Resolve to rebuild retirement

By Christine Dugas • USA TODAY • January 1, 2009 The bear market and the economic slump have caused most 401(k) retirement savings to have a major meltdown this year. Not only has the financial mess caused retirement investments to plummet in value, it also has caused a growing number of employers to suspend their 401(k) company match. But as gloomy as it all seems, you shouldn't spend the winter hiding under the blankets. After you put away your holiday decorations, it's a good time to regroup and learn from this year's pitfalls and mistakes. Here are seven tips to rebuild retirement savings in 2009: Make sure you can sleep at night As difficult as the year was, you may have learned some important things about yourself. You may be far less willing to take risks than you thought. "We've been through one of the most rapid and extreme bear markets in history," said Stephen Utkus, principal at Vanguard's Center for Retirement Research. "And if that wasn't a test of your risk tolerance, I don't know what would be." If you're still comfortable with your asset allocations, then your risk and return are in good balance. But if you've lost much sleep this year, you know it's time to reduce risk and adjust investment priorities. Don't panic After the worst financial crisis since the 1930s, start 2009 by making a candid assessment of your retirement plan, Utkus said. If that means investing less in stocks, fine. Just be aware that you may have to increase your savings over the long term to compensate for the lower returns you'll get from bank CDs and money market funds. If you shifted money in a panic, however, you might want to reconsider. So far this year, 401(k) trading activity has risen to 6 percent. Not surprisingly, most people have moved their money into stable value funds and money market mutual funds. That may seem safe. But if you are planning to get back into stocks, don't think you can time the market. Most people simply sell low and buy higher. Start the year by making sure you have a smart financial strategy — and don't rely on the past when you plan for the future. "Everyone says, 'The market is going down, therefore I shouldn't invest in equities,' " Utkus said. "You should think about how to be best positioned going forward, as opposed to spending too much time gazing out the rearview mirror." And most planners say that if you have a long-term investment horizon — 20 years or so — you should have most of your assets in stocks. Diversify your holdings Some plan participants were too aggressive in their investments by investing only in one kind of stock — small company stocks, for example. When the market collapsed, their retirement savings did, too. It's even more risky to be too concentrated in company stock, said Christopher Jones, chief investment officer for Financial Engines, which provides advice to 401(k) plan participants. Even though the Enron debacle should have provided a cautionary tale about investing in company stock, that's still a major problem, Jones said. And many plan participants continue to invest 100 percent of their 401(k) money in company stock. "They look at the stock market and say that they've done better in their company stock," he said. "The fallacy, of course, is that it doesn't guarantee anything about the future." Make sure that you have a well-diversified portfolio that includes broad-based stock funds, such as those that track the S&P 500 stock index. Keep age in mind When you are 30, you can put all your money in stocks because you'll have plenty of time to make up for any losses. When you are 55, it's much harder to make up those losses. Many employees who are close to retirement are now suffering because they overly invested in stocks. But if they'd invested in a target-date fund, they would be in better shape. These funds invest in a mix of stocks, bonds and money funds based on when you plan to retire, and they're managed by professionals who make disciplined investment plans. Nearly half of 401(k) plan participants who are ages 56 to 65 had portfolios that had at least 20 percent more in stocks than target funds designed for that age group did, said Jack VanDerhei, research director of the Employee Benefit Research Institute. Older plan participants should consider target-date funds, especially if they don't believe they have the financial acumen to accomplish their asset allocation on their own, VanDerhei said. Keep saving Even if the stock market calamity has made you feel frightened and demoralized, you should try to stay in the game. Then you can take advantage of the pretax savings that you have in a 401(k) plan. And if your company offers a matching contribution, you also can take advantage of that. "You should make sure that you are saving enough to get every last penny of your company matching contribution," Jones said. Unfortunately, more than 20 percent of the workers who participate in their plan do not contribute enough to get the total company match, according to Hewitt Associates. Remember the big picture A growing number of employers are suspending their company match. That creates worries and resentment among workers, and some are considering dropping their 401(k) plan entirely. But keep in mind that most companies, unless they go into bankruptcy, will eventually reinstate their matching contribution. And the responsibility for retirement savings was yours, anyway, said Sheryl Garrett, a financial planner in Kansas City, Mo. "Companies have to cut where they think it inflicts the least amount of pain on their employees and their business," she said. "Cutting into your retirement nest egg temporarily is their way of trying to stay viable and continue giving you a paycheck." Do not cash out Younger employers tend to cash out their 401(k) plan when they switch jobs. Big mistake. For most, if they have $10,000 or less in their plan, it looks like free money, and retirement seems far away, said Pamela Hess, director of retirement research for Hewitt Associates. But if a 25-year-old has just $5,000 in a retirement account that earns a 7 percent average rate of return, it will be worth $74,872 when the worker reaches 65 — even without adding any more money, according to Hewitt.