AARP Bulletin - December 2011

Your Money ; Financially Speaking
Prepare for the future by following your budget, not your dreams
A Plan Beats a Panic Every Time By Jane Bryant Quinn

An AARP editor asked me recently, “At what point do we say to people: ‘OK, you can panic now.’ When will our financial
advice—to stay the course—have to change?”
To which my response is: Advice from invest-
ment advisers has changed
already. They’ve grown more
conservative. When they say
stay the course, they’re talk-
ing about the new course. That
means a laser focus on match-
ing your expenses to income
and savings, with investment
considerations second.

You cannot outsmart the future. Stocks usually rise in a presidential election year, but that’s no guarantee. Some economists—including those at the respected Economic Cycle Research Institute— forecast a new recession in 2012, which could cut off the stock market at the knees. Doomsday prophets foresee hyperinflation, yet slack economies kill inflation and hold down interest rates, as we’ve recently seen. Europe might, or might not, prevent defaults.

income for every other age group fell. Only 9 percent of people 65-plus lived in poverty in 2010, compared with 13. 7 percent for those 18 to 64.

Careful budgeting pays. A study led by MIT economist James Poterba found that only 18

Consider selling your home and buying or renting an apartment to slash your housing expenses. Buyers will show up if you knock enough money off the price. Fiserv, which tracks the real estate market, thinks that prices will stabilize by the end of 2012, although that depends on where you live and whether the economy grows. Again, you can’t predict. Your living arrangements should follow your budget and needs, not your dream of a better price next year.

A panic response? No one should invest based on predictions. Preparing for 2012 (and ’ 13 and ’ 14) does indeed demand a panic response—but not of the investing kind. The panics we think about, when stock markets fall, could be titled “Omigod, sell everything.” The more critical wake-up call, especially for people still working or younger retirees, is “Omigod, I’m not saving enough” or “Omigod, my expenses are too high.” Those are the action items that matter most.

The story varies, depending on your age and
work status. If you’re at least 65 and fully retired,
you may be in decent shape. You’ve already faced
the need to balance your expenses with your re-
duced, post-paycheck income. Social Security
benefits will rise 3. 6 percent in 2012, and infla-
tion-linked pensions will rise, too. Between 2007
and 2010, median household income for people
65 and up increased by 5. 5 percent a year, while
percent of people with retirement ac- counts draw out money in any year be-
tween ages 60 and 69. They’re covering
their expenses with other resources and
letting savings build.

Time of transition So planning is critical. The sooner workers pare expenses and repay debt, the easier the transition to retirement (or semiretirement) will be. Think ahead to where you might find part-time work if a 2012 recession takes more full-time jobs away. Belonging to community and volunteer groups gives you a valuable network to tap.

Sticking with stocks As for investing, people with long-term savings shouldn’t give up on stocks. True, for more than a decade major U.S. stocks have zigzagged up and down with no net gain in price. But if you’re in blue-chip mutual funds—and reinvesting dividends—you’re probably making money anyway. With dividends, stocks have returned an average 5. 2 percent a year for the past 15 years, according to investment research firm Ibbotson Associates.

The new, conservative advice concerns how much to have in stocks during the critical five years before you’ll need your savings to live on.

Some financial planners think you should dial back to as little as 20 to 30 percent, with the rest in high-quality bonds or bond mutual funds, including Treasuries.

For income, dividend-focused stocks and mutual funds continued to do better in 2011 than the market in general. But the future is unforeseeable. Charting a careful course beats a panic every time. ;