Inside: Watch for Market Moves
SMART PLANNING FOR A L ASTING RETIREMENT SUMMER 2009
Signposts to Retirement worksheets at smartmoney.com can help you determine a long-term strategy.
Watching and planning for the turnaround
Consumer Views Consumers account for two-thirds of spending in the U.S. economy.1 When they stop spending, the economy slows. Recovery won’t begin until they start to spend again. To monitor the consumer pulse, many economists look at two monthly studies of consumer attitudes about current conditions and the short-term outlook:
Today’s best economic news is that the current recession will end — even if we don’t know exactly when. Based on measurements going back to 1854, the U.S. economy has fallen into recession 33 times, and 32 have ended.1 Number 33 will too.
Looking for Signs
Illustrations by Andrew Bannecker
Don’t expect a single, clear signal that a recovery is at hand. The process will be gradual. Watch the stock market, as measured by the Standard & Poor’s 500 Index.2 In past recessions it typically has rallied three to six months before the recession ended.1,3 Look for a rally that persists over weeks and months.
Leading Indicators Every month, The Conference Board publishes an index of leading indicators — 10 reports tracking activity that can signal a turnaround before the economy recovers. Watch for solid gains in this index over several months. Also
• The Conference Board Consumer Confidence Index, with reporting from 5,000 households.
look for interest rates moving steadily higher (showing that borrowing is again on the rise); increases in new factory orders and in permits to build new homes; and a drop in the number of people filing for unemployment benefits. Watch for reports of companies once again showing a profit — especially in such hard-hit industries as homebuilding and banking.4
• The Index of Consumer Expectations, part of Reuters/ University of Michigan Surveys of Consumers, with reporting from 500 households. Around third quarter 2008, both reports posted sharp declines. That’s no surprise, given the weak job and housing markets. Eventually the job market will stop constricting and the government’s economic stimulus program will get more money into consumers’ pockets. At that point, the two confidence reports are likely to turn around. In April 2009, both indexes showed increases.2
Summing Up The stock market typically rallies before the economy turns around. If you avoid investing in the stock market until you are absolutely certain the recovery has begun you could miss some potentially big gains. Read on to learn more about retirement investing with an eye on economic recovery. National Bureau of Economic Research, 2009. 2The Standard & Poor’s 500 Index is a market-capitalization-weighted index of 500 widely held securities designed to measure broad U.S. equity investment. It is not available for direct investment. Past performance is not indicative of future results. 3InvesTech, March 13, 2009. 4 The Conference Board, April 20, 2009. 1
Bureau of Economic Analysis, 2009. The Conference Board, April 20, 2009; Reuters, May 1, 2009.
Picture This Q.When it comes, what will the recovery look like? A. We won’t know for certain what shape the recovery will take until it has been underway for some time. Economists use the alphabet to describe the way past recoveries have played out. Here are the letters they use: The economy takes •Va -shaped. rapid dive and then recovers just as quickly.
-shaped. The economy •Uslumps, stays depressed for a
Retiring on the Wrong Side of Recovery
time and finally climbs back up again. W-shaped. The economy slumps, starts to recover, then slumps again. Only after this second leg down does the recovery begin and continue in earnest.
A guide for tackling shortfalls John Lennon wrote, “Life is what happens to you while you’re busy making other plans.” Most people’s plans involve saving for retirement. What life delivered is the worst recession in 80 years, in terms of how long it has continued.1 Chances are, the slump took a bite out of your savings. If you had planned to retire soon, you’re probably wondering what to do now. Here are three things to consider:
Work longer. Staying on the job can beef up your savings in several ways. You continue earning income for more years. And while you work, you keep making tax-deferred contributions to your employer’s retirement savings plan. Finally, while you keep working, you can afford to delay collecting Social Security. Your benefit could start at age 62, but it will be larger if you hold off until full retirement age (66 for those born in 1938 through 1959) and larger still if you delay benefits until age 70.
Contribute more. It’s more important than ever to keep contributing the maximum to your retirement plan. In 2009, you may contribute up to $16,500 to a workplace retirement savings plan such as a 401(k). But if you’re age 50 or older, you can also make a catch-up contribution of $5,500, for a total of $22,000, if your plan allows.
Pare your expectations. Balance your plans for retirement against today’s economic realities — meaning some of your plans might have to be trimmed. Think in terms of postponing, scaling back and shifting priorities to get your plans in line with what you can now afford.
Q.What can we say about the current recession? A. So far, it looks decidedly U-shaped. It began in December 2007 and there’s no conclusive evidence of recovery visible as of yet. That makes it the longest economic slump since the Great Depression.1
Q.When have we had a W-shaped recovery? A. We’ve had several. The Great Depression had a W-shaped recovery, since it consisted of two separate recessions. The first ran from 1929 to 1933, the second from 1937 to 1938. The economy also traced a W at the start of the 1980s, with one slump from January to July 1980 and a second from July 1981 to November 1982.1 1
National Bureau of Economic Research, 2009.
National Bureau of Economic Research, 2009.
Stick With Your Strategy
When the Bear Becomes a Bull Be there for potential gains Trying to out-guess the market — thinking you know which way the stock market is about to move and buying or selling accordingly — is called “market timing.” There’s no evidence anyone can time the market with precision.
