5 Retirement Lessons Learned From the Great Recession
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5 Retirement Lessons Learned From the Great Recession

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Ten years ago, retirement dreams became nightmares. Stocks plunged as the government took over Fannie Mae and Freddie Mac, Lehman Brothers went bankrupt, and the Reserve Primary Fund suffered losses, shattering investor confidence in safe-haven money-market funds. For many, it was the most hair-raising moment in a crisis that ultimately wiped out $3.4 trillion in retirement savings.

The pain didn’t stop with the market slide. The financial crisis also meant plummeting home values, stagnating wages, a loss of job security and the start of a long era of rock-bottom interest rates that proved devastating for savers.

Although stocks have now rebounded, the job market is strong, and interest rates are on the rise, many retirees and near-retirees are still feeling the effects of the financial crisis. Fifty percent of working-age households were at risk of being unable to maintain their standard of living in retirement in 2016, up from 44% in 2007, according to the Center for Retirement Research at Boston College. A decline in housing wealth is a major reason that retirement security hasn’t returned to pre-crisis levels, says Geoffrey Sanzenbacher, the center’s associate director of research. Home values and home ownership rates, he notes, still haven’t fully recovered from the recession.

For the older workers and retirees who survived it, the crash is much more than a historical event. It’s a reminder of all their retirement-planning strengths and weaknesses. We talked to preretirees and retirees about the lessons they learned from the financial crisis and how the Great Recession shaped their current views of the market and retirement.

SEE ALSO: 14 Retirement Mistakes You'll Regret Forever

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5 Retirement Lessons Learned From the Great Recession | Slide 2 of 6

Lesson 1: Don't Time the Market

Standard & Poors 500-stock index plunged 37% in 2008, but investors who hung on for the long haul have enjoyed nearly a decade of solid gains. Source: Yahoo Finance (as of Aug. 7)

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The long-term impact on retirement portfolios depended in part on investors’ reactions to the crash. A decade later, Jeffrey Smith is still living with the consequences. Smith, 58 years old, works as a technical specialist for a telecom company, and if all had gone to plan, he’d be on the brink of retirement right now. But during the financial crisis, Smith’s IRA dropped 75%, as individual stock holdings, such as the troubled insurer American International Group, got crushed.

Even more devastating, Smith missed the market rebound that began in March 2009. He tried various trading strategies to recover his losses, but nothing worked. Then in 2012, he shifted into cash—where he stayed until last year. “I lost confidence in my broker and lost confidence in myself,” Smith says. “So there was no recovery.”

That moved the goalposts for his retirement. “After the crash, it was apparent to me I could not retire at 60, which had been my goal,” says Smith, who has a home in Nacogdoches, Tex., but spends much of his time working in Iowa. Now, he says, he thinks he can retire at 67, or perhaps a bit sooner, but he and his wife “are not going to be able to live in a big house and travel the world.”

SEE ALSO: 10 Best Stocks of the Bull Market

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5 Retirement Lessons Learned From the Great Recession | Slide 3 of 6

Lesson 2: Turn Chaos Into Opportunity

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Paul Franceus, 54 years old, sees the financial crisis as the best thing that ever happened to him financially. But it didn’t start out well at all. In October 2007, he invested the $150,000 proceeds from the sale of his Baltimore home—right at the stock market’s peak. That money “went through the whole bloodbath,” Franceus says. But he kept his cool. “I figured it would come back at some point,” he says. “I ignored the news and ignored the 60 Minutes stories of people crying about losing their retirement and kept putting money into my investments the whole time.”

The steady-eddie approach allowed Franceus to pick up stocks at bargain prices near the market’s lows. Now, the software engineer from San Francisco says he’s on track to retire as early as next year, and he has little fear of another market crash. “I feel like I have enough now that I can afford the volatility,” he says.

SEE ALSO: Test Your Bull Market IQ

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5 Retirement Lessons Learned From the Great Recession | Slide 4 of 6

Lesson 3: Build a Strong Defense

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Bill Ahlstrom, 65 years old, favors defensive, dividend-paying stocks such as food and pharmaceutical companies. Those types of holdings served him well during the financial crisis, when his portfolio lost only about 25%, while Standard & Poor’s 500-stock index dropped 57% from its 2007 peak to its 2009 low.

“You can’t wait until you retire to get defensive” with your investments, says Ahlstrom, who retired from his accounting career in 2015 and lives in South Milwaukee, Wis. “You have to do it in advance.”

Ahlstrom says he’s now “a little nervous” about another market crash, but he feels secure because his investment income is sufficient to cover his living expenses. “As long as I can live off the dividends,” he says, “market fluctuations don’t affect me.”

SEE ALSO: 25 Dividend Stocks That Analysts Love the Most

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5 Retirement Lessons Learned From the Great Recession | Slide 5 of 6

Lesson 4: In a Crisis, Cash Is King

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G.W. Potter, 77 years old, retired in 1995, and he likes to keep 18 to 24 months’ worth of spending money in the bank. That strategy became a portfolio-saver during the market downturn, because he didn’t need to sell any of his beaten-down investments to cover his living expenses. Instead, he pulled money from his cash hoard to pay the bills.

Today, Potter says he believes the market “is gonna come down.” He’s maintaining his strategy of keeping about two years’ worth of spending money in cash and carefully monitoring his portfolio withdrawals, which currently weigh in at just under 3% of his total nest egg. “My mantra is simple,” says Potter, a former chemistry teacher in Georgia. “Avoid at all costs selling low.”

SEE ALSO: 6 Ways to Build a Roth Retirement Nest Egg

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5 Retirement Lessons Learned From the Great Recession | Slide 6 of 6

Lesson 5: Create Checks and Balances

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Smith, the telecom worker who lost most of his IRA in the crash, last year reinvested in “very aggressive stocks,” he says. But this time around, he has asked his wife to help keep watch over the portfolio. She has full access to the IRA account, he says, and if she sees a stock she has qualms about, she can “sell it instantly.”

Some things haven’t changed, however. Smith still has a predilection for trading, rather than buying and holding, his stocks. And today, he says, he can buy and sell on his phone for $7 per trade, “and I can do that at 80 miles per hour on the interstate in South Dakota. I don’t even have to pull the car over.”

SEE ALSO: Best States to Retire: All 50 States Ranked for Retirement

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