O’Brien: Lessons on retirement savings from the rollercoaster stock market ride
The mail brought me a pleasant surprise the other day: my 401 (k) statement.
It’s been a long time since I could say that; like most Americans, my 401 (k) took a serious beating in 2008 when financial markets collapsed.
But when I opened my annual statement for 2010, I found my balance has now climbed above its peak from 2007. It’s certainly not like I won the lottery or am going to contemplate early retirement. Heck, it’s hard to imagine ever having enough to retire, period.
Still, it’s a relief to at least be back in the black again. And this got me wondering: Is this the case for most Americans? And if so, are there any lessons we should take away from this?
For answers, I called Jack VanDerhei, research director at the Employee Benefit Research Institute, which is backed by large companies, including financial institutions. VanDerhei is one of the most respected names on the issue of retirement and finances, and his organization has a vast trove of data on retirement issues.
Turns out the news is more mixed than I would have expected, given the rampaging bull market we’ve experienced in the past two years. The closer you are to retirement, the less likely it is you’ve recouped your losses from the past two years. More on that in a second.
He did have a number of lessons from the data he’s compiled in the past two years. But here’s the big one: When it comes to your 401 (k) and a falling stock market “… don’t panic!” You need to stay in this long term,” VanDerhei said. “Don’t stop contributing just because the rate of the return has gone negative.”
Putting aside the issue of whether the stock market will continue to rise over time, there are two reasons VanDerhei cites. First, if your employer matches your contribution, you shouldn’t pass on that free money. And second, 401 (k) contributions will reduce your taxes in the short term, since contributions are typically taken from pretax income.
The performance of these plans is of the highest national interest. For better or for worse, 401 (k) plans are the main way we’re paying for retirement. Or trying to pay for it. The Employee Benefit Research Institute notes that in the past two decades, 401 (k) plans have grown so large that 49 million American workers were active participants, and that 401 (k) plan assets had grown to represent 17 percent of all retirement assets, amounting to $2.8 trillion.
Of course, the majority of assets in these plans are stock. So, when the stock market tanks, that creates a potential crisis in retirement plans. And if people have to postpone retirement, they don’t free up jobs, which makes the employment problem worse. And you’re quickly in an ugly cycle.
Since I’m 42, I’m decades away from retirement age. Still, it was painful to watch my 401 (k) holdings drop about 25 percent in 2008. I already felt I was behind in retirement savings, and now I was running in quicksand.
In the two years since, however, my assets have jumped more than 40 percent. Phew!
Overall, this comeback is fairly typical. In a report from November, the Employee Benefit Research Institute found that 401 (k) retirement accounts fell 27.8 percent in 2008 before rising 31.9 percent in 2009. A similar figure for 2010 wasn’t available.
But that rising tide was felt differently across age groups. For instance, for people between the ages of 56 and 65 who have been in 401 (k) plans for 30 years, only 70 percent had more in 2009 in their accounts than they did in 2007. By comparison, for people between the ages of 26 and 35 who had been in their plan less than four years, more than 95 percent are ahead of where they were in 2007.
There are a variety of factors for that, the institute found, including the fact that workers in their 60s tend to be making withdrawals from their accounts. Younger workers, who typically have smaller account balances, tend to see their account rise because of contributions they’re making as well as stock market growth, whereas older workers’ balances, which are usually larger, are more dependent on the stock market for any increase.
“A lot of people had a very negative experience,” VanDerhei said. “But a lot of this was because they shot themselves in the foot.”
In a perfect world, our retirement savings wouldn’t be so complicated and wouldn’t require us to monitor them so closely. But they are, and so we should. And that’s another big lesson VanDerhei emphasized: Keep re-evaluating your plan. If nothing else, you can set up target dates that will automatically re-allocate your holdings as you age.
The final lesson, alas, requires throwing a wet blanket over whatever cause for celebration the rebounding stock markets have given us. Because, as VanDerhei noted, just because your 401 (k) has come back from the dead, it doesn’t mean you’re adequately prepared for retirement: Close to half of the baby boomer generation is considered to be “at risk” for not having enough socked away for retirement.
“Even if the market decline hadn’t occurred, many of these people wouldn’t have been in a position to retire,” he said.
That’s a reminder of the most fundamental lesson when it comes to retirement: Save more now.