It’s estimated that at this point investors have lost between 30% and 45% of the value of their investments. That wipes out a lot of the last few year’s 10-20% annual gains that were seen by some in the market. These losses are beginning to make many a pre-retiree reconsider their plans for a cozy, no-worries golden years adventure.

So, What went Wrong?

What got us to this point, where the vagaries of the stock market can nearly devastate our retirement nest eggs? The move by businesses from the defined-benefit pension plans, to the market-based 401k/403b retirement arrangements.

The number of companies offering pension plans has continued to dwindle to almost nothing over the last couple of decades, replaced by employee-directed company-sponsored 401k plans. The companies have shifted the burden of responsibility from themselves to their employees. You hear a lot of good buzz that you have “more choices in where to invest” and “you can make a larger profit”, but now we’re seeing the dark side of that PR spin.

It is true that when things are good you can make more money on your own, investing in whatever you choose. The counterpoint of course is you can lose more money on your own, as well. No risk, no reward. The problem is that people are gambling with the money they are going to have to live off of when they are old and possibly can’t work anymore. That’s a dangerous thing to gamble with.

Defined pension plans fell out of favor when businesses realized how EXPENSIVE they become, as your workers become older and actually start using the pension. It was fine when the pension was this far-off cost that would be handled in 20-30 years. But when those 20-30 years passed, and businesses had to actually pony up the money, that became actual COSTS. And don’t mention the costs of administrating the pension, guaranteeing that enough money would be there for the retirees, calculating cost-of-living increases, etc.

Enter the 401k plans. Businesses loved them because it removed the burden of management and administration from them, and employees loved it (sort of) because they got to ‘play the stock market’. While the last few years’ stock markets were going up, it was fairly easy for a novice investor to eke out at least some profits, no matter what they invested in. Now with a full blown Kodiak Bear market, even the seasoned, life-long investment professionals are hard-pressed to break even with their investments. Those novice investors are like deers in a truck’s headlights; Not sure which way to go, and too scared to get out of the way. Next thing you know, BAM! 40% losses, and Bambi is limping into the government bonds ’safe zone’.

Not Out of the Woods Yet

Now, over the long-term, investors are told that stocks will always go up. Many an investment counselor can trot out pretty charts and graphs to prove that over a long enough period, the stock market has always shown an increase. That’s good if you still have 20-40 years worth of work left, but if you’re an older worker, that might not be an option you were planning on.

Workers under 40 years old – This demographic can still take the long-view of the economy and probably will be able to regain most if not all of their investment losses prior to retirement. This assumes that we don’t have a LONG recession, and things get back to stability and normality relatively soon.

Workers over 40 years old – This age group has a more serious problem. Roughly half of their investments have evaporated in less than a year. Even if you were right on track for retirement, this ‘detour’ is going to set everyone back significantly. You’ll have to plan to either work twice as hard to build up the retirement, plan to work longer before retirement, or plan to live on half the amount of income you originally calculated. None of these choices are particularly fun.

Workers over 50 years old – In this age group, things are SERIOUS. There’s not that many years left to accumulate the retirement, and with the economy the way it is now, age discrimination and downsizing threaten this group much more than others. It’s become a concern to just maintain the amounts already accrued. Risking the remaining amounts of money isn’t exactly an appealing option, seeing as how easy it is to lose it. Many in this age group may be very tempted to become risk-adverse, giving up possible gains for a guarantee against loss. But no risk, means no reward. Regaining the losses of 2008 might not be possible before retirement age, no matter what strategy is used.

What’s in the Path Ahead?

I’m going to do a bit of prognosticating now on some future effects of this massive decrease in retirement investments. I may be off, so I’ll revisit these forecasts in 20 years or so.

