is the best option re-opening your doors to a family member who may have felt the downturn in a very real or tangible way. Will the kids still living under your roof ever launch? Can you afford that? Will your parents, stricken by the poor performance of their retirement funds, the fact that they may have been drawing too much or had saved too little suddenly be on your doorstep?

You may have had a napkin written budget prior to this mess, but now you need to formalize it. I have often suggested that the world’s economy will not rise to our levels but instead, we will fall to some sort of equilibrium among nations with no real economic superpower emerging. That said, could you live one a third of what you take in now? Could you do it with a house full of adults and kids?

Washington on the Move

When you vote, remember this Congressional inaction, the GOP squabbles that are attempt to distance their affiliation with the president in the hope of keeping their jobs, and the Democratic side of the aisle that had hoped this wouldn’t happen but, because they dug their heels in, for better or worse, and crafted a bill that does not simply shift power in a crisis.

This administration has fumbled every emergency it has tried to handle. Keep in mind when you vote that there is a candidate who believes that less regulation is better – still – and admits to having no economic experience worth bringing to the table. These are harsh economic times and the current leadership is clearly to blame for being leaderless.

This is a solvable problem that requires patience and fortitude.

Additional Reading:

    Retirement Planning Books and Guides

    Mutual Fund Investing Books and Guides



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