Reclaim Your Wealth in 2008
|December 8, 2008||Posted by Roshawn Watson under Uncategorized|
This year’s market crash has eliminated $3 trillion dollars worth of retirement savings. Foreclosures rates have hit record-breaking levels, up 76% this third quarter alone. Just last month, over a half-million jobs vanquished, which represents the “worst mass layoffs in over a third of a century.” Finally, the National Bureau of Economic Research (a.k.a. the Bureau of the Obvious) has officially declared that the economy had been languishing in a recession since December 2007.
Image Credit: TW Collins
To say that the economy has suffered some detrimental blows recently would be a gross understatement. Some fear “the nation (has) hurtled toward what could be the hardest hard times since the Great Depression.” Nonetheless, there are some things you can do to position yourself to build wealth even in today’s markets.
A pressing concern amongst consumers is retirement, and rightfully so. One of the best ways to make sure that your portfolio can recover from huge losses is working a little pass your planned retirement date.
By the time one retires, he or she hopefully will have multiple sources of retirement income, and many of them could benefit from some fattening (i.e. by working a little longer). For example, social security and investment returns can rise as much as 6.4% for every extra year of work according to the Wall Street Journal.
Perhaps even more important is that while you are working you can save more. I have mentioned previously that I am a fan of Roth 401Ks, which about 22% of companies offer. Currently, they allow you contribute up to $15,500 a year ($20,500 if you’re over 50) in addition to whatever you’re putting into your IRA or normal 401(k).
Unfortunately, for those who have already retired, the undesirable solution is to reduce annual withdrawals (4% of the remaining portfolio balance instead of the initial balance), to work part-time (if benefits are not needed), or to work full-time. Of course, if a retiree’s portfolio has not suffered very badly or he or she is well into retirement, these adjustments may not be necessary.
As painful as it may sound right now, history has repeatedly shown that the best way to rebuild portfolios is to stay in the stock market. In fact, if you are in a position to buy, this appears to be one of the biggest buying opportunities of the last decade if not century. The oracle himself (Warren Buffet) even suggests it.
It also appears like a great time to sell those losers. Of course, this means (1) accepting the fact that buying the stock/fund was an error in the first place and (2) that you may repeat the same mistake again. However, by selling the poor performers, you will limit your tax liability and free up the remaining cash to buy some winners.
The plummeting real estate market has also been extremely stressful for many. Home prices have been dropping faster than during the great depression. Also, at least 40% of homeowners are financially overextended, meaning their PITI exceeds 28%.
Spending is another area to watch because businesses are increasingly willing to slash prices and negotiate. Many times, all one has to do is ask. Controlling your outflow is nearly as important as increasing your income (i.e. earned and passive).
Remember that prices are declining because stores are trying to chase those dollars as consumers tighten their collective belts. By knowing what competitors charge, timing your purchases, and having cash on hand, you can get some phenomenal deals. Although there has not been an official pronouncement of deflation, the widespread deleveraging, job layoffs, stock and real estate price declines do suggest that deflation is a possibility. Remember, during periods of deflation, cash is king!
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.