Fried Nest Eggs


By Amey Stone Brace yourself: Your 401(k) statement for the third quarter will be arriving in the mail soon, and it's not going to be pretty. The S&P 500 slid 15% for the three months ended in September. That's enough to send the results of most retirement accounts heavily weighted in stocks into negative territory -- even for people making ongoing contributions.

This year's losses (the S&P is down 19% year-to-date) come on top of 2000's -- the first time ever that the average 401(k) plan account balance declined, according to Boston research firm Cerulli Assoc. No doubt in 2001, "account balances are probably suffering as a result of the market being down this year," says Lisa Baird, a Cerulli consultant.

For investors with retirement still 10 years or more away, it should be easy to shrug off the negative returns -- indeed, that would probably be the smartest thing to do. Chances are the steep declines are temporary, and the market will resume its ascent, albeit at a more leisurely pace than many came to expect in the torrid bull market of the late 1990s.

CRUEL IRONY. For those with short-term horizons, reallocation of assets into safer havens may be the way to go now (see BW Online 10/5/01, "Can You Still Afford to Kick Back?"). But we're all going to have to adjust our rose-colored glasses. "Certainly, we're going to see a deflation of expectations of what financial market instruments are going to return in the future," says Christoph Bianchet, U.S. economist at Credit Suisse Asset Management.

Any way you look at it, the slide has likely dealt a serious blow to the retirement security of the 46 million Americans age 60 and up who don't have long investment horizons. In what now seems a cruel irony, in recent years financial planners had been advising even older investors to keep more of their retirement savings in stocks. And the soaring returns of the late 1990s made it tempting for seniors to play the market -- a move they may now regret.

"It's clear that some people got carried away and stopped doing their asset allocation because it was more fun to be greedy," says Edward White, a portfolio manager at Gannett Welsh & Kotler. The new reality that many older Americans are now facing could have profound implications for the broader economy and, ultimately, on retirement planning for the rest of us.

NO-WIN SITUATIONS. First of all, in an effort to rebuild their nest eggs, many people approaching retirement may now decide they have to stay in the workforce longer to supplement their incomes. Yet many companies are pushing early retirement as a way to shrink their own employment rosters during a suddenly accelerated economic slowdown. The sharp rise in unemployment claims reported on Oct. 4 by the Labor Dept. is just the latest evidence of companies slashing jobs in the wake of the September 11 attacks. "The economy looks like it is headed into recession," says Laurence Kotlikoff, a professor of economics at Boston University. "There aren't going to be a lot of jobs for older workers in the short run."

The other option open to retirees who don't have a comfortable level of savings is to curtail their spending. That, however, would put more of a damper on consumer spending -- and that's the last thing the economy needs right now. "Savings is a good thing," says Edward Deak, an economics professor at Fairfield University. "But this is bad timing to increase the level of savings, when consumption and consumer confidence are already so weak."

Not to be too gloomy here, but the weaker spending power of older Americans will eventually have an impact on their children, the so-called sandwich generation, which now has both college-age offspring and elderly parents. The sandwichers may have to help out if their parents don't have enough savings to cover their expenses in retirement -- especially as the population lives longer thanks to improvements in health care. They also are likely to have smaller inheritances. Plus -- gulp -- if the economy remains stalled, or even weakens, the sandwich generation may find it difficult to save for retirement at all.

"REALLY AWFUL THING." And while analysts say younger Americans should be investing heavily in equities, the recent declines may have scared many out of the market just when they should be getting into it. Already, a Sept. 24 report from Hewitt Associates found that participants in 401(k) plans are shifting more money from stocks into fixed-income investments. "It's important that they now don't do the really awful thing, which is to go 100% into bonds," White says.

To date, most individual investors have shown the mettle to stay in stocks. Mutual-fund redemption rates remain low relative to stock market declines, and transfers to fixed-income 401(k) plans, while up dramatically, still affect just a tiny percentage of all accounts, Hewitt has found. The danger may come if stocks resume their descent. "The market could go back down again and really challenge people's commitment," worries White, "but they really need to hang in there."

Here's one last thing to consider: Social Security. With the government running surpluses, there wasn't much reason to worry about how our pay-as-you-go system would fund Baby Boomers' retirements. Now, Washington is considering more than $100 billion in economic-stimulus spending to revive the economy (see BW Online, 10/5/01, "Want Fiscal Stimulus? Simplify Taxes"). That could push the federal budget into deficit again. "For good reason, we've given up any notion of fiscal restraint," says Kotlikoff, who, like many economists, expects the surplus and then some to go to military and economic stimulus spending. "I just see us as being more unprepared for the future than we were," he says.

All the more reason for investors -- of any age -- who have the time and the wherewithal, to keep socking away what they can now into smart plays to prepare for a more comfortable retirement. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum


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