Five Years Later...
On September 15, 2008, global financial services firm Lehman Brothers famously declared bankruptcy, leading to widespread panic in the financial industry. Suddenly, the U.S. economic decline, a result of the housing bubble burst in 2007, became a widespread financial crisis with repercussions across every industry and in almost every household.
Five years later, as the slow (and sometimes painful) economic recovery continues, the 2008 crash "remains very fresh in our minds,” says John Piershale, CFP, wealth advisor at Piershale Financial Group in Crystal Lake, Ill. “It wiped out a lot of net worth for a lot of folks and it has really changed the way a lot of people live.”
We Make Less Money
One of the most obvious effects of the 2008 crash is number on your paycheck or the balance in your checking account. “Real income is down,” says Emily Sanders, managing director at United Capital Financial Advisers in Atlanta, citing figures from the Economic Policy Institute. “If you’re an average worker with a college degree, your average real income has gone down.”
One reason for the decrease is that so many workers have dealt with job loss and long periods of unemployment during the past five years, and we continue to live in a world where “the possibility of job loss is a stark reality,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial. While the U.S. jobless rate fell to 7.4 percent in July 2013, according to the U.S. Labor Department, 3.5 million Americans have been out of work for more than a year.
Gallegos recommends staying on good terms with former employers, building relationships and goodwill with industry contacts now (in case you need a job later), and sticking to a simple monthly budget that sets aside some of each check for savings.
It’s Tougher to Get a Mortgage
In the high-flying days before 2008, it was easy and quick to obtain a mortgage, even if you had some credit issues or no money for a down payment. But the widespread mortgage loans to high-risk borrowers were a significant factor leading to the crash, so things have changed. As a result, “regulators got a lot stricter about how they would loan money, so now it is a long process to get a mortgage,” Piershale says.
With the new criteria for obtaining a loan, “more people are buying homes they truly can afford,” Gallegos says. He recommends getting pre-approved for a mortgage loan with a lender. But also do your own math to be sure of what you can really afford, as a lender still might pre-approve you for more than you are comfortable paying. Don’t forget to consider homeowner association dues, property taxes, insurance, maintenance and utilities when calculating your home-buying budget. Gallegos also advises caution when considering an adjustable-rate mortgage because rates can increase rapidly.
Saving For Retirement Isn’t As Easy
Prior to the 2008 crisis, many financial planners expected that company-sponsored 401(k) plans, which frequently included generous employer matching benefits, would offer a reliable safety net for many Americans. But that assumption is less likely now. “During the crisis, many employers cut the amount of their 401(k) matches, or stopped matching funds altogether,” Sanders says. “Those matches have only slowly been reinstated and many have not been restored to pre-crash levels. Without those matching funds from employers, it’s more difficult for many individuals to save for retirement.”
Employees aren’t just missing those 401(k) matching funds; many simply no longer have access to 401(k) plans. According to a 2013 survey by American Investment Planners, LLC, the number of 401(k) plans offered today is 9 percent lower than in 2009. Immediately following the crash, an estimated 31,000 plans were terminated in 2009 and another 15,000 in 2010. Yikes.
That puts the burden on us to make sure we have enough retirement savings. Piershale is advising clients to revise their retirement calculations accordingly, and to consider working longer, cutting back on expenses and maxing out their personal contributions to IRAs. (For 2013, you can save up to $5,500 in your IRA, or $6,500 if you’re 50 and over.)
Low-risk Investments Don’t Pay Off
In 2006 and 2007, conservative investors could expect to make 6 to 7 percent on long-term CDs, says Derek Gabrielsen, wealth advisor with Strategic Wealth Partners in Seven Hills, Ohio. Today, those investors are lucky to get 2 percent returns. Similarly, traditional savings accounts have average interest rates less than 1 percent.
“To get the same returns [as before 2008], investors have to invest in higher risk vehicles,” Gabrielsen says. “When people see that they can’t keep up and can’t reach their goals with the low-risk vehicles, they are usually willing to explore some alternatives.”
While bonds are traditionally the next step up the risk ladder, the bond market has taken a hit in recent months. And as interest rates rise, bond prices will continue to fall, Gabrielsen says.
Even if you have little tolerance for risk, Gabrielsen recommends moving into the stock market to continue reaching your investment goals. While many investors sustained huge losses in 2008, the stock market has generally had good returns over the long run. ETFs and mutual funds that track major indices or represent baskets of stocks are often a good place to start.
Home Equity Stays in the Home
Before the crash, many people viewed their homes as an ATM, Gallegos says. “Prior to what is now known as the ‘subprime mortgage market meltdown,’ home equity loans were very popular. In a rising home market, most homeowners had some equity in their home. Many of them borrowed on that equity to pay bills, take vacations or refinance debt.”
In the past five years, housing markets throughout the United States have dropped. As a result, for most people, “it is smart to hang on to any equity for major home repairs, or best of all, an investment in the future,” Gallegos says. “If they must tap into equity in order to stay on top of their debt, it is likely that they have too much debt.” Bottom line: Don’t do it.
Attitudes Have Changed
Not all changes are bad. After weathering the economic environment of the past five years, more Americans realize the importance of saving, having an emergency fund and relying less on credit cards than before the crisis. “It can be easy to get comfortable as the economy improves,” says Gallegos. “But more people realize that no job is absolutely secure and no revenue source is without risk.”
Americans are also more conscious of the importance of their credit scores, which help determine the interest rate people will get on loans, whether they’ll get a loan at all and can impact everything from auto insurance rates to whether they’ll get an apartment or even a job, Gallegos says. To improve those scores, make sure to pay bills on time and keep debt low, limiting charges to 35 percent or less of available credit.