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Week of 2.27.09

Retirement, Interrupted: What to Do?
By Manisha Thakor

Manisha Thakor Manisha Thakor is a financial guru and co-author of the book "On My Own Two Feet". Here she offers advice on how to plan for your retirement during these turbulent economic times. Millions of near or current retirees who have funds invested in the stock market are facing a serious conundrum as the values of their portfolios plummet just when they need to cash in.

Over the long run, the average nominal rate of return for stocks has been roughly 10 percent. But in any given year, the disparity of returns can vary wildly. You might think this 10 percent historical average was deduced by examining a series of years in which stock returns were something in the range of 0 percent to 20 percent. In reality, if you go back and look at calendar year returns for the stock market (as measured by the S&P 500) what you will find is that in over two-thirds of the years stocks were either up by more than 20 percent or generated negative returns. In other words, this financial river runs all over the place. Put together a succession of years with negative returns while nearing the end of a career or in the early stages of retirement and you have the classic recipe for... retirement, interrupted.

Millions of Americans are fighting the urge to dry-heave upon opening up their 401k or IRA statements. It's a natural, understandable response. The key to getting your retirement back on track and reinvigorated will depend upon a variety of factors - most importantly your age and risk tolerance. The most important rule of thumb, however, is that the stock market is not a checking account.

Have a question about saving for your retirement? Email us. Manisha will answer selected questions online next week.
Historically, investors have received outsized returns in stocks (relative to other investment alternatives like bonds, real estate, or cash) because of the additional risk incurred when investing in stocks. Key takeaway: When you invest in stocks, there is no guarantee that when you need the money, your stocks will be up in price. That's why for years financial advisors have said, "Don't put money in stocks that you know you need to spend in the next five years." That goes for everyone. If you have a particularly low sleep-well-at-night factor, you might consider extending that range to seven (or even ten) years.

Below you will find suggestions depending upon your stage in life.

In your 20s and 30s

Congratulations. While things seem tough right now, you are actually in an incredible position. Why?? Because you are getting a chance to sock away retirement dollars while prices are low, low, low -- and you have literally decades for that money to grow and compound. Your goal should be to save at least 10 percent of your gross income for your retirement. That may seem like a mountain right now. But let's assume you are 25 years old and you are making $40,000 a year. If you set aside 10 percent a year, every year, in a retirement account and earn the long run average nominal return of 10 percent a year - you'll have nearly $1 million tucked away in savings by the time you retire.

If you wait until you are in your mid-40s to start saving (which all too many people do) you'd have to save a whopping $35,000 a year to end up in the same place. The money you save early on is the most valuable money you'll every have -- because it has the most time to grow and compound.

In your 40s and 50s

Here it comes: You are in the financial equivalent of having woken up one day with an extra 20 pounds on your frame. The only way to get the weight off is to exercise more or eat less. The effect that the plunge in the stock market has just had on your portfolio is very similar. You have a stark choice ahead. You must earn more (by working longer than you expected) or spend less. While this may not sound like great fun, there is a silver lining. You can turbo charge the effects by doing both simultaneously.

The key for you will be to avoid the natural human tendency to want to spurn stocks at all costs. No one knows what the future holds for the market. The best anyone can say with certainty is that historically markets have displayed a remarkable tendency to "revert to the mean." In plain English that means when times are good, they aren't nearly as good as they seem. Conversely, when times are bad, things often are not as dire as they might appear at first blush.

To help take the emotion and guesswork out of the retirement investment process, consider using low cost target-date retirement funds, such as those offered by bankrate.com, to make sure you keep a healthy mix in your portfolio between stocks, bonds, and cash.

In your 60s, 70s, and beyond

Another rough rule of thumb for investing is that the maximum percentage you should have allocated in stocks is 100 minus your age. So if you are 70, the maximum percent of your portfolio in stocks should be 30 percent (100 - 70). If you followed this axiom, you've taken a bit of a licking, but your portfolio should keep on ticking, with the remainder in bonds and cash. If this is not your position, returning to work on a part-time basis to help augment your financial situation is also a solid strategy.

As hard as it may be, having an honest heart-to-heart with your children about what kind of financial help you might need is another important, empowering step you can take. You spent years raising your family, and there is no shame in having the circle of care complete the loop.

It would be nice if there were a magic wand that could be waved to get your retirement back on track. But the truth is that thrift, hard work, and realistic expectations are the power trio most likely to turn your situation from retirement, interrupted to retirement, reinvigorated.

More Insight from Manisha

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NOW: Credit Cards: You Asked, She Answered

Note: The answers provided by Manisha Thakor represent solely her opinion and do not represent the opinion of NOW or its producers, who bear no responsibility for them. These answers do not necessarily reflect knowledge on Thakor's part of all factors relevant either to the circumstances of the questioner, or to circumstances experienced by others in their own situations. You therefore should consult with, and solely rely on, your own professional advisors before making any material financial or legal decision rather than on the answers provided here.
 
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