Retirement Planning: Bouncing Back

For previous articles of interest on how to manage this current financial crisis, please visit our previous blog entries collected here at BlueCollarDollar.com.

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The most common question asked of me these days is when the markets will bounce back. Even with numerous issues plaguing the everyday lifestyle of the average American (debt, housing, and jobs to name just a few), the strength of the markets, in particular, that of their retirement plan, is still weighing heavily on their minds. While such focus and energy would have better used in the years prior to the current downturn, it seems to be a measure of confidence that things will get better.

But tying your mood to such fickle places as the market can be difficult at best. What we hear on the evening news and through web reports on the subject is a daily moving number, sometimes up and just as often, down. But like all measures, it depends how much on where you stand as to what you see.

To simply look at the popular Dow Jones Industrial Average (a grouping of the largest industries in the US and representative of those industries) is not enough. Although when hear those numbers, they can offer hope and despair, and lately, at the same time. Knowing that the value of the Dow is down significantly from its plus 14,000 point high last year to its recent rebound to over 8100, gives the average sideline viewer hope while at the same time, dashing that hope.

But a lot goes into the making of those numbers and the theory of how long it will take this index to get back to even. Dividends play a role in how the index performs but does not show up in the index's number. Just about every member of the Dow has cut its dividend as its share price fell. This keeps the percentage of shared profit (what shareholders get in return for holding the stock is a portion of the profit, calculated as yield and divided into the share price - a $1 dividend on a $20 stock is a 5% yield). Sometimes, the drop in the DJIA does not stop the dividend payment from dropping. This increases the value of the stock even if the share is worth less - in the index.

Deflation (a decline in prices because folks aren't spending and credit is too tight to use borrowed funds to buy products) or inflation (the effect of a currency being worth less than the goods it previously purchased) can have an effect on the index but it doesn't show up in the number.

And because the Dow represents only 30 companies, it is not often indicative of the market as a whole. And because the Dow changes over time, with new companies being added while older ones are deleted from the index. One of the biggest gaffs the DJIA ever did was removing IBM, which while it was absent, performed better than the 30 in the index.

So when you hear that the market is down, don't fret. It will recover. If it does so in an historical fashion, it could take as little as four years to regain its former glory and as long as eight. But rest assured, these are simply efforts at looking back, adding in some often excluded facts and mixing it in with a little hope.

Which is why many folks who ask what they should do often here me say - do nothing but focus on fees and expenses.

Some Retirement Account Suggestions

A recent Boston Globe article offered this: "When millions of U.S. investors open their second-quarter retirement account statements soon they might be disappointed with their dividends, analysts say.

"Most investors will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June amid skyrocketing fuel prices and a slowing economy." The temptation many fear is that these individuals will begin tapping those plans, seeing the balances as better used for day-to-day living expenses rather than day-to-day expenses in the future.

You should avoid touching that 401(k), now posing more as a 201(k) after recent market turmoil for two reasons: One, if you are well away from retirement (say fifty or below) you are looking at a long time for the markets (and your savings tied to those markets) to recover.

The second reason has more to do with why. If it is for debt relief, then scale back your contribution and use the extra cash towards debt (contribute only what matches). If it is for market relief, reduce the fees in your plan and index your savings. Normally, I suggest index funds be held outside your defined contribution plans for the better tax treatment but with the markets sending mixed signals and more aggressive funds failing to offer fee relief, perhaps the switch would make the losses less painful.

These times do make pensions (defined benefit plans), those antiquated savings stabilizers (like Social Security) look awfully good. I just hope next time some politician suggests privatization, that we remember these trying times.

Where You Live; What you are Worth - Retirement Planning and Credit

Do you live in a state where housing has taken a big hit? Do you live in, near or around a place where credit has all but dried up and foreclosures have appeared like so much acne before prom night?
Have you felt immune to the downside fallout of those events because you pay your bills (and more importantly, your mortgage) on time, have little or no debt and money in the bank?

The credit crisis is about to make itself known to millions of Americans who otherwise would have felt as though all of that bad financial news was not their concern. Even folks who have pristine credit, the very ones who use at it is supposed to be used and were proud of the lending power (credit limit) these credit issuers gave them. You were a good risk.

Lately though, credit card companies are estimating, or should I say, re-estimating that risk and its worth to their bottom line. Bad loan decisions and the overall tightening credit market has forced many lenders to rethink their generosity and with that, how much money you can borrow. What was previously a five figure credit limit on home equity lines and credit cards has been reduced often by as much as 90%.

What can you do?
In most instances, nothing. If the financial institution you do business with decides that there is overwhelming risk in your ability to pay off balances, even if you have done so faithfully in the past, the credit limit can and in many cases, without warning, be reduced. Primarily, this seems to be targeted towards small business owners who rely on those credit limits for business and travel decisions. But it is finding its way into the average person’s financial lives as well.

If there is so much as a hint of financial stress in your credit score, even if you don’t live in a state with a high degree of foreclosures, you will eventually come under scrutiny. Best thing to do is maintain your credit score. Do this by paying your bills on time and by communicating with your lender. In many instances, they would like to assess their risk and remedy the situation to not only their best interest, but yours as well.

They may lower or waive any fees on the account or renegotiate the terms of the current loan. Do this by threatening to shop around. There are some better risk-situated financial institutions willing to lure business away from competitors.

The last thing you can do is reconsider the project you might be starting around the house. Determining the value of a remodel has gotten more difficult with the best changes coming from structural improvements rather than upgrades to living spaces. Exterior maintenance and things like electrical, insulation, and plumbing will be more worthwhile fix-it projects than a new kitchen or bathroom.

Small businesses might reconsider the need for certain business trips in terms of return on that investment of time. In some cases, the credit companies may be unwittingly making a business decision for you.