Less Promotions – I’m betting that many workers will opt to work longer, rather than do with less in retirement. Especially the Baby Boomers, the ones that are used to a certain ‘lifestyle’ that they’ve achieved. Since these people aren’t leaving the workforce, I’m proposing that in the next couple of decades it becomes more difficult to move up the corporate ladder. While age discrimination works against older workers in the middle and lower rungs, it works FOR older workers higher up (more experience and prestige/reputation). If no one leaves, no one can be promoted.

Permanent Adjustment to Frugal Lifestyle – Of course there’s going to be quite a few backsliders, going back to their Conspicuous Consumption roots, but I think that many out there are going to continue the (enforced) habits of frugal living. That equates in a serious on-going decline in demand in this country. And that equates to businesses having years and years of lower sales. People have been burned by a sudden downshift in the economy, and are going to remember that for quite a few years. Look to people storing away money and putting off many major (and possibly ALL) purchases.

Home Ownership Increase - This one seems counterintuitive at first, but let me explain. As the HUGE glut of houses continue to flood the market, these houses are SLOWLY being sold at near-fire sale prices. Banks are taking losses as people return the keys via ‘jingle mail’ (returning house keys to the lender via mail). Those houses aren’t going to evaporate. They are going to be priced down until someone buys them, if nothing else than to get them off the bank’s books. It may take quite a while, but anyone that wants a house at a reasonable price will be able to eventually find something before things settle down completely. The real estate speculators and banks losses are our gains.

Tighter Credit, but Lots of Credit Cards - Banks have been seen by many as the villains in this play; They are the ones that issued the bad mortgage loans. They aren’t loaning any  of the stimulus money they received from Congress. They have frozen lending almost entirely. They are the ones that created the CDO debacle, along with a myriad of other ‘derivatives’ investments that even they didn’t understand completely. Add to that mess, the recent high-profile Madoff 50 billion dollar Ponzi scheme, that has defrauded even the super-wealthy. I’m not thinking there’s a lot of love in the room.  I predict that there will be quite a few new regulations, reviewers, and a whole lot more scrutiny applied to the banking system. This in turn will continue to cause the banks to act VERY conservatively, keeping credit tight.

I expect however that consumer credit cards, while they are going to suffer too with the changes imposed on them by the Credit Card Reform Act of 2008, are going to continue to be plentiful. The reasoning is because the profitability of these consumer loans and the ease in which a bank can create them, will continue to be a significant source of revenue while other sources are drying up.

The times ahead are going to be interesting, and I’m fairly confident that we’ve seen enough upheaval to cause some permanent and/or long-lasting changes. Some things might not be so bad however. Our new financial reality is what it is, and people can get used to quite a few things when they have to.

We’ll make it. We always do.

What do you think the future will look like after this 2008 financial storm? Will you be able to retire or are you making other plans? Leave us a comment and let us know.

So what does all this doom and gloom mean?!??

It’s Time To Buy!!!

Through the magic of dollar cost averaging, there probably won’t be a better time to buy stocks for a very long time, as long as you follow a buy-and-hold mindset. Your 401k is designed to be a long-term investment vehicle, yet a huge number of people are failing the ‘gut check’ and getting out of the market.

Critical Market Factors

This investor flight is actually causing the market to go down even faster, as large investment firms are ‘forced’ to liquidate their investors holdings, usually in mutual funds, at any price. More people bail out, more stock hits the market, the prices across the board go down. Lather, rinse, repeat.

That’s one of the big reasons it’s time to start bucking the trend and buy more stocks, mutual funds, and other investments for your retirement funds. There’s no way to predict exactly when the market will bottom out, but you can still stock up on high-quality investments that can see you through the winter of your retirement, at a great discount.

Dollar Cost Averaging

Dollar cost averaging is the practice of investing on a periodic basis, using the same amount of money at each investment point. That means at some points during the year, you might buy investments at a higher price, while other times of the year you might buy the same stocks at a lower price.

