The nation’s financial problems have proved costly for workers at retirement’s doorstep. Nearly one in six lost roughly a third or more of the value in their 401(k) plans—America’s primary savings vehicle for retirement—from the start of the recession in December 2007 through this June, a new report finds.
In that period, 32 percent of workers ages 55 to 64 with money in Vanguard-administered 401(k) plans saw their savings shrink by more than 20 percent, while 16 percent faced losses of more than 30 percent, according to Vanguard’s report,“How America Saves 2009.”
The market collapse hit Vanguard’s oldest plan participants even harder: 37 percent of those ages 65 and up lost more than 20 percent of their 401(k) savings, while 22 percent saw declines greater than 30 percent.
Defined contribution plans such as 401(k)s are the backbone of most Americans’ retirement strategy. Americans have an estimated $3.4 trillion in these plans, accounting for 33 percent of all household financial assets in the United States, the Investment Company Institute reports.
‘Over-concentrated’ in stock
The steep losses documented in the Vanguard report, which examined the employer-sponsored plans of 3.5 million participants, show that many older workers’ portfolios were “over-concentrated” in stocks and not properly diversified for their age, says Jean Young, a research analyst for Vanguard’s Center for Retirement Research.
To their credit, most plan participants didn’t panic by selling off their equities at record lows and moving into conservative investments, giving up chances for growth. Young says that more than 80 percent retained their portfolio allocation during the financial crisis and are now “well-positioned to participate in the recovery.”
History shows that market gains tend to emerge quickly after a steep decline. According to a recent report by the mutual fund company T. Rowe Price, stocks gained an average 33 percent in the year following market lows from 1962 to the present.
Consider the case of a 60-year-old man who earns $75,000 a year and whose retirement account was well funded before the economic crisis took hold. If he wants to retire at age 65 with about 70 percent of the income he had when he was working, he must save a whopping 45 percent of his wages, according to an analysis by Financial Engines, a firm in Palo Alto, Calif., that advises independent investors. But if he delays retirement until age 66, his savings requirements shrink to 23 percent each year. If he waits until age 67 to retire, he doesn’t have to save any more each year than he did before the crash to reach his retirement goal.
Getting back on track
“That’s the power of delaying retirement,” says Wei-Yin Hu, Financial Engines’ director of investment analysis and research. “If you stayed in the workforce two to three years without saving anything extra, you could get back on track to retire.”
Hu also points out that losing 30 percent in a 401(k) plan doesn’t mean retirees will be living on 30 percent less income in retirement. Most people have retirement income from other sources, including Social Security and perhaps a pension plan, neither of which is subject to losses from the downturn.
The positive power of automatic enrollment was also cited in the Vanguard report. It said that employees who were automatically enrolled in a retirement savings plan by their employers had a participation rate of 84 percent, compared with 60 percent of those with voluntary enrollment.
Automatic enrollment was one of several initiatives outlined by President Obama to strengthen Americans’ retirement savings. In his weekly address to the nation on Sept. 5, he said all working Americans should have access to a retirement savings account.
Carole Fleck is a senior editor at the AARP Bulletin.