The signs are everywhere. Employees letting their 401(k) statements pile up unopened, afraid of the bad news inside. Anxious execs watching their company stock sink, taking 40% of their retirement savings down with it. Once-confident do-it-yourself investors flocking to financial planners. No doubt about it: The bear market's claws have shredded dreams of an earlier and richer retirement for millions of Americans.
You don't have to be a dot-bomb ex-millionaire to feel the pain. Ordinary folks, tempted by the bull market's easy gains into upping their bets on aggressive stocks, have lost 25%, 30%, even 35% percent of their wealth. The average 401(k) investor--long criticized by financial pros as overly cautious--saw her balance drop in 2000 for the first time in the pension plan's 20-year history.
It's time for retirement savers to figure out how to get back on track. BusinessWeek's Annual Retirement Guide is here to help you make the choices the bear market demands. You'll learn how to manage your 401(k) alongside taxable accounts to keep more of your earnings away from the Internal Revenue Service. You'll find out the dangers of locking up too much of your portfolio in your employer's stock. Near-retirees can learn when to start planning a strategy for tapping their nest egg and how to anticipate health-care costs.
For thirty- and fortysomethings still decades away from the life of leisure, this bear market may turn out to be little more than a speed bump. But workers who thought they were close to hitting the exit ramp may find themselves making tough decisions--including postponing retirement.
That's what Jim and M.J. Kasser of Sarasota, Fla., are wrestling with. Jim, a 59-year-old self-employed wholesaler of sophisticated financial products, started thinking about slowing down when he fell and injured his neck three years ago. Jetting around to brokerages in his 35-state territory "is not an older man's business," he says. So he set his sights on semi-retirement at age 62--an achievable goal when the bull market lifted his moderately aggressive portfolio over $1 million.
Since the market peak, though, Kasser's investments are down 30%. Even with plans to trade his house for a condo--and downsize M.J.'s collection of Asian and African art--Kasser figures he'll now be working full-time until he turns 65.
One thing Kasser isn't doing is fleeing from stocks. Few would-be retirees are: The 1.5 million 401(k) accounts tracked by consultants Hewitt Associates still had 70.6% of their assets in equities at the end of May--down only slightly from an all-time high of 74% in March, 2000.
Sticking with their planned retirement age is the top priority for most workers who use the sophisticated Web-based retirement tools offered by Financial Engines. "Most people want to get out at a particular time," says Christopher Jones, vice-president for financial research at Financial Engines, which helps workers calculate their odds of retirement success. Some 38% of the service's users are saving more--boosting contributions by 30% on average--to meet that goal.
The one thing almost everyone is doing is looking for more advice. In the past six months, the number of employers signed up for Financial Engines' 401(k) service has soared from 100 to 500--and the number of potential users from 500,000 to 1.5 million. Financial planners and money managers are enjoying a surge in business: "I'm seeing a lot more people coming in with their tails between their legs," says Jonathan Guyton, a principal at White Oaks Wealth Advisors in Minneapolis.
So what should you do as you contemplate your shrunken account balances?
-- TAKE HEART. Investors are paying the price for stubbornly refusing to diversify out of technology and large-cap stocks during the bull run, says John Lynch, Madison (Wis.) branch manager for American Express Financial Advisors. But look at the bright side: "The aggressive ones have lost earnings, not principal--and they're still ahead," Lynch says. Even with the nasty downturn, the Standard & Poor's 500-stock index has rewarded investors with 15% average annual returns for the past decade.
The people hit hardest are older baby boomers whose aggressive investments and $1 million 401(k) balances in the late '90s lulled them into taking mid-50s retirements, says Debra Neiman of Neiman-Maloy Financial Group in Wakefield, Mass. But if you expect to work for another decade or more, you can probably meet your goals with minor adjustments (table)--provided you weren't counting on stocks to rise 20% a year forever.
-- TAKE STOCK. Go ahead--open those statements. "The first order of business is a deep cleansing breath," David Yeske, a fee-only certified financial planner in San Francisco, tells shell-shocked do-it-yourself investors. Many investors, Yeske says, are reluctant to sell their beaten-down tech stocks because "they feel like that's locking in the losses." But dumping losers to build a more balanced portfolio is "repositioning and moving forward," he says.
-- STAY INVESTED. Here's painful news for those feeling battered by the market: The only asset that gives you a fighting chance to make up your losses is stocks. "You have to stay in and have the patience to let the market work in your favor," says Ray Ferrara of ProVise Management Group in Clearwater, Fla. But that doesn't mean staying within the S&P 500 universe of large-cap, tech-heavy U.S. shares. Diversifying by company size, across industries, and around the world can reduce your risks. Bonds and money-market assets can smooth your returns by providing steady income. But even early retirees need to keep 50% or more of their funds in stocks to produce the income they'll need for 25, 30, or 35 years.
-- BE REALISTIC. The past 18 months have disabused most people of the notion that stocks will rise 20% every year. But economists have worse news: Future investors may not reap even the average returns of the postwar period.
From 1946 through 1997, stocks paid off, with dividends and capital gains, at a compound average annual rate of 7.5%, after inflation. Part of that gain came from the fact that stock prices grew 2.5 times as fast as corporate earnings, pushing the markets' average price-earnings ratio from 10 to more than 25. "Investors grew more optimistic about how growth could translate into stock prices," says Roger Ibbotson, Yale University professor of finance and chairman of Ibbotson Associates, a Chicago data and consulting firm. "We're not going to see a repeat of that." Ibbotson predicts that stocks will return only 6.25% a year in coming decades--and other economists are even more pessimistic.
Such a drop in returns could sharply boost the amount you need to save (table). Test your asset mix with a variety of predicted returns at online services, such as Financial Engines (www.financialengines.com), Financeware (www.financeware.com), or American Express (finance.americanexpress.com), which calculate the odds of making your goals.
-- THANK YOUR UNCLE. Uncle Sam, that is, who is boosting tax breaks for retirement savers. The new tax-cut bill will eventually allow you to put as much as $15,000 a year (up from $10,500) in pretax dollars in your 401(k) or similar account. Annual limits for contributions to individual retirement accounts, which can be pretax or aftertax depending on your pension coverage, are rising to $5,000 (up from $2,000).
For empty-nesters, the tax bill provides two big breaks. Workers over 50 will be allowed to contribute an additional $5,000 in pretax dollars to 401(k)s or similar accounts. And a worker can stash up to 100% of his or her pay in a 401(k)--via pre- and aftertax contributions and employer matches--to a max of $40,000. The old limit of $30,000 or 25% of pay held back the savings of wives who returned to the workforce to help build a retirement nest egg.
-- GET HELP. Investing isn't as easy as it might have seemed during the late '90s. Look back at your experience and ask yourself: Do I have the insights to pick winning investments in a tougher market, the cool head to stick with a plan, and the self-discipline to rebalance my portfolio at least once a year? Chances are the answer is "no"--and your money could be better off in a professional's hands. At the very least, get an adviser to provide some independent analysis of your asset mix.
The bull run of the 1990s rewarded all investors, savvy or naive. We're unlikely to see a repeat of that in our lifetimes. It's going to be up to you to do thorough planning and smart investing for a secure retirement. Now more than ever, your retirement plan is worth the attention you give it. By Mike McMamee