This spreads the risk of a purchase at a ‘high’ point in the investments sales price over a larger timer period, or ‘averaging’ the costs. You don’t make as much buying at the lows, but you also don’t spend as much buying at the highs, when you average out the price.

For those that have already seen impressive drops in the value of their investments, but still have a long investment time frame ahead (say 10 years or more) increasing your purchases now can ‘average you out’ of the losses you’ve seen, as the stock prices recover. Even if they never recover back completely, the addition of low-priced shares into your portfolio will average out your profits and earnings more than either selling off, or hunkering down and not investing during this period.

For the new investor, now is a time of opportunity! Assuming new investors are younger, your time frame until investment can be particularly long (up to 45 years in some cases). Buying stock now and holding it could prove to be the smartest investment you could make for retirement, as the normal increase in stock over the long term have historically averaged 8-10% annually. Buying even a few investments now, and holding for decades, can add up to some serious retirement benefits.

Buy, Buy, Buy!

Now is also a good time to increase your 401k contributions, at least through the end of the year. If you’ve been making periodic contributions, but haven’t reached the $15,500 contribution limit ($20,500 for age 50 and above) you still have enough time to increase contributions a bit before the cutoff.

Choose wisely, consider stocks with strong historical records but weak short-term sales. Select investments in companies here for the long haul, and you could make quite a haul at retirement time yourself.

With the AARP estimating that 401k plans have lost between 25 and 30% of their values recently, it’s hard not to cry.

So, to cheer everyone up, I’ve come up with a list of 10 Fun Things to do With Your 401k Statements.

1. Make a Bulls-Eye – Those cool little pie charts that usually tell you how your money is divvied up into different investments, makes a great little target for darts, knives, pellet guns, and even bows and arrows. Just pin them to your favorite backstop, and pretend you’re aiming for one of the hedge fund managers that caused all this.
2. Fold it into Paper Airplanes – It seems that those same funds that have just lost a third of your retirement funds, always has the money to print the statements on better-than-average paper stock. Perfect for folding. Fold that sucker and make it soar! At least that’s one way of getting your investments soaring again.
3. Make a Halloween Mask – A couple of eyeholes, some red marker to write “I’m YOUR 401k” and you’re ready to scare the bejeezus out of people. (Admittedly this probably won’t scare the kids, but the parents will take one look at you, and shy away in fear and revulsion).
4. Make a Papier-Mâché House – This one might be helpful, because it might be as close as you get to that French chalet you were originally planning on. Remember, details are important, so make your little replica as close to your dream cottage as you can.
5. Weave into a Bullet-Proof Vest – Now that your retirement funds are greatly decreased in value, it’s possible that your life insurance pay outs are much higher than your retirement pay outs. Seems like time to take precautions from that spouse that was planning on the French chalet. Can’t be too careful.
6. Use for Cut-Out Ransom Notes – These statements usually have different fonts, sizes, and sometimes different types of print. Perfect for using as cut-outs for ransom notes when you have to turn to that fall-back career (crime). Just don’t mess up and accidentally use the mailing address.
7. Make a Hamster Bed -  Giving your statement to Benny the hamster at least recycles the paper, and gives Benny a nice home. It also keeps Benny alive as a fall-back food source for when things get really bad. While you’re at it, stock up on some sea-salt and cracked pepper as well.
8. Play Liar’s Poker – A popular game around the drinking fountain, it goes kind of like this. “I can retire in 25 YEARS.”, “Well, I can retire in 22 YEARS.” “Liar! Show me the projections!” See how low you can bluff. Maybe you can win back enough money to actually retire when you say you will.
9. Re-Gift it (to Someone You Don’t Like) – This works as an “I-hate-you” kind of gift. Carefully white-out your name, and replace it with the name of someone you dislike. Maybe that neighbor that keeps bugging you about your dog barking, or the teacher that looks at you funny during all those parent-teacher conferences (that seem to happen so often with your child).
10. Make Paper Dolls – Cut up the statement into pieces you can then fashion into little dolls. You can then play with them, and pretend they’re going on a trip around the world. You can send them to Hawaii for a few months,.. then they can go to the Maldives, then maybe to England, Tibet, Egypt, Narnia, Oz, Metropolis, Olympus,. they can g o a w akljwerkt,….

