Don't be a chump: Save for your future

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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NEW YORK (Money) -- Question: I started my job 10 years ago and have been doing everything the experts recommend: working hard, living below my means and saving religiously. But investment returns have been so bad that I don't have nearly as much to show for my efforts as I expected. Meanwhile, I see people who bought houses with no money down, maxed out their credit cards and spent extravagantly are now being coddled by the government. It makes me feel like a chump. Why should I continue to save and invest if the government is going to reward bad behavior? --Mike, Cleveland, Ohio

Answer: For what it's worth, you're not alone in feeling that you've been had. I've gotten lots of emails from readers who feel pretty much the same way.

Some pinched pennies for years to accumulate enough of a down payment to buy a house with a conventional mortgage, only to see the market value of that house nosedive. Still, they continue to bust their humps to meet their mortgage payment every month.

Others are frustrated because they feel they're the financial equivalent of innocent victims of a drive-by shooting. They saved diligently and invested intelligently in their 401(k)s and other retirement accounts. Yet their accounts have been hammered, at least in part because of the irresponsible actions of others -- i.e., lenders who made subprime loans that were delinquencies waiting to happen, homeowners who knew or should have known they couldn't afford the mortgage payments and Wall Street firms that packaged the toxic loans into securities that eventually dragged down the entire market.

So it's understandable that people who have worked hard and played by the rules may feel cheated or at the very least disillusioned when they see banks and investment firms getting bailed out and some delinquent borrowers getting special treatment.

Question is, though, what do you do with these feelings?

As a political matter, I think it's good that we air our views about the questions that this crisis has raised. Is it wise for the government to use taxpayers' money so that financial institutions and delinquent borrowers don't have to face the full consequences of their actions? Should only "deserving" victims receive aid? And if so, how do you do you separate them from the undeserving? Do the short-term benefits of the government intervention outweigh the long-term danger?

There's also the issue of how far the federal helping hand should extend. We started with the quasi-government corporations, Fannie Mae and Freddie Mac, moved on to investment firms and banks and then the automakers.

The feds are now talking about helping not just distressed mortgage borrowers, but giving low-rate mortgages to people who aren't struggling so as to spur home sales.

Who's next on the lend-them-a-hand list? Retailers? Builders? Will the original TARP (Troubled Asset Relief Program) morph into TRAP (Troubled Retirement Asset Program) to cover 401(k)s that have taken a hit?

These are legitimate questions, and they're hardly the only ones. Clearly, the proper role of the government in the economy, the business sector and in our lives generally is a topic that should be the focus of a spirited public debate.

But as far as your personal finances and your own retirement planning are concerned, I think it would be a big mistake to let smoldering resentment of the government's actions affect your behavior.

For one thing, even though today's circumstances are somewhat unique, the fact is we're never completely insulated from the decisions of others. As English poet John Donne put it in 1624, "No man is an island, entire of itself." That's true socially and financially. For better or worse, other peoples' behavior always plays a role in the performance of our economy and markets.

Besides, even if your umbrage is justified, what are you going to do, stop saving and investing because you believe people who acted in a profligate manner haven't gotten their comeuppance? I don't see how that would leave you better prepared for retirement.

Even if you believe that we are wrongly moving into an era in which the government will assume a larger economic role generally and figure more prominently in our future retirement benefits specifically, I still don't think that would be sufficient reason to suspend your saving and investing program.

When I look at the shape Social Security and Medicare are in, it convinces me that, to the extent you can, you would want to arrange your finances so you don't end up relying primarily on the government to fund your retirement lifestyle. And the only way I know to do that is to save as much as you can and invest as sensibly as you can.

As for the returns stocks have delivered the past 10 years, there is no question they're disappointing. But the lesson to draw from this isn't that it's foolish to invest. It's that you've got to approach investing with a coherent strategy, realistic expectations and the knowledge that, despite your best efforts, there will still be times when you'll suffer setbacks.

All of which is to say that if you truly want to have a shot at a decent retirement, you're going to have to continue what you've been doing: work hard, live below your means, save religiously and invest intelligently. In fact, if anything this crisis suggests that perhaps you should be saving even more so that you'll have an extra margin of safety against volatile markets.

Will doing all this guarantee that you'll be able to retire in comfort? Of course not. Doing the right thing has never come with the absolute assurance of success. But if you don't follow these steps, your odds of having a secure retirement will drop dramatically. Only a chump would expect otherwise.