Bear Market Challenges Path to $1 Million Retirement Goal

WINDSOR LOCKS, Conn. -- How is the market affecting my personal finances in this wacky economy? Better than I thought it would.

When I was 18 and had my first "real job" that allowed me to invest money into a 401(k) retirement account, my financial counselor told me, "You will want to have a million dollars in the bank when you retire."

Thirty years later in 2005, my father-in-law and his sister passed away, and we came into an inheritance. Coupled with our assets, we were millionaires.

Our financial advisor asked us where we would see ourselves in a year, in five years, and what did we hope to do during our retirement? We painted a picture of living well: cable TV, annual vacations, a good working car, maintenance on the house and an occasional party or two. We told him what money and stocks we had, and he recommended that we modify our portfolio to diversify.

But here's what I didn't understand from my financial advisor when I was 18: "You will want to have a million dollars in the bank." The emphasis at the end is the important part.

Owning a property is not the same as having cash in the bank. It is not liquid, so you can't spend it. Our properties were worth about $400,000, but if we sold both houses, we would have to live somewhere and that would cost us money. Age and risk were big factors.

So we changed our lifestyle.

A few years ago our expenses ran about $3,500 a month. We were 42 and 43. Our retirement "doctor" explained we could begin collecting Social Security starting at 62, but our benefits would be reduced. If we planned to collect the full Social Security benefit (provided it was still there when we retired) the longer we waited, the more money we would receive. Born in 1965, the age for my "normal" retirement would be 72.

At our current rate, our financial math said we would need a minimum of $840,000 to live on between now and "normal" retirement. Our financial planner encouraged us to find ways to live more cheaply and save another half million dollars and then get back to him.

What a reality check that was.

We went back to work and forgot about retiring. I continued school and worked full-time. With benefits, I was earning six figures and my husband's part-time self-employment income was our fun money. With our income, we paid over $30,000 in federal income taxes.

But in December 2007, the economy started taking its dive. We watched in horror as the stock market crashed in October 2008. Fortunately, we had diversified and only lost half of what we had invested in stocks, mutual funds and a 401(k) -- about a third of our portfolio. Our cash, CDs, money market and annuity were not affected. Our house value might have tanked had we not invested a $100,000 to make it more efficient.

Now our annuity is valued at $84,000 so it hasn't fully come back to the $86,000 we paid for it -- but at least our investment is protected. Our stocks and mutual funds are back to where they were on Oct. 10, 2008, but the market is volatile, and we could be in the same or a worse position tomorrow. Interest rates on our CDs and the money market have been weak.

I have now graduated school with an MBA, but I am unemployed. My husband's construction business is having trouble finding work. Our income this year may be the equivalent, or less, of what we paid in taxes last year.

We've cut back on spending and found we can manage on about $18,000 a year. Diversifying our investments was important at our age and financial position. Reducing our costs has also been easier than we thought.