No Time for Timing Timing requires you to make two calls absolutely correctly: 1) You must sell when the market is high but likely to head lower. 2) You must buy when the market is low but likely to head higher.
You risk getting it wrong both times. Instead of selling at the top, you’re likely to sell only after prices have declined sharply. Instead of buying at the bottom, you’re likely to wait for absolute proof that the bull market has returned before purchasing more shares. In fact, many of the market’s sharpest gains come very early in a bull market. If you’re one of the many investors who moved all your money from stocks to cash, you must now consider if that is still where you want your money to be.
Forget timing. A better alternative is a well-thought-out asset allocation, based on your investment objectives, time horizon and risk tolerance. Stick with the mix of stock and bond funds and cash you decided on, making changes only as you draw closer to retirement and want to tame your risk. A reminder: Asset allocation can help you achieve diversification in your workplace retirement savings plan, but it doesn’t ensure a profit or protect against a loss in volatile markets. Past performance is no guarantee of future returns, but historically stocks have offered the best hope of beating inflation. From 1926 through 2008, stock returns beat inflation by an average 6.42% a year. The inflationadjusted performance of bonds was an average annual 2.61%. Cash earned an average 0.68% a year after inflation.1 You can lose purchasing power if your investments grow at a rate that’s less than inflation. Ibbotson® SBBI® Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation, 1926–2008. Performance measures: Stocks, S&P 500 Index; Bonds, LongTerm Government Bonds; Cash, 30-Day Treasury Bills; Inflation, Consumer Price Index for All Urban Consumers. 1
Set Your Sites on Shopping Looking for ways to save money to increase your retirement-account contribution or build up your rainy-day fund? Before you shop, check online for bargains. Coupons It’s a no-brainer to Google your favorite store and “coupons” before any purchase, for both in-store and online shopping, though the real challenge is finding coupons that haven’t already expired. RetailMeNot.com, which posts 80,000 coupons for 15,000 stores, updates its site on a nearly real-time basis, and BradsDeals.com, which has about 2,400 deals, lists coupons that will expire by day’s end on its home page. Average savings: 20%, but use in addition to a price-comparison site like Shopping.com and save even more, says RetailMeNot.com cofounder Guy King.
Sales Alerts New Web sites will send an e-mail to you when your favorite items go on sale. At ShopItToMe.com, users pick from more than 500 brands and sign up for free daily, biweekly or weekly e-mails about upcoming sales for items in their size.
Adapted from “Surprising Online Bargains,” SmartMoney, The Wall Street Journal Magazine, March 2009.
Flaw-Finding Mission Does your credit report have the facts and nothing but the facts? Take a close look. “Check your credit report for errors.” That oft-cited maxim of personal finance is based in part on a landmark 2004 study by the U.S. Public Interest Research Group that showed a whopping 79% of credit reports contain mistakes. Has there been any improvement since that study? Not quite. In a random sample of reports, some consumers didn’t recognize their own reports, which contained such
doozies as a $45,000 credit line that doesn’t exist and didn’t contain a mortgage that very definitely does. The credit bureaus — Experian, Equifax and TransUnion — say these errors underscore the importance of obtaining reports and reporting the mistakes. Too true! To check your credit report — it’s free once a year from each of the three
credit bureaus — visit the Web site annualcreditreport.com. Adapted from “Mistakes Were Made,” SmartMoney, The Wall Street Journal Magazine, January 2009.
Test Your Knowledge: Economic Recovery 1. Recoveries in the stock market typically tend to begin A b efore the economy starts to recover. B o nly after the economy is clearly out of recession. c a bout the same time as the recession ends.
2. The Great Depression was a perfect example of this shape of recession and recovery:
U VW a
3. W hen the stock market is depressed, your best strategy is to a s hift your money from stock and bond funds into cash. b s tick with your chosen asset allocation despite the bear market. c h old off on making new investments until you are certain the new bull market is here to stay.
Answers: 1: A Based on past recessions, the stock market tends to recover three to six months on average before the recession ends.1,2 That is why the market, measured using the performance of the Standard & Poor’s 500 index, is one of the 10 leading indicators that are supposed to help identify turning points in the economy. 2: C The Depression of the 1930s was not one but several events. First came a recession that lasted from August 1929 to March 1933. That was followed by a recovery that lasted until May 1937. Next came a second recession that lasted until June 1938. The second upward leg of the W was a recovery that began midway through 1938 and lasted until early in 1945. 2 3: B All recessions are certain to end some day. On the other hand, the need to save for retirement and to keep your retirement savings growing faster than inflation is a lifelong constant. So your best strategy is to maintain your long-term investment strategy through market fluctuations. Investing in the stock market when stock prices are depressed means potentially valuable assets are available at what are likely to prove to be bargain prices. 1
InvesTech, March 13, 2009. 2National Bureau of Economic Research, 2009.
© 2009 SmartMoney. Prepared by Custom Solutions from SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & Company, Inc. and HearstSM Partnership. All Rights Reserved. This newsletter is for informational purposes only. Everyone should evaluate his or her personal situation before taking any action. Please consult your own advisers for legal and tax information.
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