Since early 2000, financial markets have struggled with economic recession, terrorist attacks, war and corporate accounting scandals. The stock market fell about 40% in the 3 years ended February 2003 in one of the deepest and longest bear markets ever!
Since February 2003, the stock market has risen sharply. Even though the U.S. economy appears to be improving, many investors are still skittish about the stock market.
But what does this mean for your retirement savings? It means it's time to take a realistic view of where you are and where you want to go. Here are some guidelines that apply to most investment situations.
- Stay the course. Now is not the time to make drastic changes in your investment portfolio - such as converting all your stocks to cash, or the opposite, investing only in stocks. It is the time to concentrate on financial planning.
- Make a plan, or update your current plan. Use the FRS to plan your future! Take advantage of the free resources available through the FRS to find out how much you'll need for retirement, and how your FRS retirement benefits, Social Security and outside savings can work together to give you the retirement lifestyle you want.
- Reexamine your goals, assumptions and expectations You may need to adjust some of them, keeping in mind that everyone's situation is different. Consider:
- Investment returns: Many financial experts expect common stocks to return about 7-9%, and bonds to return about 5-7%, over the long term.
- Personal savings rate: Most financial experts feel you need to save 8-10% or more of your income towards retirement. Most families only save about 2% of their income.
- Retirement age: More and more people are retiring later in life. When do you expect to collect Social Security?
- Diversify your portfolio. A diversified portfolio of stocks, bonds, TIPS and cash can help smooth out the market's ups and downs. In recent years, bonds, TIPS and cash outperformed a portfolio of only stock funds. With a diversified portfolio, over long periods of time, you have a better chance of ending up with more "winners" when you actually need the money.
- Risk is necessary. You need to take some risk to achieve long-term growth. Remember you want your retirement savings to at least keep pace with inflation. Over the long-term, stocks have handily outpaced bonds (particularly considering the effects of inflation).
- Rebalance and strengthen your portfolio. Financial experts say that 90% of your investment success comes from getting the right mix of investments, or asset allocation, in your savings. It's easy for your asset allocation to drift away from your target, for reasons such as the recent stock market declines. You may need to make adjustments, and be sure to:
- Include an appropriate amount of stocks or stock funds in your portfolio mix. Over the long term, stocks provide higher returns than bonds or cash, although they involve greater risk as well.
- Consider investing in balanced funds. A balanced fund can offer a simple and inexpensive way for you to follow a long-term investment strategy, because the fund rebalances itself over time. This can be very useful if you're not comfortable about selecting investment funds, or if you don't have a detailed plan with a target allocation mix.
- Make sure you're making appropriate investment fund choices - look for low fees and good long-term results with acceptable risk.
- Take advantage of tax-deferred savings opportunities in your personal savings plan. Recent tax law changes allow you to put away more money in Individual Retirement Accounts (IRAs) and other qualified plans such as 457, 403(b) and 401(k) plans, if your employer offers such a plan.
- Believe in the future — and in yourself. Investments in stocks, bonds and cash have grown over longer periods of time. Financial markets have always been volatile over short periods of time, but have rebounded from market downturns. Your challenge, like that of all investors, is to develop and follow a sound investment strategy - and have patience - to get to the financial rewards you want.
|
