The Retirement Conundrum

I've been doing the 401(k) meeting thing the past few days, and this general theme has come up over and over, particularly with older employees:

"The last eight months, my retirement accounts have gotten killed. I had it worked out so I could hang up my job next year, but now that's all blown to hell. I'm going to be working 'til I'm seventy-eight ..."

Part of older workers' problems is that they bought into the conventional wisdom that you should, even in retirement, have a sizable chunk of money invested in stocks.

Since we're in the midst of the second worst meltdown of equities in U.S. history, this has turned out to be not great advice. And if you were in the wrong asset allocation, you could have really eaten it.

... An investor who put $1 million three years ago in AllianceBernstein’s 2010 Retirement Strategy fund (LTDAX) would have seen decent gains for two years. But the latest market turmoil would have knocked her balance down to nearly $750,000, because the fund had 68 percent of its assets in stock and real estate trusts when the market started to crash last fall. Had she invested that money in the Wells Fargo Advantage Dow Jones Target 2010 fund (STNRX), she would still have $970,000 today—in part because that fund holds only 27 percent of its assets in stocks. Seth Masters, chief investment officer with AllianceBernstein, says high equity percentages are necessary to help a portfolio last the 30 years people are likely to live in retirement. “Any fund with a longer-term investment perspective did poorly in 2008,” he says ...

I know few people who haven't been damaged by the cratering of equities. But for older workers, some with hundreds of thousands of dollars in retirement funds, the negative blowback as been huge.

One sixty-two-year-old artist came to the office and told me:

"My financial advisor screamed at me to stay in stocks when I wanted to get out. I've got half of what I had a year ago. My $600,000 nest egg is now worth $320,000 ...

This month's Smart Money Magazine notes the same thing that anguished TAG member did:

For years, retirement planning has been dominated by complex formulas of "models" that tell people exactly how much to save, how much to spend and how to invest. Guided by advisors who enthusiastically adopted these tools, millions relied on them to figure out the size of the next egg they'd need for retirement and how much cash they'd get to spend when they got there. But after a crash that blew a hole through many retirement portfolios, even the experts who design these models acknowledge they have serious limitations...

Yesterday a 401(k participant at Disney asked: "The advisors I've relied on for years don't seem to be working for me anymore. What's somebody trying to plan his retirement going to do?"

Now, I'm not a certified financial advisor, but I read a lot and shoot off my mouth a lot in 401(k) enrollment meetings. So here's my two cents:

1) Think about ratcheting down your stock allocation until the market stabilizes. (Are you 70% in stocks? Try 60%. Maybe even 50%.)

2) Get used to the possibility that stocks won't have the same robust returns going forward they've had for the past three-quarters of a century. Some experts believe that bonds will have competitive returns with stocks for lengthy stretches in the future.

3) Educate yourself. Don't rely exclusively on "experts" because those folks can be wrong. If you can't sleep nights with the idea of losing money, you might want to be more conservative in your investments (shorter term bonds, anyone?) so you don't lie awake moaning.

4) The standard wisdom is, you can pull 4% out of your retirement stash each year and never whittle your money pile down to nothing. But experts now say, welll ... maybe there's a 70% chance that you'll never empty your accounts. So maybe a better strategy is spending only 3% of assets every twelve months, or spending no more than half or three-quarters of your yearly investment earnings and dividends.

5) Be ready to adjust your investment strategies as market realities change. But adjust, don't drop them like hot rivets because stocks/bonds are going up or down.

6) If you're within hailing distance of 60, focus on preservation of assets, because you don't have as much time to recover from market losses as somebody a decade out of high school.

As I told one of the unhappy 401(k) investors yesterday, there are no total guarantees for anything. If the government collapses, even all those "rock solid" treasury bonds will be worthless. In the end, all you can do is estimate the odds, calculate the risk, and plan accordingly.