San Francisco Deena Katz spends a good part of her day convincing people to forget the past so they might enjoy the future.
The financial adviser with Evensky, Brown & Katz in Coral Gables, Fla., uses modest investment return assumptions when crafting retirement plans. But while the numbers involved certainly have changed, in some respects they are the same pragmatic calculations investment professionals have used for years.
"Returns are a means to an end," Katz said. "What do people have to make in order to do what they want? And how can they adjust their lifestyle when things get better or worse?"
Three years into the worst bear market for stocks in a generation, and we're back to Retirement Planning 101: Save more and spend wisely. Nowadays, you can add another caveat: Assume nothing.
Until the bear market took hold, many retirement savers believed stocks would keep delivering double-digit annual gains and usher them into their golden years well before age 65. They planned futures around the Nasdaq and found comfort in the Dow.
Instead, this bear market has robbed hard-earned retirement savings and crushed spirits. Relentless stock losses and economic uncertainty reduce hopes for a comfortable retirement, leaving some investors wondering if they'll be able to retire at all.
Not to worry, financial planners say. You can still get there from here.
Maybe you have more modest retirement expectations now, but modesty has been a smart approach to personal finance as long as there have been fools and money.
People who lived through the Depression, for instance, aren't inclined to measure success by the houses and cars they amass. Now in their 70s and 80s, most don't view life as a competitive sport where the winner has the most toys.
"The good life doesn't have to be expensive," Katz said. "It doesn't have to cost a lot to live well -- if you know how to manage it. Managing your own expectations is the most important investing principle, and also the toughest."
Katz is telling clients that the next five years likely will bring 6 percent average annual gains from stocks and 3 percent from bonds, adjusted for inflation.
"Nobody likes to hear that," she said. "People are still remembering the returns of the 1990s." Back then, her retirement blueprints figured a 10 percent average return, Katz explained.
"But that doesn't mean people can't meet their goals," she adds -- nor that returns won't turn upward once again.
Among Katz's newer charges, for example, is a 54-year-old woman who owns a retail business. Because this client wanted to retire at 58, she invested aggressively in technology- and growth-oriented stock funds during the bubble. After three years of watching her net worth wither away, she cashed out in December and sought Katz's advice.
"We agreed that 58 was not a reasonable expectation for her," Katz said.
In fact, the client has become energized about nursing her now-ailing store to health. "She sees bringing her store back as a challenge, and she wants that," Katz said. "We've framed it in a positive way: 'This is a great challenge,' rather than 'Sorry, you can't do this."'
You can do this, too, but it takes sharp eyes to realign a tilting picture. And while indeed things are harder on people closer to retirement who, like Katz's client, may have gambled on high-growth stocks, it's time to stop bemoaning losses and figure out a solid plan that may not be solely about money.
If you do, then your most important question becomes not the fearful "Can I retire?" but a more hopeful "What can I do later in life?"
A small shift -- in spending, in habits, in perspective -- is all that it takes in many cases to get back on track. When Balasa creates a retirement plan, for example, he assumes a 7 percent average yearly real return from stocks -- in bull or bear markets. "That's not what we're shooting for," he explained, "but that's what we're planning with."
Through compounding, 7 percent return doubles your money every 10 years. Sounds pretty good -- now. When we were more effusive about stocks and thought in 10 percent averages, we assumed money would double every seven years. Switching those two numbers makes a huge difference in the quality of retirement life you can expect.
Or does it?
"My question to clients is 'Can you live comfortably if you get 4 percent or 5 percent return on your portfolio, after expenses and inflation?"' said Pran Tiku, a financial adviser with Peak Financial Management in Wellesley, Mass. "Can you see any reason why you would want a 7 percent or 8 percent rate of return, and if you do, are you able to handle the volatility it takes to get that?"
Another bubble-bred mistake was assuming that stock volatility was a relic of the past. Watching another hot IPO lift-off, we started to believe that riches came without risk. The stock market was a space shuttle, predictable and panoramic -- until it wasn't.
You can't give up in such situations. Instead, you gather the pieces, try to understand what went wrong, begin to reassess what's important, and, over time, move ahead.
Katz, the Florida adviser, suggests that we're entering an enlightened period where retirement as we know it will not continue, but where self-worth comes from what you know rather than what you own.
"We aren't going to have enough money to do it like our folks did," she said, "but we'll find a way to make it a positive. We are going to reposition our lives to do different things, but we won't be retired."