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Do You Mean I Can't Retire?!

By James G. Mentzer D’99

This article represents the personal views of the author and should not be considered either professional tax or legal advice. If you have questions concerning your own situation, please consult a personal adviser.

Mentzer

The other day a pastor called asking if he should continue to invest in his retirement plan given the shaky nature of financial markets. It’s an interesting question. People everywhere are wondering if they will need to change their plans for retirement. The jokes about 401(k) plans now only being worth 201(k) are getting stale.

The collapse of investment banks Lehman Brothers and Bear Stearns last year and the recent struggles of insurance giant AIG have left many investors shocked, scared, and confused. Historically, Wall Street has been ruled by either greed or fear. Even though market indices like the Dow Jones industrial average started to show small gains in the spring, fears continued — particularly among those hoping to retire in the next decade. What’s a person to do?

First of all, do not worry about waking up one morning and discovering that your brokerage firm has collapsed. Not only are these firms financially strong, but they operate in a very different manner from the flailing investment banks that have made headlines over the last year.

Do check, though, to make sure your investment firm is part of the Securities Investor Protection Corporation (SIPC) program. This way, even if your brokerage firm collapsed your investments would not disappear. The SIPC insures member-firms’ investment accounts up to $500,000 by replacing missing securities when possible. So while the value of your 401(k) or IRA may fluctuate with market conditions, it cannot just disappear.

At the same time, continue making regular contributions to your 401(k), 403(b), or IRA retirement program. Dollar-cost averaging means that you are buying more shares of your investments when the price is low. People who have the courage to continue investing in the stock market are the ones who will make money in the long run.

If you have not already done so, ask your financial consultant to give you some detailed projections for your financial nest egg. Retirement can be a challenging journey if you have no idea where you stand. If you prefer to do this yourself, many financial services companies offer basic retirement calculators online: fidelity.com, for example, has an easy-to-use retirement calculator.

Such projections may give you needed reassurance that you can move ahead with your retirement plans despite the current chaos on Wall Street. Or, they may suggest that postponing retirement plans for a year or two might make sense. Many pastors who had originally planned to retire in 2009 are reconsidering that decision.

Either way, do not make quick, drastic changes to your retirement portfolio. To recoup steep losses, some investors try to time the market to make the money back quickly – a major mistake. Not only is it exceedingly difficult to time the market, but if you guess wrong you will end up making a bad situation worse.

While no one knows whether we have reached “bottom” in the financial markets, most analysts believe that better times lie ahead. Now may well be the worst time to get defensive with your retirement investments. Not only will you transform “paper” losses into reality, but you run the risk of missing the market’s recovery. Do that and it could take longer than a decade to recoup your investment. If your portfolio is properly allocated, stay with what you have.

While a general rule of thumb for proper allocation is to have more aggressive investments when you are young and to be more defensive when you are older, proper allocation can vary widely for each individual. Sit down with your financial consultant to reassess your risk tolerance and return needs in the light of current market conditions.

Many who saw themselves as aggressive investors during the boom days of the ’90s are now discovering their more timid side financially. Don’t hesitate to contact your financial adviser if market turbulence is really causing you anxiety. Making some changes to your portfolio might be the wrong thing to do financially, but the right thing to do to calm your fears. Ultimately, peace of mind when it comes to your retirement plans can be worth its weight in gold.

James G. Mentzer, CLU, ChFC, has been a financial planner since 1985. He is currently director of planned giving for the United Methodist Foundation of Raleigh, N.C.