Jim Jubak

Jubak's Journal10/10/2008 12:01 AM ET

How to rescue your retirement

You may think you can make up for today's painful savings losses simply by working longer, but it's not going to be that easy. Start by taking these 3 vital steps now.

By Jim Jubak

I was getting my hair cut the other morning when the talk drifted to the stock market, as it so frequently does in these days of 500- and 700-point drops in the Dow Jones Industrial Average ($INDU).

With a sigh, my friend and favorite haircutter admitted that, after months, she'd finally mustered the courage to open her IRA statement. It was bad, but no worse than she'd expected. With a shrug she said, "I guess I'll just have to work longer before I retire."

This conversation is being replayed right now in millions of homes, stores and workplaces. Remember that there was a retirement crisis before the current financial-market meltdown, and it surely hasn't gotten any better.

Working longer will be the only solution for many people. But it's a solution we speak about with a kind of wistful hope. We remember all the outsourcing and job losses in the good times for the economy, and we know that our need to work after retirement runs right up against the lack of job security in the global economy.

If current trends continue, this solution won't work. To make it possible, the government will have to get on board. Our leaders (and I use the term loosely) in Washington, D.C., have got to understand that the only solution to the retirement crisis that will follow quickly on the heels of the current financial crisis is to create jobs here in the United States at decent wages.

This time, it's worse

After greedy CEOs, complacent government regulators and Wall Street experts blew up the stock market in 2000, the good folks in Washington threw those of us saving for retirement a bone. To make up for the 49% drop in the Standard & Poor's 500 Stock Index ($INX) from March 23, 2000, to Oct. 9, 2002, the government announced special makeup rules for retirement accounts. Anybody older than 50 who could scrape up the cash could contribute an extra $5,000 to his or her retirement account. (The IRS also allows you to put in an extra $3,000 if your employer goes bankrupt. Whoopee!)

I don't think that was enough in 2002, and it's surely not going to be enough in 2008 or 2009 or whenever this bear market and financial crisis finally end.

This is our second bear market in stocks in less than 10 years. The 10-year return on the S&P 500 is a negative 4%. Investors in the stock market over the past decade have actually lost ground -- and that's before inflation, which has run at an annual 2.7% from 1998 through 2007.

And I think this time around the crisis is even worse than in 2000-02.

It has dealt major damage to exactly the kind of "safe" assets favored by retirement portfolios. I'll bet you can find the shares of Fannie Mae (FNM, news, msgs), Lehman Bros. (LEHMQ, news, msgs) and Washington Mutual (WAMUQ, news, msgs) in a majority of the conservative retirement plans in the country. Retirement plans of all sorts -- from defined-benefit company pensions to defined-contribution 401(k) plans -- have lost $2 trillion in value so far in this crisis, Peter Orszag, director of the Congressional Budget Office, told Congress on Oct. 7.

It has also taken a bite out of the biggest retirement asset that most people own: their houses. Housing wealth dwarfs the stock and bond portfolios of the median American family. And a housing depression that has knocked 20% off home values in the hardest-hit areas has delivered a crippling blow to many families' chances of a decent retirement -- even if they don't fully realize it yet.

And the huge baby boom generation is eight years closer to retirement than it was in 2000. The first of the boomers will turn 66 -- the age at which they'll qualify for full Social Security benefits -- in 2012. That's just four years away. Not much time to make up lost ground, even if this bear market were to end tomorrow. And, as I explained in my last column, "Everything's changed now -- for the worse," I don't think this bear will go quickly or be succeeded rapidly by a vigorous bull market.

So what can we do to save our retirement?

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1. Run some numbers

Yes, I know it's painful to look, because then you have to admit the size of your losses. But unless you look, you can't possibly begin to do anything about the problems you face, as you don't know how big they are. It's time to run some numbers on MSN Money's retirement calculator.

Do two simulations. First run the calculator with your retirement savings and your savings rate before the bear market of 2007 (and counting). Enter reasonable estimates of your rate of return -- say, 10% for a pre-retirement portfolio with heavy exposure to stocks and then 6% for a more conservative, post-retirement portfolio.

Give yourself a decent life expectancy. Remember that people are living longer than ever before. I entered 85. Modify yours to account for family history. Enter a desired retirement income of 60% to 80% of your pre-retirement income.

Now try to balance the books. Cut your post-retirement income, add some income from a post-retirement job, up your rate of return -- but get to age 85 with a dollar to your name. Now do the same exercise with the retirement savings you have today, after the bear has taken its bite of your portfolio.

Try to balance the books again and see how big an increase you'll have to make in your assumed rate of return, your savings rate and the income from your post-retirement work, and how big a decrease you'll have to make in your post-retirement income.

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By balancing your retirement books, you'll learn a lot about the trade-offs you face. In my case, I learned that either of two things will do the trick:

  • An increase in my hoped-for pre-retirement rate of return to 11% from 10%, and an increase in my hoped-for post-retirement rate of return to 8% from 6%.

  • An income of $25,000 a year from working after I've retired.

What does this tell me to do? Probably pretty much what it tells you:

Continued: Don't go too conservative

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