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Dangerous days: How to avoid being eaten

Is the financial crisis threatening your retirement? We offer advice to help people at four stages of life keep their goals intact.

October 19, 2008|Martin Zimmerman | Times Staff Writer

These are the times that try men's (and women's) financial plans.

With Wall Street stumbling through its second bear market in less than a decade, government officials estimated recently that Americans' retirement accounts have lost more than $2 trillion in value in the last year. More than half the people surveyed recently by the Associated Press said they'd have to work longer than planned before they could afford to retire.

The Times asked certified financial planners Darius Gagne and David DeWolf of Quantum Wealth Management in Culver City to analyze the challenges faced by four Southern California clients in their 20s, 30s, 50s and 70s. The names have been changed, but the personal and financial details are drawn from real life.

The roster of issues facing the four households will be familiar to many Californians.

Falling housing prices are pushing more homeowners into foreclosure and robbing many families of the financial backstop that provided comfort during the last bear market, which lasted from 2000 to 2002. The credit crunch has dried up access to auto loans, credit cards and other lending -- and even shaken confidence in money-market funds and bank savings accounts, which have long been seen as safe, no-brainer investments.

Meanwhile, unemployment is rising, adding angst over job security to the blender of worries.

How do you deal with it all? With financial markets in turmoil and the economy slumping, you may need to make significant changes in your living and spending patterns to reach your savings targets. Some goals may have to be downsized, others abandoned.

Although everyone's situation is unique, a few overriding themes emerge.

* It's OK to worry, but try not to panic. If you're more than 10 years away from retirement and your savings are properly diversified, you should be able to ride this out and recover your losses when the market eventually turns around.

Even people who are closer to retirement or even in retirement probably can survive financially if their portfolios have at least 50% of their money in bonds or other fixed-income investments.

If stock losses in your 401(k) plan are keeping you up at night, don't sell and lock in losses on money you won't be seeing for 25 years. You can shift new contributions to safer investments if that will help you sleep better, but you're also in danger of missing a chance to buy stocks when they're relatively cheap.

* Don't freeze up, either. If you're 62 and made the mistake of having all your money invested in Google Inc. shares (down about 46% this year), you probably need to cash out some at a loss and move those assets into a safe haven.

If you're lucky enough to have more than $250,000 in your bank account, move some funds to another bank so you'll stay under the new limit for Federal Deposit Insurance Corp. coverage.

* Spend less, borrow less. It's more imperative than ever to live within your means and save as much as possible. If that means skipping expensive dinners, forgoing big-ticket Christmas gifts and losing the premium cable channels, so be it (they canceled "The Sopranos" anyway). Pay off credit card debt, and charge only as much as you can pay in full each month. Tap lines of credit and emergency savings only when absolutely necessary.

* Make hard choices. Expensive private colleges can provide an edge for your kids, but without serious financial aid, sending them there can put you in the poorhouse.

A good state school or even community college may be a sensible option if your savings have been battered by the downturn.

Likewise, you might "need" a new car, but there are probably several years of life -- if not prestige -- left in your 8-year-old Accord.

And now, some more specific situations:

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