Q-and-A With Jonathan D. Pond: Saving for Retirement

 

The diving stock market has worried all investors, but none more than those who are about to retire and those who have already retired. The main concern is that you won't have the time to make up for your investment losses. In fact, the news media has brought attention to the plight of many pre-retirees and retirees who lost large percentages of their life's savings.

 

The common lament is that retirement-age savers are sunk financially, because they don't have enough time to make up for their investment losses. Many age-50+ investors worry that they cannot afford to lose any more money, so they've moved it into safe investments. Who would blame them? At a time when stocks were losing more than 10 percent a month, making 2 percent on money market funds looked awfully good. But for most people who are soon to retire or already have, it's important to keep at least some money in stocks. This way, their increase in value can provide the growth necessary to pay ever-increasing living expenses during a long retirement.

 

Avoid the trap of pulling out of stocks after you have lost money, only to miss the rebound in the stock market.

 

 

While bonds and stocks have declined in 2008, if you had about three-quarters of your money in Vanguard's  Total Bond Index Fund and the rest in the Total Stock Fund throughout the year, as of the end of November, you would have lost only about 8 percent. At this point, that would make you the envy of most investors. Moving all the money into money market funds and CDs would be a mistake in my opinion.

 

In fact, as crazy as it might seem with such a terrible stock market, you should consider very gradually adding to your stock-fund holdings over the next couple of years. That way, you will have about 40 percent invested in stock funds.

 

Why? Because retirees, particularly those who will draw on the money for 20 years or more, need their investments to grow in order to keep up with ever-increasing living costs later in life. In fact, your living costs could double during the next 20 years. Putting money into safe securities, such as money market funds and CDs, won't provide any capital growth, and the low interest they pay will probably not be enough to pay your bills in the future.

 

 

Good for you for participating in your 403(b) plan at work. You'll be pleasantly surprised to see how much the contributions grow over the years, despite the investment losses we have suffered in 2008. Resist the temptation to reduce or eliminate your contributions.

 

For starters, contributions to 403(b) and other retirement savings plans provided in the workplace reduce income taxes. More important, the best way to build up your investments is by regularly adding to your savings. Investing money at regular intervals is known as "dollar-cost averaging." The trick is to stick with your schedule of regular contributions, regardless of whether the markets are up or down.

 

Because you're invest­ing a fixed amount at fixed intervals, your dollars buy fewer shares when stock, stock-fund, or bond-fund prices are high and more when they are low. As a result, the average purchase price is lower than the average market price over the same time frame. In plain English, you're buying more when prices are low. You can't beat that. 
 

When your husband gets into a position in which he can contribute to a retirement plan for self-employed workers, he should consider a so-called "self-employed 401(k) plan." Such plans are easy to set up and are quite flexible as to the amount contributed to the plan. The contribution limits are very generous. A self-employed person age 50 or more can contribute and deduct up to 100 percent of the first $20,000 of self-employment income, with even higher limits for earnings over $20,000. Someone under age 50 can contribute up to 100 percent of the first $15,000 of self-employment income with higher limits thereafter.