How a Financial Crisis Can Help Your Retirement

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By Joe Udo

It's been five years since the global financial crisis, and the stock market has made a remarkable recovery. The S&P 500 (^GPSC) rose 125 percent and is now at an all-time high. The bull market has been great for many of us who kept investing through the difficult years. Financial downturns can actually be good learning experiences. If we encounter a crisis early in our investing journey, we have plenty of time to recover and learn from our mistakes.

A recent study from Fidelity found that American households have made huge strides in their personal finance habits. Many investors have taken the following steps to secure their finances further:

Save more. Investors increased their retirement contributions over the last 5 years, which means they are likely to be more prepared for retirement.

Better prepare for the unexpected. Many households have reduced their personal debt over the last few years. They also started or increased their emergency fund. Unexpected events will have less of an impact on your life if you have adequate savings to cushion the blow.

Rethink risk. Many investors sold stocks during the downturn and shifted to bonds. Of course, it's difficult to know when to get back in and a lot of people missed part of that 125 percent S&P 500 gain. Investors need to examine their risk tolerance to figure out a plan they can stick with over the long term.

Many investors lost a lot of money during the financial crisis, but the long-term lessons we learned are invaluable. There will be another financial crisis in the future, and we need to apply these lessons to avoid losing even more money next time. It's much better to go through these financial crises when you are young rather than when you are getting ready to retire.

Investing opportunities during the financial crisis. For younger investors, the financial crisis was a boon. It provided an opportunity to buy stocks at bargain basement prices. Even if your portfolio lost 50 percent of its value, it is still a small amount in the grand scheme of things when you're young. %VIRTUAL-article-sponsoredlinks%Young people didn't have a huge amount of money to lose. When you're starting out, it's more important to increase your saving rate and to learn how to invest for the long term.

It's also good to go through a big correction so you can see how the stock market recovers. You can learn from this experience and be more prepared for the next downturn. The downturn was an opportunity to figure out your risk tolerance and your target asset allocation. Many investors thought they could handle a stock market drop. However, when the S&P 500 dropped 50 percent, they really couldn't handle it. If you set your risk tolerance correctly, then you should be able to stick to your asset allocation plan and ride out the down years.

Once you have a long-term plan and a good asset allocation target, you just need to stick with it and rebalance occasionally. Of course, we all change as we get older and you will need to reassess your risk tolerance every 5 years or so. Most of us will become more conservative and our portfolio needs to reflect that.

Personal finance lessons. Even if you don't follow the stock market, a personal financial crisis can be a good learning experience. If you lose a job, you will learn to cut costs and keep some emergency funds for the future. If you lose a house to foreclosure, then you will know not to buy too much house next time. Losing a well-paying job can be difficult, but you will learn how to live a moderate lifestyle and avoid overspending. These financial setbacks can be tough, but if you have an open mind you will learn from your experience.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

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7 Most-Missed Tax Deductions and Credits
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How a Financial Crisis Can Help Your Retirement

Taxpayers may forget that donations they gave last year may get them a bigger refund. If you cleaned out your bulging closet and dropped off clothing or household goods at your favorite charity, this may be deductible on your tax return.

Taxpayers taking a full course load and working toward a degree can receive education benefits through the American Opportunity Tax Credit for college expenses. But even those who just took one class to further their career may be able to take the tuition and fees deduction. With this credit, you can deduct up to $4,000 for tuition and fees, books and educational supplies for you, your spouse or your dependents.

Taxpayers can deduct state income taxes, but what about residents of states that don't have a state income tax? In this case, the state and local sales tax deduction is especially useful because these taxpayers can deduct sales tax paid on purchases. Even people who live in states that pay state income tax can benefit if they paid more sales tax due to large purchases.

The earned income tax credit is a refundable tax credit given to filers who earn low to moderate income from their jobs. The credit can be worth up to $6,044, depending on your income and how many dependents you have, but one in five tax filers overlook this opportunity, according to the Internal Revenue Service. You must file your taxes to get it, so even if you make less than $10,000 (the minimum income filing requirement), you should still file your taxes.

If you were looking for a job last year, you may be able to deduct costs related to your job search -- even if you didn't secure a job. Job search expenses such as preparing and sending resumes, fees to placement agencies and even travel related to the job search can be included.

This credit is often overlooked and seldom talked about. If you have an income up to $29,500 ($59,000 for married filing jointly), you can save for retirement and get a tax credit worth up to $1,000 for individuals and $2,000 for couples if you contributed to a qualifying retirement plan such as an individual retirement account or 401(k). The retirement saver's tax credit is a win-win situation since contributions to your IRA may also be a deduction from income.

Taxpayers who weren't so lucky gambling last year should know that losses can be deducted if they itemize their deductions. However, your amount of losses cannot surpass your winnings, which must be reported as taxable income. For example, if you have $2,000 in winnings and $4,000 in losses, your deduction is limited to $2,000. Make sure to collect documentation such as receipts, tickets and other records to support your losses.

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