The real estate crash, stock market tailspin and subsequent recession sent the average American’s investment portfolio into a deep decline. Those nearing retirement age were forced to reconsider their options after watching their savings dissipate, and financial experts were left to wonder: How did we get here?

Explanations for the economic meltdown (rampant consumerism, predatory lending practices, mass deregulation of the financial industry) have dominated headlines since the nation’s businesses began falling victim to the winds of change, but few have analyzed what Americans can do to rebuild their futures.

According to the Employee Benefit Research Institute’s 2009 Retirement Confidence Survey, 89 percent of workers surveyed said they planned to postpone their retirement in order to increase financial security, and 72 percent said they intended to work even after retiring.

Personal finance gurus are advocating various methods to make planning for the future more feasible in today’s economic climate, and the unifying thread is conservation.™

The Three-Pronged Approach

If debt contributed to the global economic crisis, then financial experts think cutting down debt and shoring up savings could be the key to balancing the markets. For those looking to plan ahead in their own lives, this means using three tools to take control of their personal finances: paying off debts, building up an emergency fund and saving for retirement.

While some big names in personal finance advise paying debts down before socking away money for retirement, Jagdish Mehta, professor of finance at the University of Nevada-Las Vegas, said he thinks the three-pronged approach is necessary to successfully plan for the future.

“In today’s society, if you say, ‘I will not start investing until after I pay off my debt,’ it will happen after you die,” said Mehta, who teaches courses on personal finance and investing. “It’s never going to happen. Nowadays, people just don’t have a debt-free life. Some people are trying to do all of this because of the downturn, and there is bad news everywhere, so they’re saying, ‘I’m trying to be debt-free.’ As soon as a year or two goes by, and the economy starts stabilizing and starts going up, people will forget all this. They’ll start going into debt again.

“Have three months of emergency savings; that’s good. And start investing: the smallest amount you can get away with, then build it up. Try to build an emergency fund, try to reduce your debt and try to increase your investments—all three side-by-side.”

Financial specialist Adam Kilbourn, a certified financial planner and chartered life underwriter for insurance agency Orgill/Singer & Associates, is also a proponent of the three-pronged approach, but said he thinks paying down debt is the most important step, especially for those new to the workforce.

“Credit card debt isn’t cheap,” Kilbourn said. “Taking care of the here and now, paying off immediate debts, is important. Many people want to jump right into retirement planning right away…. Look at your emergency fund, make sure you have three to six months saved up in the bank. If you don’t have an emergency fund, you’re falling back on debt.”

Evaluating Options

While there are several approaches to planning for the financial future, the one thing nearly every personal finance expert agrees upon is the need for retirement savings. There is no set date for Social Security funds to run out, but with more and more people retiring, the odds are good that future retirees will receive less and less from the government in their later years.

Social Security was established in 1937 under President Franklin D. Roosevelt’s New Deal. Social Security benefits were intended to help the elderly, disabled and unemployed, as they do now. Funds for the program have always been collected from payroll tax revenue, but originally limited what industries were eligible to receive benefits, and also excluded the majority of women and minorities. Today, coverage is universal, though politicians have worried about the program’s solvency since the 1970s.

While those who live in poverty or who have not had the opportunity to save for retirement due to unemployment or disabilities rely on Social Security benefits to subsist on as senior citizens, others will use Social Security as a supplement to their retirement income.

“Social Security will be there,” Mehta said. “The problem is it will cover a smaller and smaller percentage of your retirement need. Fifty years ago, it could’ve covered 90 percent of your retirement need. Now it’s like 50 percent or 40 percent of your retirement need. In 20 years, it will be 20 to 30 percent of your retirement need. The amount they will pay will be a lot smaller compared to your need. Modern society’s needs will keep going up.”

In order to plan for future needs, there are numerous investment and tax vehicles for retirement savings, such as a 401(k), 403(b), traditional IRA, Roth IRA and a Roth 401(k). There are several differences between each plan, many of which involve taxation, but financial experts like Mehta and Kilbourn advise workers to invest a percentage of their income in at least one of the vehicles.

For employees who work for companies that offer 401(k) plans, Kilbourn suggested maximizing the investment and also maximizing the employer match if one is offered, because it is akin to “free money.” If a company does not offer a match or an employer-sponsored retirement account, Kilbourn said an Individual Retirement Account is a viable option for workers, though its maximum investment limit per year is much lower than that of a 401(k) plan.

Mehta said that he advises students to maximize contributions to their retirement plans because most people do not save enough to live on when they retire. According to the EBRI’s 2009 Retirement Confidence Survey, 44 percent of workers said they plan to guess how much money they will need to retire. Many would probably be shocked to learn that the average middle class worker should have $750,000 to $1 million saved by retirement age, depending on income and lifestyle.

Rethinking Retirement

Though the amount needed to retire comfortably may seem out of reach for some workers, Mehta said he hopes the current recession will inspire people to be more conscientious of spending within their means and saving for the future.

“Even though I feel that 90 percent of people will forget the lessons, I hope that I am wrong,” Mehta said. “I hope that more and more people learn from this. I hope our country becomes bigger savers, like Asian countries are. I think people should save 15 to 20 percent of their income in their savings for the future. If nothing else, we learn a few lessons: spend less on a credit card, have smaller debt, become a more conservative society and learn from here.”

Those whose retirement savings were wiped out when the recession hit may have had too many risky stock allocations and not enough conservative cash allocations, Mehta said.

“If you had good retirement planning before this downturn hit, then you don’t need to change, because then you will be the right way anyway,” Mehta said. “If you didn’t do it right beforehand, now I advise you to do it right over the next year or two—correct it, reorganize it, revamp it. There’s nothing you can do about the money you lost in the last year or two, but if you have at least 10 years to retire, then you can make it up… less than 10 years to retire, you’ll have to adjust your retirement.”

For those who were close to retirement when the stock market declined, Kilbourn said he thinks they should reevaluate their positions and seek help if necessary.

“They shouldn’t feel bad,” Kilbourn said. “No one saw this happening. They should reach out and look for some help, talk to many different people and get a few different opinions. Once they’ve had a few people give them advice, then they have some choices to make. One is that their portfolio needs some reallocation.  There’s no magic bullet. My worry is that people don’t make any choice.”

Younger workers need not worry about risky stocks, because they have the opportunity to reallocate as they get closer to retirement age.

“If you’re 30 years old and contributing to a retirement plan, you should be jumping for joy right now,” Kilbourn said. “The mother of all shoe sales is going on in the stock market. Everything’s 50 percent off. If you have another 20 years to contribute, then you should be buying. If you’re getting ready to retire, this is the worst possible thing to happen to you. That’s a dichotomy right there. I don’t know what the next three to six years are going to look like for these people.”

By Caitlin McGarry

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