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Scrambling to save your nest egg

The 2008 stock market plunge has inspired jokes, bumper stickers and offhand quips to the following effect: My 401(k) is now a 201(k).

Behind the gallows humor is an uncomfortable truth: The bear market, as of March, wiped out an estimated $2 trillion in value from 401(k)s and individual retirement accounts.

The losses have reset retirement expectations for many older workers and exposed the dangers of a retirement-savings system that has shifted responsibility and risk onto the workers themselves.

In 1980, 60 percent of private-sector workers were covered by a defined-benefit pension plan, while 17 percent were offered a 401(k) – then a new investment vehicle that allowed workers to stash away income tax-free, often supplemented by matching funds from the employer.

By 2006, those numbers were reversed: Now only 10 percent of workers have a defined-benefit plan, while 65 percent are offered a 401(k). The number of workers who were offered both types of plans stayed flat.

The rising share of workers with 401(k)s means that individuals need to make decisions about how to invest a big chunk of their retirement savings. Advocates say that’s not always a good thing.

“People are not ready to take care of themselves, quite honestly,” said Jean Setzfand, director of financial security for AARP, the 40 million-member advocacy group for Americans over age 50.

For those close to or already in retirement who have seen their accounts decimated, there may be no option but to work longer or rejoin the work force. But everyone who manages a retirement account can benefit by following a few pieces of advice.

Keep contributing

The temptations to cut 401(k) contributions can be myriad. Workers are weary from market losses. Financial pressures on families are mounting, making the extra income a tantalizing target. Some companies have stopped providing matching funds.

But those who cut off the flow of funds to their retirement accounts miss the opportunity to buy into the market at a discount.

“The biggest mistake is not continuing to contribute,” said Carol Arnott, a certified financial planner with Greenville Financial Group. “When the market is in such a decline, it’s a great place for us to be buying in with our long-term money.”

Don’t jump around

Another temptation is to move 401(k) money away from battered stock funds to safer investments like money market funds. Doing so locks in losses from the bear market and ruins the chance of benefiting from the rebound.

It’s simply impossible to time the market, Arnott said. Another mistake she sees is investors who jump in and out of investment funds based on their performance in the previous year.

“It’s like barreling down I-95 and looking in the rearview mirror,” Arnott said. “You are destined to crash.”

And for those who want to cash out a 401(k) when leaving a job, beware – it will cost you 20 percent of the account’s value in federal taxes, and 10 percent in early withdrawal penalties.

Watch asset allocation

It’s not smart to hop from fund to fund – but inertia can also be dangerous. Workers need to rebalance their retirement accounts as they age to adjust risk levels and find the proper mix of equity and fixed-income investments.

“When you leave people to their own devices, a large percentage of people close to retirement ended up betting way too heavily on equities,” said Jack VanDerhei, research director at the Employee Benefits Research Institute.

One answer to the problem of asset allocation is target-date, or lifecycle funds, where fund managers choose an investment mix based on an individual’s expected retirement date, although the management of these funds has recently come under increased scrutiny.

Reconsider expectations

Younger workers have the benefit of having many more years to return their retirement accounts to health. For those closer to retirement, big 401(k) losses may require fundamental adjustments in their plans.

One strategy is to extend the time frame in which workers plan to tap their 401(k)s. For some, that may mean postponing retirement, or even finding a job in retirement to keep some income flowing.

“Stay in the work force as long as you can,” advised AARP’s Setzfand. “Only time can help resolve this matter.”

Citizen Online Archive, 2006-2009

This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

In 2010, a power surge fried a server that contained all of videos linked to dozens of stories in this archive. Also, a server that contained all of the databases for dozens of stories was accidentally erased, so all of those links are broken as well. However, all of the text and photos that accompanied some stories have been preserved.

For all of the stories that were archived by the Tucson Citizen newspaper's library in a digital archive between 1993 and 2009, go to Morgue Part 2

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