Recoup your bear market losses

There's a chance - even if you're in your late fifties. But you have to keep investing in stocks.

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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).

(Money Magazine) -- The plunge in stock prices has been especially tough on those who recently retired or are on the verge of doing so and who are relying on their 401(k)s for income. But what if you have a bit more time - say, a decade or more of working, saving, and investing?

While conventional wisdom says that workers in their twenties and thirties can easily recoup their bear market losses, baby boomers in their forties and fifties aren't viewed as being so lucky. Yet if you're in this group, your prospects may not be as bleak as you assume. As crazy as it sounds, it's possible that last year's market crash could even work in your favor.

That's the surprising finding of a new Urban Institute study that projects how people of various ages might fare under three scenarios following this bear market. It takes into account all potential sources of retirement income, from Social Security to pensions to the value of 401(k)s and other accounts.

Under some circumstances, the researchers found, even older boomers in their middle to late fifties can end up with the same or nearly as much income at age 67 as they would have had if stocks hadn't crashed last year but instead delivered average returns. This assumes these workers keep saving as if nothing changed (roughly 7% to 8% of their salary, on average).

There's even a chance, under the rosiest recovery scenario, that about one in four boomers could experience a modest boost in retirement income - about 7% or so.

Patience pays

How, you may ask, is that possible? First, for a significant number of older boomers to achieve this cheerful outcome despite the crash, the market would have to stage a rather remarkable recovery in 10 years - rebounding at a real rate of 12.8% a year until 2017, and then posting market-average gains thereafter.

Equities have delivered such lofty gains before, in the late '50s, early '60s, and late '90s, but it's rare. The bar isn't quite so high for most boomers to come away with roughly the same amount of retirement income that they would have enjoyed without a crash. That would take a recovery where stocks deliver real annual returns of 9.6% through 2017 followed by average gains.

Of course, it's impossible to predict how the market will do. But unless you believe stocks, in the wake of this crash, are likely to lag bonds and cash over the next 10 to 20 years, it pays to stick with equities.

Indeed, it's the above-average returns you can earn when stocks sell at beaten-down prices that give you any chance of breaking even or possibly coming out ahead. "If you pull out of stocks now," says Barbara Butrica, one of the study's authors, "you'll be locking in your losses."

Butrica and her colleagues aren't predicting a recovery, strong or otherwise. But their study holds a key lesson: If you hope to rebuild your battered nest egg, you shouldn't abandon equities - especially now.  To top of page

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