It's rough out there! While the latest U.S. recession —also referred to as The Great Recession—spanned from December 2007 to June 2009, many Americans are still feeling the pain from the worst economic downturn since the Great Depression. A recent study from Yale University shows the recession hit even harder in particular areas of the country, and the Federal Reserve released staggering numbers showing the wealth of the average family plunged 40% from 2007 to 2010.
Although the U.S. economy is recovering it has been a slow, cumbersome rebound, and particularly unnerving for Americans nearing retirement. Recently-named AARP financial ambassador Jean Chatzky has six smart money moves to make in this scary economy.
1. Draw a Road Map
Chatzky's first recommendation is to make a plan. Set your money goals and aspirations by asking yourself the following questions:
Where [financially] are you right now?
Where do you want to go?
How much money do you need to save regularly to get there?
"You can't be too aggressive in the amount you think you're going to earn on your money these days because it causes us to under save, which is a chronic problem in America," she warns. "So be conservative and save enough."
2. Refinance!
Interest rates are at historic lows and the Federal Reserve intends to keep it this way through at least 2014. You need to take advantage of the low rate environment, even if you're not a homeowner.
"You've got to expand beyond the mortgage," says Chatzky. "Car loans, student loans, credit cards, whatever is in your portfolio of debt, refinancing it to a lower rate is just money in your pocket."
3. Pay Down Your Debts
"[It's] very easy; highest interest rate first. That's all you have to remember because that's the best guaranteed return that you can find on your money," she states. "So pay down those highest interest rates, and then roll into the next highest interest rate when that's gone."
To get ahead on your debt repayments, Chatzky recommends paying attention to credit card balance transfer offers. If a company is offering a low or zero percent rate for a specific time period, consider taking advantage of this in order to "supercharge" your repayments by eliminating interest rate accrual.
4. Develop and Fund an "Income Ladder"
An income ladder, similar to a traditional bond ladder, is a saving and investing strategy in which you put money into fixed-income investments with different maturity dates. When the investments mature, the funds are then used as gained income.
"For people who are transitioning into retirement, what we don't want is to force them into a position where you have to sell stocks to raise cash to pay your bills. Instead, move money into safety to cover you for three to five years of expenses."
Keep doing this to protect yourself from economic volatility and continue to generate income flow. Consider a mix of CDs, fixed-rate annuities, and bonds.
5. Diversify Tax Loads
Don't assume your tax rates are going down in the future. More and more experts believe we'll all be paying higher tax rates due to our ballooning Federal deficit. This could have a big impact on your retirement savings when you're ready to use those funds. Don't kick the can down the road.
"Put some money in a Roth [IRA], pay the taxes now," advises Chatzky, "so that when you get to retirement you can choose where to withdraw depending on your tax rate."
6. Be Realistic About Life Insurance
Going against conventional wisdom, Chatzky says more Americans are finding that they cannot drop their life insurance plans once they retire. She reminds us that when a spouse dies, their pension income can drop dramatically.
"Run the numbers again, and just make sure before you drop it that you're really covered," she says.
You can check out more information from the AARP's new financial ambassador Jean Chatzky here. And of course, there's more Investing 101 on Breakout.
