I had a chat with Dan McGinn of Newsweek yesterday about the perfect storm of retirement, falling home values, and falling stock market, and the weakening economy. One of the thoughts that entered my mind was based on a discussion I had with someone closer to retirement and that person was concerned about their retirement because the stock market was falling, their home value was falling, and the economy looked weak. While not a problem on their own, this mean that their retirement assets were dwindling in value and what looked like a solid retirement strategy (tap retirement funds and home equity as needed) was now shakier because everything was worth a little less. So, what’s one to do?
If you’re 20 years or more away from retirement, don’t worry and stay the course. It’s easy for me to say because a lot can happen in 20 years (twenty years ago was when we faced one of the worst recessions since World War 2, had the dot com boom, bust, and then resurgence… all mixed in with a sizzling hot housing market) and you probably can’t hold my feet to the fire in twenty years if I’m wrong! Either way, acting now when you have such a long time horizon would be a mistake… at the very least, wait until the pundits are whispering bubble again before cashing anything out.
If you’re a little closer, say 5 years, then you need to start planning. First, did the stock market fall significantly hurt you? If so, your asset allocation is probably out of whack. I know the asset allocation rule is 120 minus your age but that’s a rule of thumb and your thumb is probably a little shorter if the stock market buzz cut really put a damper on your plans to go snorkeling in the Caymans. What’s the solution? You shouldn’t readjust now, that would be selling at the low, but you should readjust your contributions such that you put more into bonds. Your next few years, prior to retirement, will still be solid retirement contribution years so you can get your asset allocation back in check by shifting your contributions to your more stable funds.
What else can you do? Consider retiring later or finding a way to supplement your retirement income. I know it’s not a pleasant thought but you probably won’t enjoy sitting around all day doing nothing, so it’s not as ugly a thought as you may think. You can extend your retirement, or make it richer, by working a few more years. By working, you can push off when you take Social Security to maximize your benefit and you can push off withdrawing from all your accounts – for the investor, time is the friend if you have a lot of it and the enemy if you’re short of it. Get yourself some more time and the world should correct itself.