The economy is taking its time to recover, but that doesn't mean you have to sit by and wait for things to get better. Now is the time for you to take control. American workers lost an average of 27% in their 401(k) in 2008. This has left people asking, "How much will I need to retire?" and "Will I have enough?" To begin to answer these questions, you should project your financial needs in retirement and understand your sources of income.
For example, if you want to maintain your current lifestyle in retirement you may need as much as 70% of your pre-retirement salary per year. When deciding what is right for you, consider factors like, is your mortgage paid off, do you have other debt, do you have a pension, how is your health, and will you be able to receive health coverage.
When determining where the money is going to come from, be realistic. Pensions are being eliminated. You are the only one looking out for you. This year, the maximum retirement benefit from Social Security for those at full retirement age is under $28,000 a year. That means any amount you need above $28,000 will have to come from your retirement account. The average 401(k) balance is $50,200, which won't last long enough when the life expectancy is 85 years for women and 82 for men.
So, what can you do? Start saving or start saving more. But be conscious of your investments. Don't try to play catch up by investing too aggressively. If you have a lot saved, you don't need to take on extra risk, and if you are way behind, you can't afford the risk.
Last week, I shared a link with tips about how to rebuild your 401k if you've incurred losses due to the stock market. This week, let's focus on how to avoid losses in the first place. The article below discusses the different emotions that can come into play when you invest and steps you can take to make the most rational investment decisions.
Don't Let Emotions Influence Investment Decisions- WSJ.com
"In the 12 months following the market's peak in October 2007, more than $1 trillion worth of stock value was lost from 401(k) and other defined-contribution plan accounts." Chances are this fact doesn't shock you. Millions of Americans have watched the value of their 401k decline, but it looks like the stock market is finally recovering and it's time to start rebuilding. So what can you do to recover your 401k losses? Check out this link for some tips: Five Ways to Fix Up Your 401(k)s
What else are you doing to rebuild your 401k? Feel free to share your thoughts with other readers by commenting on this post.
Let's talk about housing this week. This is an industry that has been hurt significantly over the last twelve months. The real estate affordability index is at a six year low, which means that home purchases are more affordable now than in 2003. This index takes into consideration the median price of homes as well as the current borrowing rate. New family home sales are one fourth of the levels that they were in 2003. One fourth! That means that there are a lot more homes on the market now than there were then or even one year ago. The median price of a home has declined almost 18% since its high in 2005.
The drastic reduction in home prices has attracted enough buyers to start working on the excessive inventory that has been weighing down the market. At the end of April, there was an estimated 10.1 months' supply of new homes for sale. Down from the 12.4 months of supply on the market in January.
Housing is critical to economic growth. Housing sales mean more jobs; more jobs mean a stronger economy. Real estate appears to be a good investment due to this severe contraction. Homes are still a good long-term investment. Now is the time to buy because of price and interest rates. Certainly the $8,000 tax credit recently approved by Congress will stimulate home sales for first-time home buyers as we lead into the summer busy season for residential real estate sales. Do we expect another housing boom? Not yet! Expect a gradual increase in activity brought on by lower prices, lower mortgage rates, and tax incentives.
If we look at the economic tea leaves for the remainder of 2009, here's what economists are generally predicting:
The worst is over! The economy is transitioning from a steep recession to recovery. Let's hope they are right on this one. Here's a break down of their projections:
- Jobs - Unemployment, currently in the 9% range, will creep up to double digits in the 10+ range. There appeared to be a leveling off of initial claims in May, which suggests that yes, people are still losing jobs, but at a slower rate than earlier this year.
- Interest rates - Possibly bad news for homeowners. Even though the Fed is committed to keeping rates low, it looks like they are going up before year end. It certainly appears that they could be up by 1% or 100 basis points.
- Home sales - the free-fall in home prices has stopped, but sales will remain slow.
- Economic growth - The economy shrunk at an annual rate of 5.7% in the first quarter of 2009. Projections are that this is the worst quarterly drop for the year. We should start to see some growth by the fourth quarter.
- The stock market - No matter how we measure the equity markets, they are all up significantly since their March 9 bottom. This is definitely a leading economic indicator.
Good news? Definitely some. We could use some, especially if you are one of the unemployed.