“I don’t have ten years to wait for the market to recover. I’m retiring next year!”
Sound familiar?
As the difficult market continues to evolve, the media doesn’t hesitate to make predictions about how long the path to recovery will be — which is why those on the verge of retirement end up petrified.
Once they dig down into the process of establishing true retirement goals and figuring out their choices, however, many near-retirees come to recognize that they can, in fact, wait for the market to recover.
Why is “selling low” such a temptation?
Many people on the verge of retirement are doing just that: selling their stock holdings, permanently locking in losses, and re-investing those deflated funds into fixed income at historically low rates.
Unfortunately, this very emotional reaction is the result of:
- Not properly defining retirement goals
- Buying into negative media forecasts – which are often based more in hype than reality
- Believing there is no time to wait out a market recovery
While your principal may be safe in fixed income investments, your purchasing power is not. The income from these investments simply cannot keep up with the rate of inflation at 3.6% in 2008 and 4.02% over the last 30 years.
What should your real retirement goals be?
Your true retirement time frame shouldn’t resemble the panicked quote at the beginning of this article. Unfortunately, many line up their retirement goals with the difference in time between today’s date… and their retirement date.
Instead, think of the day you retire as the day you begin achieving your goals. You want to prepare to:
- Generate income over 20 to 30 years or more
- This income must increase purchasing power each year
In other words, a wise retirement goal time frame extends decades beyond the retirement date. If you want to create an income stream that provides you with purchasing power every year, you’ll need to craft a diversified investment strategy.
A fixed income investment strategy will simply not work.
Can you really wait for the market to recover?
As I write this on February 17, 2009, the S&P 500 closed at 789.17, down from the October 9, 2007 high of 1565.17.
Suppose the market takes ten years to return to this level.
In order to make this happen, the market’s annualized return would need to be 7%, based on price alone, and not including dividends. The S&P 500 currently yields 3.20%. If you add in dividends, the total return is 10.20%.
That’s right — by waiting for the market to recover, you give yourself (and your retirement income) the chance to earn much more than any fixed income investment could over the next ten years.
Of course, market returns are not guaranteed and will vary going forward. But.
The truth is, you can and should wait for the market to recover if you are planning to retire.
By defining wise retirement goals, building a diversified portfolio — and understanding the deep impact of media “scare tactics” on your perspective — you’ll be on your way to a more comfortable, productive retirement planning process… and becoming a resilient investor.
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Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor