Picking Up the Pieces After a Financial Mistake

I recently had a conversation with a friend nearing retirement about her financial status after the market crash. She presented some of her finance concerns, and I would like to share her story -- and some advice -- about getting back on track after flailing in the financial crisis.

Anna’s Story

Anna* has worked in retail her entire life. Anna started out brilliantly, putting 6% of her earnings into a 401(k) matched at 1.5% by her employer. She worked for this employer for 25 years and socked away a pretty hefty amount toward her retirement.

Then, at 45 years old, she cashed out of her 401(k) — taking a 20% hit, by the way — set up a $100,000 savings account and poured all of the remaining cash into her dream home. The housing market was good and looking up, so she felt secure purchasing a 6-bedroom home on a large acreage as an investment.

In the housing market crash, her lovely home retained its value, because she lived in the very steady-market Midwest. However, her hours at work dwindled, and she worked through her $100,000 savings account rather quickly. In a four-year time period, she'd burned through 2/3 of her savings to supplement her lowered income.

Alarm Bells

Therefore, when Anna started thinking about retirement (she is now 55), I heard major alarm bells. Alarm Bell #1: All of Anna’s money was tied up in a house. Alarm Bell #2: At the rate she was going, Anna only had a year or two worth of cash left to supplement her decreased wages at work. Alarm Bell #3: Selling her mega-house now would take a long time, even though she would eventually get asking price.

Ways to Get Back on the Retirement Wagon

A good next step for Anna at this point is to go back to full-time employment for a few years. If her employer can't raise her hours, she should find an additional job or a different job altogether.

Next, she should put as much money from her new job into a 401(k) as possible. Even though she doesn't have many years left to build a retirement savings, squirreling away some cash is better than having none. Plus, she has few expenses, so putting money toward savings shouldn’t be too difficult.

Speaking of few expenses, Anna should consider keeping a finance journal to record where all of her money goes. Without a mortgage, credit card or auto loan, she should not be spending an average of $30,000 per year, especially since all of her retirement funds are tied up in a house.

Finally, Anna should consider selling her mega-house -- but be wary against selling too cheaply. Houses in that price range take a long time to sell, so she needs to be patient to bring in the price that it is worth.

Through Anna, I learned that even the most intelligent planners can have financial mishaps. Anna's new goal is to set aside $750,000 for her retirement — the low end of the projected amount she will need for comfortable golden years.

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*Not her real name -- protecting identity