Saving piggy from the bear
The booming 1990s are over and probably best forgotten. Now get your savings back on track by returning to basics. Save more. Work longer. Become a smart investor.
© St. Petersburg Times
The lingering bear market is testing the patience of even the most optimistic investors. Making regular contributions to your retirement savings feels suspiciously like throwing your money down a black hole.
"Watching the market go down every day, you wonder why you're doing it," Gerald Schuster said. But Schuster, 38, hasn't given up. The St. Petersburg fitness instructor still puts $100 a month in stock mutual funds, building his retirement savings bit by bit. As soon as he can, he intends to boost his contributions.
Financial planners say such persistence is bound to pay off in the long run. If you've got enough time and you're willing to work at it, you can patch up even the most battered retirement piggy bank.
But there's no getting around the fact that it's going to take real effort. The illusions fostered by the market's boom in the late 1990s are gone and probably best forgotten.
Retirement plans built on projections of 12 percent or even 20 percent investment returns made the process look way too easy. If you can earn those kind of returns, you don't need to save as much or work as many years. But with the market down for a third straight year, investors have lost both money and time and are being forced to re-evaluate their expectations.
"Now's a good time to do a new plan," said Phillip Behnen, a financial planner with A.G. Edwards in St. Louis. "Then even if the markets jump back up, you'll at least know what the worst-case scenario is."
How close any plan comes to predicting the eventual size of your retirement nest egg depends on how much you've already saved and how three big assumptions about the future turn out:
* how much you can save each year;
* what kind of return you can earn on your money;
* how many years you can keep working, stashing away money and letting your investments grow.
"When the return that people experience isn't what they projected, they have to adjust one of the other dials," said Greg Rosica, a certified public accountant with Ernst & Young in Tampa. The alternative is making do with less money in retirement.
For investors with money in stocks, recent returns have been decidedly miserable. One of the most popular retirement savings choices is a mutual fund designed to replicate the performance of the Standard & Poor's 500 Index. That once rewarding choice has backfired as the index has fallen 40 percent from its 2000 peak.
Now financial advisers are busy telling clients how to repair the damage to their retirement plans. Not surprisingly, their recommendations sound a lot like the old-fashioned advice they have been dispensing for years. The biggest difference is that shrinking 401(k) accounts may make more people willing to listen.
"Some people who thought they were fine investing on their own now think they need expert guidance," said Tampa financial planner Sameer Shah of Shah & Associates.
Even with guidance, some will have to postpone retirement, especially if the hoped-for date is just a few years away or if they had fantasies of retiring before 50 by cashing in their high-tech stock portfolios.
"People are truly having to reassess their situations," said Frances Doyle, a certified public accountant with Omni Tax and Financial Advisors in Tampa. "They might have to work longer, or they might have to continue working some into retirement."
Working helps two ways. It allows more time on the front end for savings to grow while reducing the withdrawals needed on the back end for retirement spending. The early-retirement years before Social Security kicks in are particularly hard on a portfolio.
But working longer is just one way to shore up a retirement plan.
"You hope you can work longer, but that's not always an option," Rosica said. "The thing you can control today is to save more by re-evaluating your lifestyle."
For some people that might mean trading down to a smaller boat or taking fewer vacations. For others it might mean brown-bagging lunches, doing their own manicures or watching movies on video instead of the big screen.
But even if scraping together extra savings would require sacrifices too painful to contemplate, the experts say it is crucial to at least keep up your regular investment program.
"They still should maximize their retirement plan at work, contributing at least up to the employer's matching percentage," planner Behnen said. "After that, they should look at doing a Roth IRA."
Contributions to a Roth are not tax deductible, but if you follow the rules, the eventual withdrawals are tax free. Regular IRAs can be converted to Roths by paying income tax on the current value of the withdrawals. That's a move some investors might want to consider since the values and the resulting tax burden are now smaller than they used to be.
New Port Richey financial planner Steve Athanassie of Trademark Capital Management warns it's a big mistake for people to get so mad at the markets that they reduce or stop their contributions to a retirement savings plan.
"They'll have higher tax bills at the end of the year," he said. "The 401(k) is the best game left in town for tax savings. Even if they just allocate their money to a fixed account or money-market account, it's important to get it in there."
Thanks to recent changes in the tax law, investors can make larger-than-ever contributions to retirement plans, including extra catchup contributions for those 50 and older.
The maximum contribution to an individual retirement account this year is $3,000 if you are under 50 and $3,500 if you are 50 or older. For 401(k) plans, the new contribution limits are $11,000 and $12,000 depending on whether you've hit the 50 mark.
Athanassie said the best way to prevent retirement plan statement shock is to focus on the number of mutual fund shares in the account rather than on the account's dollar value.
"You're always accumulating more shares at lower prices, and when that share price increases, they will come back a lot quicker," he said. "The market is inevitably going to come back up."
That hope is what motivates investors such as Gerald Schuster in St. Petersburg and Mike Callahan in Tampa.
"Everything's on sale right now, and I'm pretty confident it will rebound at some point," Schuster said.
Callahan, a 49-year-old urban planner, said he sometimes feels like sticking his head in the sand, but he keeps telling himself he's investing for the long haul.
