Saving for Retirement

Repair. Rebuild. Retire.

The storm has subsided. Now get your savings back on track and maybe prepare to work a few years longer.

By Mary Beth Franklin, Senior Editor

From Kiplinger's Personal Finance magazine, September 2009

If you're worried that significant cracks in your nest egg will scramble your retirement plans, you're not alone. In 2008, more than 40% of U.S. workers saw their 401(k) plan balance drop by 30% or more in the wake of the biggest market meltdown since the Great Depression. If you were temporarily paralyzed by the carnage, it's time to take charge again. After all, your peak account balance was merely a snapshot in time, not a birthright. Markets go up and, unfortunately, they also go down.

Now is the ideal time to assess your financial situation to determine whether you need to save more (you probably do); rethink how you invest your money (maybe you're not quite as risk-averse as you thought); and consider delaying retirement by a few years.

RELATED LINKS
	Preserve Your Income
	Stay Faithful to Stocks
	Your Retirement Action Plan

"Even modest increases in savings or delaying retirement can get your plans back on track," says Ken Fine, a vice-president with Financial Engines, a leading provider of investment advice to 401(k) plan participants. But, adds Fine, "left to their own devices, some people are making a bad situation worse."

The inertia problem

Most workers haven't made any changes in their retirement-savings plan. A recent report by Vanguard found that 84% of its more than three million retirement-plan participants made no trades in their accounts in 2008. That inertia no doubt shielded many investors from overreacting to market volatility, but it also indicates that some are frozen in their tracks.

Because workers have sustained such extraordinary losses, "they'll need to be much more proactive about saving to build their nest egg back to prerecession levels," says Pamela Hess, director of retirement research at Hewitt Associates, a human-resources consulting firm. That means reviewing your mix of funds, rebalancing periodically and getting advice on how to meet your long-term goals.

Or you can keep it simple and use an all-in-one target-date fund, which selects and manages your investments for you and grows more conservative as you approach your retirement goal. (Congress is looking into target-date funds that suffered major losses last year during the once-in-a-generation market collapse. Nevertheless, we still believe these funds are appropriate for long-term investing goals.)

The stock allocation in the average 401(k) participant's account dropped to 59% at the end of 2008, according to a study by Hewitt. That's the lowest level since the company started tracking trends in saving for retirement 12 years ago. "Workers who impulsively transfer assets to more-conservative funds during market slumps may hurt their ability to save enough for retirement," Hess warns. (Use our calculator to see how long it will take to recover your savings.)

A new study by Financial Engines found that delaying retirement by two to three years can help meet retirement-income goals even without increasing annual savings -- assuming you maintain a diversified, age-appropriate portfolio. But those who abandoned stocks last year in favor of an all-cash portfolio face a tougher challenge. Because of the low returns on supersafe investments, some workers may have to stay on the job up to four years longer than those who maintained a diversified portfolio in order to recover from the 2008 declines.

Even so, a growing number of financial advisers are urging retirees and those nearing retirement to shift their focus from return on investment to reliability of income (see Preserve Your Income). "If you have a significant nest egg already in place, consider managing it more conservatively than the new dollars you invest in the market," says Jim Coleman, a financial planner in Waterbury, Conn.

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