Start
Solving
the Problems of a Financial Crisis
Posted November 2008
Many of us heard from
our parents about the horrors of the 1930s.
Displaced families lived in tents and improvised shacks in "Hoovervilles" on
the edges of towns across America. Unemployment was
25%. People literally starved to death.
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2008 is not 1932 so do not
panic
The Great Depression
is not going to repeat now. There is a social
safety net in place and things will improve--they always
do. Even the Great Depression came to an end.
Our first suggestion,
then, is simple: do not make any panicky decisions that
might look good short term--but could prove damaging in the
long term. After all, you are going to live for many
more years after this economic crisis is over.
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So how do you make your
way through the 12 to 18 month recession that is ahead?
And how do you plan now for the long term?
To start making your way through
this, we
strongly recommend:
1. Invest in and
faithfully use a personal financial software program.
We cannot emphasize how important it is for retirees to know
precisely where they are financially and how they are spending
the income they have. "Oh," you may say,
"I know where I spend my money." But do you
really? Do you keep track of the cost of every cup
of Starbuck's coffee you buy? Or the nickels you put into
the parking meter? Do you know to the penny how much money
you spend on dining in and out each month? And how much
you spent on Christmas last year? Or at your weekly poker
game?
The point of keeping track
of every dime you spend with a software program such as Quicken
or Microsoft Money is simple: once you know where your
money is going, you can make rational decisions about where to
trim back and what your next steps should be. You
should be able to see some preliminary results within 30 days
and a more accurate picture of your everyday spending within 3
or 4 months. (And
you may be surprised by how you are actually spending your
money. We certainly were!)
You may discover that you
can weather this current financial crisis with some modest
changes--or you may decide that you need to do something
drastic, such as move to a lower cost living situation.
(For modest changes that can save you as much as a few hundred
dollars a month, please read our Nudging
the Budget suggestions.)
2. Don't obsess
over your retirement fund statement. What has happened is
ugly. It is frightening. But most of the damage has
already been done. Rather than looking at your losses,
start focusing on what you can do the improve your
situation.
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Avoid get-rich-again-quick schemes. Some
retirees are attempting to recoup their losses with
investments they think will make up their lost
money. Con artists with fast-money schemes are
on the phone every day now trying to prey on retirees'
fears. They are attempting to sell pipe-dreams that
could lead to even larger problems. They often
claim, falsely, that they work with celebrities. Or
that you can make 50% with no risk. Don't believe them.
If someone calls you with this kind of offer, hang up.
4. Selling
Off Can Be Unwise. Other retirees have tried to
sell a second home in this down real estate market--perhaps not
the wisest solution, if there are any other choices for
finding new sources of day-to-day living expenses.
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A
Real Life Retirement
62 year old Dede moved to a California mountain
town a couple of years ago. It was her first
step toward a new semi-retired life, so she rented
a home while getting established. During the
recent financial crash she lost about 35% of her
savings. A real estate mortgage investment she had
made went into foreclosure meaning further
losses. Home prices in
this town have dropped about 30%, so she is now
planning to buy a home in the hopes of being able
to "make up her losses."
Buying a retirement home while prices are low could make
sense--if her total monthly costs are lower than
her rent. But buying a home to make up
her her stock market losses is a doubtful
proposition now. The stock
market may come back before housing prices do. |
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5. Speak with a financial
advisor before you do any additional investing or
divesting. Then
take his/her advice with a grain of salt or get a second
opinion. Caution
must be your guiding principal these days. Don't
become preoccupied with return on capital, be concerned with
return of capital!
6. Go back to work part time or full time.
Read
our suggestions for working while retired. You
might find that you enjoy it! And
you can count on the fact that you will be in good
company: many retirees are returning to work or staying on
their jobs now.
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Your feedback
and comments are welcome. If you have experiences
or ideas to share, please send
feedback now.
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