This story originally appeared in AARP: The Magazine.Want to know how hard the recession whacked us? Take a look at these newly released numbers from the Federal Reserve: From 2007 to 2010, the wealth of the average American family plunged by 40 per cent, taking it down to the levels of the early 1990s.
That’s frightening news for everyone, but particularly for people who are knocking on the door of retirement or have already edged through. How are you supposed to recover from that?
The answer: By thinking strategically. Here are six key steps to get you back on track toward financial peace of mind.
1. Develop a road map. People with financial plans are much more likely to feel prepared, even in tumultuous times. They’re more likely to feel that their dreams and goals are secure. And, oh yes, they do actually save significantly more.
That’s why Nathan Bachrach, CEO of Cincinnati-based Financial Network Group, calls this the first move. He suggests working with a fee-based financial adviser to develop a plan, but also notes you can craft one on your own as long as you use realistic assumptions.
The most important one: Plan on a conservative 6 per cent a year return on your money over the long term. Don’t assume you’ll earn the 12 per cent a year on your money that you got during the market’s heyday.
2. Consider refinancing your debts. We’re living in the lowest interest rate environment in history; you might as well cash in-and not just for your house.
Currently, 48-month loans for used cars are averaging 4.67 per cent, according to Bankrate.com. If you’re paying more than that, refinancing your loan is a simple, cheap and smart transaction. Transfer credit card debt to a zero per cent card so that you can make headway paying it down.
Bill Hardekopf, CEO of lowcards.com, suggests the Slate card from Chase, which offers zero per cent interest for 15 months, no annual fee, and no transfer fee if you transfer your balances within the first 30 days of opening the account. He also likes the Citi Simplicity Card, which offers zero per cent for 18 months. There’s a 3 per cent balance transfer fee but no annual fee.
And even if you refinanced your mortgage a year or two ago, you may want to do it again, particularly if you can lock into a 15-year fixed loan at just over 3 per cent. Just be sure you’ll be in the house long enough to recoup the costs of doing the deal. (Divide the total cost by your monthly savings — that’s the number of months you need to stay in the house to make it work.)
3. Then pay off your debts. In fact, you may have already started. The one bright spot in the Federal Reserve report is that average credit card debt fell 8 per cent from $7,300 to $7,100 in the 2007-2010 period. (Though that’s still too high.)
If you decide to transfer your balances, use the low (or zero) interest rate period that some cards offer as a window to supercharge your repayment plan. Do the same if you refinance your car loan or mortgage. Don’t extend the term of your loan or take money out. Use the interest rate break as a means to get out from under the lender’s thumb in less time.
4. Develop — and fund — an “income ladder.” One of the most frightening things about the current economy is the volatility in the markets. If you’re retired (or will be within a few years), you need to take precautions so you won’t have to sell investments to cover regular expenses when the market takes a nasty tumble.
Tennessee-based financial adviser Jim Brogan suggests doing this with an income plan and corresponding income ladder. The idea is that you figure out how much you’ll need to live on each year, then stash four to five years worth of that money in safe investments that mature in a staggered sequence to fund your expenses.
What qualifies as safe? “Any product that has a fixed term and pays a fixed rate,” he says. So: CDs, fixed-rate annuities, individual bonds or preferably a mix of those. How about cash? You have to be careful not to underestimate the long-term impact of inflation, says Brogan. “You can’t just bury the money under the mattress” and get no return from it.