"I have no brilliant formula," he said. "I'm just trying to be disciplined and continue doing what I'm doing in the hopes that I will see the upside one of these days."
But what should you do with your money while waiting for that upside to materialize?
Financial planners say the No. 1 lesson of the bear market is that there is no substitute for a sensible plan for diversifying your investments, a concept they call asset allocation. At the first level, that means deciding on the right mix of stocks, bonds and cash. At the second level, it means dividing each of those groups into different pots of money, such as growth stocks, value stocks, small stocks and foreign stocks.
How much money should be in any one pot depends mostly on how aggressive you want to be. If you're young and willing to take risks, you can afford to have most of your retirement savings in stocks, with higher concentrations in sectors such as small stocks and foreign stocks. One reason the bear market has been so painful is that many investors who weren't young and who couldn't afford to swallow their losses were betting almost everything they had on fast-growing companies, such as tech startups, that had great potential but equally great risk.
"The biggest mistake that most people could make at this point is to take too much risk to get back to where they were," said Ray Ferrara, a Clearwater financial planner with ProVise Management Group.
Investors who fared the worst over the past 21/2 years were those with concentrated positions in one or more stocks that tanked or in a single battered sector, particularly technology. Spreading your money around reduces risk and evens out returns because some types of investments always do better than others.
"Clients who had a good asset allocation between large cap and small cap stocks and between value and growth stocks weathered this storm much better than those who were just in large cap," said Lana Wagner, a St. Petersburg financial planner with Professional Financial Resources.
The "cap" refers to a company's market capitalization, which is the value of its outstanding shares. Large cap companies, those with outstanding shares worth $5-billion or more, were big winners during the late 1990s, while small cap companies, those with outstanding shares worth less than $1-billion, have done better during the downturn.
Financial planner Athanassie in New Port Richey said he lost clients during the stock market's heyday because the widely diversified portfolio he recommended didn't perform as well as one concentrated in high-octane stocks.
"New clients are much more open to the conversation," he said. "Recently I had a doctor come in who had lost a substantial sum who said, "Steve, I'm ready to listen.' "
One big mistake many investors made was to focus solely on growth, aiming for appreciation in share price to the neglect of income-generating investments such as bonds, certificates of deposit and high-dividend stocks. Unfortunately, the growth was all on paper. Unless investors sold their shares when the market was high, most, if not all, of their gains were wiped out.
"Everybody needs to write on their foreheads that it's the stable income that holds up a good solid portfolio," said Kimberly Overman, a financial planner with the Financial Well in Tampa. "Just owning a lot of different mutual funds isn't necessarily diversification. That's what people are learning the hard way with a market like this. Their brokers are learning it, too."
The lesson has been particularly painful if investors were taking stock market risks with money they would need to spend in two to three years. Selling shares when the market is down means locking in losses, losing any possibility of recovery.
"It's very important when you're doing your asset allocation to make sure that you've got liquidity to take care of any emergency needs," planner Wagner said. That rainy day fund "needs to be in a fixed account you can get at and not have to bail out in a bad market."
The process doesn't stop with allocating the assets. Financial planners say keeping the right mix requires rebalancing one to four times a year, depending on how actively you want to manage your money. When stocks rise, they become a larger percentage of the portfolio. Three years ago, rebalancing meant selling some stocks and transferring the money into bonds or cash. Right now it may mean selling some bonds and buying beaten-down stocks, unappealing as stocks may seem these days.
While the decline in the stock market has made investors more interested in balanced portfolios, financial advisers say many are still hanging on to outdated assumptions about how much their investments are likely to earn.
"People are becoming more realistic in their projections, but they're still not ready to go to an 8 percent level," planner Ferrara said.
Over the past 80 years, stocks returned an average of 10 to 11 percent a year, with dividends reinvested. If stock returns in the future are close to those normal levels and 20 to 40 percent of a portfolio is in lower-yielding income investments, then annual returns of 6 to 8 percent are a more likely scenario.
Tampa financial planner Douglas Hanke of Florida Financial Advisors said he uses a sobering 6 percent return when making projections for clients' retirement plans. He said that persuades clients to save more, which increases the chance they will achieve their goals. If the markets turn out to be more generous, they will have extra money to spend in retirement.
Hanke and other planners say investors shouldn't give up on stocks.
"You cannot live on money market or CD yields," Hanke said. "At some point you are going to have to get back in the market because you will have to have growth to maintain your purchasing power over time."
-- Helen Huntley can be reached at firstname.lastname@example.org or (727) 893-8230.
Back to the classics
If the stock market setback played havoc with your savings, you may not be able to retire as soon as you had hoped. But you can get your retirement dreams back on track by following some classic investment advice. Here's how:
Save more. Take advantage of increased contribution limits for individual retirement accounts and other retirement savings plans.
Work longer. Each year you stay in the workforce gives your savings one more year to grow.
Cut expenses. Learn to live on less now, and you won't need as much income when you retire.
Lower expectations. Don't count on your investments growing at double-digit annual rates.
Diversify. Split up your investments so you have some money in stocks, some in bonds and some in cash. Don't put too much money in stock or bonds of any one company -- even if you work there.
-- Helen Huntley
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