(It seems the author has suffered a slight nervous breakdown, and will not be able to complete this post. Please tune in tomorrow as we believe with sufficient psychiatric help, and strong anti-depressants, we will have another article for you. Thanks for reading!)

The main way of handling it was to juggle the increasing calls from creditors, and make sure that no one knew that they were calling. I can understand this reaction. She didn’t want anyone to know how bad things really were, in hopes that she could resolve everything without anyone finding out how close they had been to the financial abyss. The problem is, she died.

Now, enter my brother-in-law. In a time of EXTREME hardship, he also has to handle a huge burden of precariously balanced debt, that is starting to make that Jingo-esque fall into a pile of financial rubble. He’s been hit by a double whammy now of family AND financial disaster.

Not the Cause, Just a Symptom

I’m not mad at my sister-in-law for doing this. It’s a pretty normal reaction for a lot of people. It’s akin to a drinking or substance-abuse problem as well. No one wants to actually ‘admit’ they have a problem until it’s well beyond their capabilities to handle it. Financial issues are no different. First it’s a couple of missed payments, which triggers increased interest fees/rates or collections actions, then it continues to spread like a disease across your other finances as you try to fight your way free of the situation. At some point, just like with a regular illness, you need outside assistance to get better.

The problem is that unlike going to the doctor for a shot of antibiotics, getting outside help for financial issues is a very touchy and sensitive issue in our society. Being seen as unable to manage your money and support the lifestyle you’ve been living in (unsustainable as it is) is still causes a social stigma in our society.

Interestingly enough on ‘Desperate Housewives’ last night (which I DON’T watch, but just happened to catch a segment of while casually flipping through the channels. No, really. I WAS channel surfing. Fine, don’t believe me.).  Gabrielle (Eva Longoria Parker) and Carlos (Ricardo Antonio Chavira) were discussing a debacle of a party they had been to, and Gabrielle was moaning about how their lifestyle had plummeted since they had gotten married and had kids. Carlos went on to talk about the good things in their lives that had nothing to do with riches or social standing, and that many of the people in the ‘high society life’ were completely miserable. Comparatively speaking, their lives were happy, they were comfortable with their money, family, home, and each other. Rich in every sense except money.

The perception though, that you’re less than perfect for having financial problems is a rampant issue throughout our society still. People are doing STUPID things just to keep everyone thinking ‘everything’s fine, nothing to see here’. My sister-in-law, fell into the same trap.

Don’t be Stupidly Considerate

If you’re the one in charge of the bills, the LAST thing you want is to hose things up completely. You’re typically responsible for keeping the finances afloat and working at making sure the future is considered, while juggling all of the issues and problems of today. But that doesn’t mean you have to do it alone!

Bring your spouse or SO into the situation. Bite the bullet and get them involved. In most cases, you’ll probably be pleasantly surprised at how supportive they can be, once they know the complete situation. Even if that isn’t the case at first, it’s a necessary step and has to be done. It’s their lives too, and at some point they have to ’step up’ and get with the game. It’s better to do it sooner rather than later, as in my brother-in-law’s case.

