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CP Investment Help Center

Salvaging Your Retirement

By Ali Jaffery

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Don't let your dream of retirement slip away from you. Do you feel like the dream of retirement is slipping away from you? Are you scared that the plans you carefully made may now be off course? If so, youíre not alone. As millions of investors grow older, they see that dangling carrot of retirement continuously moving a little further away from their reach. And millions of current retirees--who already feel vulnerable from the hit theyíve taken over the past two years--wonder how much more their portfolios can take.


You canít afford to stand still like the proverbial deer in the headlights. There are things you can do to help weather these difficult economic times.


1. Re-examine Your Risk Tolerance
Many retirees are overdue for a change to their investment policy. If you are uncomfortable with the percentage of your portfolio that is in the stock market, you may need to rethink how much risk you can take.


For example, letís say you started the year 2000 with $100,000 and an allocation of 70% stocks and 30% bonds. Today that portfolio would be worth $82,300 and the allocation would be 59% stocks and 41% bonds. If this were your portfolio, would you now be comfortable with almost 60% of your nest egg in the stock market?


Most retirees have only 35% to 40% of their portfolios in the stock market, so if your allocation is significantly higher, consider shifting toward more conservative investments. For many retirees, a more comfortable equity allocation would land in the 25% to 30% range. Although stocks are still the best choice for building wealth over the long term, studies have shown that itís very hard to recover if you deplete your nest egg in the early years of retirement.


Of course, you donít want to sell into weakness and miss out on a market rebound, or let fear guide your portfolio decisions. Try to come up with an allocation that meets your long-term needs. To rebalance your portfolio, you may have to take some painful losses (or perhaps even worse--capital gains). But itís important to have an asset allocation that you can live with. If your allocation is appropriate for your risk tolerance, youíll be better able to ride out the volatility of the stock market.


2. Rerun Your Retirement Projections
If you havenít run a retirement projection in the past year, go do it. The assumptions used in your last projection may be very different from what youíd use today. Projected rates of return may be lower. Asset balances will probably be significantly different.

Iíd also recommend that you make sure you run a probability analysis as well as a cash flow projection. Even with lowered expected returns and a smaller nest egg, you may find a cash flow solution that doesnít have a very high probability of success.


Although you donít need to have a 100% probability of having your assets last throughout retirement, Iíd try to find a solution that does show a 75%+ probability of success. Typically these types of probability analyses (Monte Carlo is one of them) run hundreds, if not thousands, of potential scenarios. You can find probability tools for retirement distributions calculations at T. Rowe Priceís Web site or you can contact a financial planner who specializes in retirement planning. Chances are you are not going to live through the worst case every year of your retirement even if it is used in the probability analysis. To find a 100% solution, you would probably spend so little each year that youíd end up with a gigantic estate. Just as running out of money too early is not the right solution, neither is spending so little that you canít really enjoy what youíve socked away.


3. Rethink Your Cash Inflows and Outflows
When you rerun your retirement projections, you may find that you can no longer retire as soon as youíd hoped. Donít despair. Start thinking about ways you can cut expenses and boost income right now:

        Go through your recent credit card statements and your checkbook to see what expenses you can cut out and not miss. Now is a good time to tighten the belt.

        Increase the amount youíre saving.

        Know how much interest youíre paying on those credit cards and other types of debt. If possible, restructure those debt payments so that youíre paying less interest.

        Refinance your mortgage over a longer time period and/or with a lower interest rate to lower your monthly payment.

        Consider downsizing your house sooner rather than later. If your kids are grown and launched, you may not need so much space.

        Re-examine your expectations of retirement. Maybe youíd find just as much enjoyment doing simpler things that donít cost as much.


4. Reassess Your Need for Professional Help
In the 1990s, practically anybody looked liked an investment genius. Not so today. While you may have been comfortable being a do-it-yourselfer when times were good, you may find your comfort level today is much different. It may be time to consider finding a reputable financial professional to help you.


For those of you who already have a planner, has she or he taken the time to talk to you throughout this market meltdown? Even more important, has she or he listened to you and understood your concerns? If youíre feeling underserved, perhaps itís time to find a new professional.


Finding the "right" financial planner for you is no easy task. You need to find someone who is not only well-educated and experienced, but someone who can relate to you on a personal level. You also need to make sure you understand and agree with the advisorís investment philosophy. Ask about her or his track record and how she or he achieved those results.  

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