The global financial crisis of 2007-8 knocked the value of most share portfolios down a notch or five. The share market had a fairly substantial — and rapid — decline, with the S&P/ASX 200 Index plunging from a high of 6,750 in October 2007 down to a low of 3,150 in March 2009, a more than 50% fall. Ouch.
Unless you sold at the bottom of the market, many of those losses were paper losses, but for people who invested in companies like Centro Properties, ABC Learning and Allco Finance, the losses were very real, and very permanent.
Sadly, there's no time machine that will let us go back and rebalance our portfolios before the crash. The best any of us can do right now is to assess our current situation and the resources we have at our disposal, then pick up the pieces and start rebuilding.
Regroup and recover
There are certain universal truths about investing for your retirement that hold up no matter how the market behaves — even amid a market meltdown. To be successful, you need to build and execute your retirement around:
* How much you currently have saved and can add to your savings each month.
* What long-run rate of return you're aiming to receive.
* How much money you need to live each year and how bad inflation will be.
* When you plan to retire and how long you expect to live.
Some of these items are out of your control. The global financial crisis probably shrunk your existing nest egg. Inflation will rear its ugly head no matter what you do. And while we wish you a long, healthy, and happy life, none of us knows exactly when our time will come.
But everything else is within your control — at least to some extent.
You can decide that you don't need quite as big a home in retirement as you did while raising a family. You can choose to work a few more years. Alternatively, you can choose to tuck a bit more away or try to reach for higher returns.
No Easy Answers
Of course, there are still limits and trade-offs to all the choices you can make. The longer you work, the less time you'll have to enjoy your retirement. If you sell your family home, you risk losing the memories you've built in it. And, of course, stretching too hard to get every last bit of potential return is what got the world into the global financial crisis in the first place.
There are no easy answers, but you still have choices. Making the most of your current situation may very well mean the difference between salvaging a successful retirement and being tethered to a desk for the rest of your life.
The first step in rebuilding your retirement is to figure out where you are now. Check out the value of your current share portfolio and take a good, hard look at the numbers you see. That's your starting line for your future.
After that, it's a question of balancing your priorities:
* Your time.
* Your risk tolerance.
* The amount you can realistically invest.
* What sort of retirement lifestyle you want.
From that point, salvaging your retirement becomes largely a matter of plugging your data into a retirement calculator (like this one from Vanguard Australia) to help you juggle your priorities in a way that's most appropriate to your situation.
If you don't like the first answer you get from that calculator, don't despair. Often, just a few modest changes to your assumptions can make a huge difference to your end result.
For instance, if the share market meltdown has made you want to swear off shares and invest more conservatively, you might be amazed at how much more you'll have to save to reach your goals.
The Key To A Successful Retirement
Before completely turning away from the share market, remember that those shares are more than just pieces of paper. They represent ownership stakes in companies that are often very profitable.
When you buy their shares, either directly or through a managed fund, you buy a slice of their business and their future profit stream. While the share market may gyrate in the near term, over the long haul, your shares will more or less mirror the value of the underlying business.
In the case of an index tracking fund that tracks the S&P/ASX 300, for instance, your performance will track that of the largest, most stable Australian companies, like BHP Billiton (ASX: BHP), Woolworths (ASX: WOW), Commonwealth Bank (ASX: CBA) and Newcrest Mining (ASX: NCM).
In the short term, a market panic can take everyone's retirement savings for a roller-coaster ride. Over time, the panic will subside and the strongest companies and their shares will once again thrive. If you take the opportunity to reassess and retool your plans based on that current reality, you very likely can still position yourself to reach a successful retirement.
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