First Steps to Financial Well Being

1. Find out what you owe – As with anything, you don’t know where you’re going without knowing where you’re at. Get the whole picture together and figure out how bad things really are. I some cases, things might sound worse than they actually are. In others, it might be long past time to take emergency measures. Either way, get the whole picture.
2. Bring your spouse/SO up to date – This doesn’t mean sit down and throw a balance sheet in front of their face. It means have a talk (long, and or multiple) about the finances, how they got to where they are, and what needs to be done to get back in control. Ask for ideas, take their input, but keep on message. You have to solve this together, and that means coming up with the solution together.
3. Change the lifestyle – Once you’ve got a plan in place, make the necessary lifestyle changes to get it in action. Cut out the ‘fluff’, get a second job (or third), and sell that old stuff. Whatever it takes to get your finances back under control.
4. Track your progress – Just as with any other long-term lifestyle change (dieting, quitting smoking) you have to keep at it. Make sure you periodically re-assess your progress and keep yourself on track. It won’t do any good to go through all these steps, only to stop all progress a month or two from now. Keep at it.

With times as hard as they are now, you should get others involved as soon as a problem comes up. Don’t be ‘considerate’ of other’s feelings, only to have to tell them of worse news later.

Do the considerate thing, tell them now!

Do you hide your finances from your family? Leave us a comment and tell us your story.

The first step I ever took towards getting my finances under control really had nothing to do with organizing the finances themselves. I started getting interested in information about financial matters themselves.

Knowledge is Power

Before I started a budget, got onto the debt snowball, or did any of the other things I’ve been doing to get my finances on the straight and narrow, I started reading about personal finance.

Lots of financial web sites exist around the Internet, all with differing advice on ‘how to save’, or ‘how to do a debt snowball’ or a whole myriad of other ‘how to’ finances. It seems like everyone has a differing opinion on what it takes to manage money.

Big surprise there.

If managing your money were easy, no one would be in debt except those that intended to be in debt. As it is, it’s a subject that isn’t taught in schools (or not sufficiently taught anyway). I can remember learning more about how a corporation is set up, how stocks and bonds work, and how the stock market operates, than on how to balance a checkbook, or how to shop for a major appliance without getting ripped off. The old school teaching didn’t take into account the emerging culture of ‘Buy it Now‘ mentality that was being promoted through the ’80s and ’90s.

So when I decided to turn things around, I had to re-learn how to handle finances.

Knowing is Half the Battle. (The Other Half is Doing, and the Third Half is Being Persistent)

Reading a number of sites gave me a good view on a common thread, expressed through comments, differing opinions, and straight-out contradictory blog posts.

You need to CONSCIOUSLY control your money!

It came back again and again to that point. Setting up the budget; Control where the money goes. Create a debt snowball; Control where the money goes. Eliminate credit card debt; CONTROL WHERE THE MONEY GOES.

Over and over again, this common denominator resonated out of all the messages I read. So, once I understood the TRUE requirement for managing my finances, I set out to do just that. Control them!

The First Step (of Many)

It’s true, if you don’t know where you’re at, you’ll never know where you’re going. My first step was to assess my finances in a realistic way. Get ALL the bills, assets, loans, bank account statements, and so-on, and figure out exactly what money I had, when it was coming in, and where it was going.

It was quite the sobering experience. I found that as much as I was making (and I thought I was making GOOD money at the time) I was spending 5% more each month than was coming in. Five percent doesn’t sound like much. It’s like a small hole in a big ship. But even a small hole can eventually sink a mighty ocean liner if it isn’t addressed. So, once I realized what shape I was in, I made some minor changes to my spending habits right off to eliminate that 5%, while I got a better handle on the big picture.

Having ’shut off’ the leak, I had more time to really go through the finances and get things fixed.

Take YOUR First Step

Even if you’re nervous about finances, or don’t know a THING about managing money, the problem is going to continue until you grab the bull by the horns and confront the issue. Taking a small first step is better than taking no step at all.

I challenge all you readers to take one step towards getting better control of your finances. Do a self-audit, set up a budget, open a retirement account, do SOMETHING now, rather than waiting for the future to ‘magically’ take care of itself. Odds are, it isn’t.

Time to Tag others!!

I’m going to tag Green Panda Treehouse, Prime Time Money, and My Dollar Plan next, and I encourage all the readers to write in with YOUR steps toward a better financial future.