Retirement losses: What now?

If your portfolio took a huge hit thanks to stock losses, pick yourself up and dust yourself off. Here's what to do next.

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By Walter Updegrave, Money Magazine senior editor

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).

NEW YORK (Money) -- Question: I've just received the statement for my workplace retirement savings account -- 99% of which is invested in an S&P 500 index fund -- and it shows a loss of 37.5% for 2008. I'm 60, make about $100,000 and I was hoping to retire next year. What immediate next step should I be taking to recover my account value? --Benjamin, Albuquerque, New Mexico

Answer: You, my friend, have way, way too much of your retirement savings tied up in stocks for someone so close to retiring.

As you're now discovering, the big danger in pursuing a pedal-to-the-metal investing policy at your age is that your nest egg can take such a huge hit that it may not be able to rebound in time for you to retire on schedule.

Unfortunately, you're hardly the only person closing in on retirement and sitting on big losses. A recent EBRI report shows that going into last year nearly 40% of people age 56 to 65 had more than 70% of their 401(k) accounts invested in equities, and almost 25% had more than 90% of their balance in stocks.

So what should someone in your position do? Well, let's start with your investing strategy. Basically, you have three options.

Stick with stocks. You could leave your portfolio the way it is on the theory that a near 100% stocks stake gives you your best shot at quickly recovering your losses. I think this approach is a non-starter, though, because it's just too risky. Sure, you would be in a great position if stocks soar to big gains as they have coming out of past recessions. But we don't know how long such a turnaround might take, and we could very well see even lower stock prices before we see higher ones. Which means you could end up in an even deeper hole at a more advanced age.

Play the waiting game. Another way to go would be to get out of stocks entirely and hunker down in stable value or money market funds. The idea is to preserve the account value you now have and then jump back into stocks when you're confident that equities are on the road to a sustained recovery.

But, the problem with this course of action is that it's virtually a mission impossible to know when to get back into stocks. What looks like a bona fide turnaround may be just another of the many false starts we've had. In that case, you could switch back into stocks prematurely and suffer more losses. If you decide to wait until a recovery has been underway long enough so that you're more confident it's the real thing, you may miss the explosive gains that often come in the early stages of the rebound. So I consider this strategy little more than a guessing game.

Fix your mix. Your third option, and the one I recommend, is to revamp your retirement savings account so that it contains a blend of stocks, bonds and cash that is more appropriate for someone your age and proximity to retirement. Your goal is to set an asset mix that gives you enough long-term growth potential so your savings can carry you through a retirement that could easily last 30 or more years, yet at the same time prevents you from being totally decimated if stocks continue to slide.

The challenge, though, is getting this asset mix right. For someone your age, a blend of roughly 40% to 60% in stocks and the rest in bonds and cash is probably about right.

But the blend that's appropriate for you will depend on a number of factors particular to your circumstances, including the size of your nest egg, how much income you think you'll need in retirement, how much you'll receive from Social Security and other pensions (if any), how long you think you'll live in retirement and how much risk you're willing to take.

A competent certified financial planner should be able to weigh these factors and help you arrive at an asset allocation that makes sense for you. Or you can arrive at a reasonable mix by going to an online tool like T. Rowe Price's Retirement Income Calculator.

Basically, you plug in such info as how much you already have saved, how much you're still contributing to retirement accounts and how your money is invested, and the calculator will show you the odds that the combination of draws from your savings plus income from Social Security and other pensions will be able to cover your living expenses for the rest of your life.

If after inserting your information you find the odds too low for your liking, you can re-run the numbers to see how making adjustments such as saving more, postponing retirement a few years or changing your asset mix, might improve your chances.

All of which is to say that your "immediate next step" should not be just about trying to recover the value of your account. That implies that you're dealing only with an investing question.

In fact, someone who's lost a big chunk of his retirement savings who is as close to retirement as you are is really facing a broader retirement-planning issue of which investing is only a part. So you really need to do a more comprehensive evaluation of where you stand and decide whether your original plan to retire within a year still makes sense given the loss you've incurred.

Who knows, after going through the sort of analysis I've recommended, you may very well find that you can still retire next year as you planned.

But if leaving your job next year turns out to be too ambitious, at least you'll know what actions you can take besides just revising your asset mix to be able to retire on a schedule that will allow you to live comfortably and financially secure. To top of page

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