How to keep a limping stock market from crushing your retirement plans

by Jim Sloan

The problem with most retirement planning calculators is that, regardless of how diligently you've made investments over the years, the big money may be delayed, or never come at all. The big money that you were essentially promised when you started contributing in that 401(k) back when you were 26 requires a strong assist from the stock market in the final 10 years of your working life to meet the expectations set out by most retirement calculators.

And while that lift certainly occurred for retirees and their investments in the 1990s, the same fortunate conditions have not exactly characterized the most recent decade. What the last 10 years has taught us is that even if you did everything the way you were supposed to, your retirement may not pan out the way you had hoped.

Even if you put money into savings accounts and retirement plans at a respectable rate, invested in money market accounts and diversified your portfolio, you still need your investments to double during the final years before you accept your gold watch and retire to the lawn chair.

Why is the final part of your career the most important for retirement?

We are "unbelievably dependent on the final few years," Michael Kitces of the Pinnacle Advisory Groups in Columbia, Md., recently told The New York Times.

Dan Caplinger of The Motley Fool recently reached a similar conclusion. He said the last decade of your career is the most important period of your investing life but it's also the period when you have the most to lose. He said that the period since 2000 has been difficult for even the most patient long-term investors, noting that the S&P 500 is still well below where it started in 2000 and that returns on large-cap stock investments have been "just barely positive."

Someone who saved for 30 years and entered the 1990s with $480,000 in her portfolio didn't have much trouble doubling their money in the last 10 years to reach the magical $1 million retirement mark. But in a market that delivered only a 2 percent return--such as the one we've had the last 10 years--this would leave the retiree with just $640,000.

Take control of your retirement future

What you need to do, Caplinger and Kitces say, is to take more responsibility for the outcome. Here's how:

  • Save more and create a less volatile portfolio, Kitces says.
  • Be flexible about your retirement date.
  • Save more when times are good and cut yourself a little slack when times are tough. Caplinger says you'll find the good years outnumber the bad in the long run and you'll save more.
  • Buy actual bonds from the issuer or through a broker, Caplinger says, and hold them until maturity so you can get all your money back.

If you are younger, start building up your retirement savings account now. And start saving more than the retirement calculators suggest to put yourself in a position to enjoy the compounding that a good stock market can bring--whenever that is.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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