The L.A. Times highlights a problem that 401(k) Administrators (including us) see all across the fruited plain: The stock-market has gotten real roller-coastery of late, and participants are understandably nervous ...
As Americans increasingly link their well-being to financial markets, the possibility of recession and a slump on Wall Street has taken on new meaning for the middle class, including baby boomers who are approaching retirement age.
Some 50 million workers now participate in 401(k)-type savings plans, a number that has shot up since 2000 as employers increasingly stop offering traditional pensions.
Similarly, 46 million households hold a stake in the tax-advantaged savings plans known as individual retirement accounts, according to the Investment Company Institute.
The result is a historic linkage between the fortunes of the public and Wall Street, just as older baby boomers -- now past 60 -- focus more seriously on the living standards that await in their post-work years.
We've gotten calls here at the office from a few TAG 401(k) participants who are angry they can't pull their money out of 401(k) accounts because they're still working (Reality: most 401(k) Plans don't allow participants to remove account funds while they remain employed.)
But this shouldn't be a problem if the goal is to preserve capital. All that needs to be done is shift the bulk of invested money into bond and stable-interest accounts. You won't lose any big bucks. (You also won't make big gains, but that's another story.)
The Times points out another reality that smacks an increasing number of Americans in the face:
... for millions of workers in medium and large companies, the reality is that retirement benefits increasingly are skewed toward personal investments. That shift puts added pressure on individuals to try to take care of themselves, rather than rely on a traditional pension, and it raises the stakes of wrong decisions.
What I tell people over and over is, diversify. You need to have domestic stocks, foreign stocks, and bonds in your investment mix. You have to resist the urge to load up on stocks in the "hot" corner of the market, because by the time you've caught on that it's going like gangbusters, it's most likely slowing down already. The diversification thing -- sometimes known as finding the "efficient frontier" (most gain for the least risk) boils down to knowing investment returns over time:
Historic Risk/Return (1926-2006) Average Return: 5.5%
Best Year: 32.6% (1982)
Worst Year -8.1% (1969)
Years with losses: 13 of 81 (16%)
50%/50% Stocks and Bonds
Average Return: 8.5%
Best Year: 32.3% (1933)
Worst Year: -22.5% (1931)
Years with loss: 16 of 81 (19.8%)
Average Return: 10.5%
Best Year: 54.2% (1933)
Worst Year: 43.1% (1931)
Years with a loss: 24 of 81 (29.6%)
Happily, for most longer-term unionized entertainment workers -- and I'm here referring to people laboring under IA, WGA, SAG, or DGA contracts -- they end up getting the best of multiple worlds. They'll collect monthly pension checks, they'll collect Social Security, and they'll have IRAs, Roth IRAS, and whatever 401(k) Plans they've participated in over the years.
As more than one financial advisor has told me: You have annuities working for you on top of personal savings accounts, you've got it licked ..."
Addendum: TAG's end-of-month 401(k) enrollment deadline looms up. You miss it, you'll have to wait until March 1st to hop aboard. (And sure, the way the market is bouncing around, you might be saying: "Who the hell wants to do this?!" But if you've got a long time horizon -- twenty-five or thirty-five years -- volatility works in your favor. You're buying low ... buying lower ... buying higher.)