Sticking to the retirement plan may be working after all

Posted: May 20, 2012

For those who swear by “sell in May and go away,” what mantra were they chanting after the collapse of Lehman Brothers in September 2008?

“Sell after Lehman and never jump in again”?

Those nervous days still seem so fresh to me. I fielded many calls from readers worried that once-fat retirement nest eggs in IRAs or 401(k) plans might never hatch.

The Standard & Poor’s 500 Index, which many use as a proxy for the whole U.S. equity market, fell 38 percent in 2008. For many working people who had diligently deferred salary to retirement savings vehicles, the swoon manifested itself in the decline in value of their accounts.

But I’d hazard a guess to say that most people who take advantage of 401(k)s or IRAs don’t just shove their money into an S&P 500 index mutual fund. After all, “diversification” is the other inescapable advice bandied about by financial planners, retirement-plan sponsors, and moms everywhere.

While the portfolio hit may not have been 38 percent in 2008, it was painful enough for many to question why they should continue to divert current income for future use.

I wrote then that I intended to stay the course. I’d keep investing in the 401(k) plan offered by my employer, but rebalance the holdings, which were far too weighted toward U.S. stocks.

With the benefit of 2012 hindsight, I’m glad I did. In fact, despite the stock market’s stumble in May — this time driven by concern that the European financial crisis may be reaching its Lehman moment — I’m actually feeling pretty good about my perseverance now that the value of my 401(k) has more than doubled since the end of 2008.

Sure, that amount was augmented by the additional annual contributions I made and the matching amount provided by my employer. But not even half of the gain can be attributed to the new money flowing in.

A better gauge, perhaps, is the rollover IRA from my previous employer where I’d contributed a little less than $41,000 over a 10-year period ending in mid-1998. I’ve done very little tinkering with its mix since.

By the end of 2007, that account had grown to about $91,000. In the wake of Lehman’s bankruptcy and escalating financial crisis, the value plummeted to $55,000 in 2008 — about where it was in 2003. But as of mid-May, the balance topped $92,000.

All of which proves only that time was on my side. Those nearing retirement when the financial crisis erupted had no such luxury. And $92,000 doesn’t approach the almost mythical $1 million and more that experts say is necessary for many of us to retire.

The nonprofit Employee Benefit Retirement Institute (EBRI) said the average account balance for 23.4 million 401(k) plan participants was $60,329 at the end of 2010. Ordinarily, being better than average would make me feel pretty good, but EBRI also says that too many of us tap our 401(k)s for nonretirement purposes, including children’s college tuition.

In my first job out of college, I was making the equivalent of what would be about $25,000 a year now, and I did not set aside any money for retirement purposes. After all, there were student loans to repay and a VW Beetle to keep running.

But I began contributing to a 401(k) in my late 20s when I joined my second employer. I started small, and each year I tried to increase the amount I was saving.

When the amounts involved are tiny, it’s hard to see any progress being made in climbing the retirement mountain. Now at the midpoint of my career, I’m happy that my younger self started the climb.

The fact remains that Americans don’t save enough for retirement. EBRI’s 2011 Retirement Confidence Survey found more than half of workers say the total amount of their household’s savings is less than $25,000. (That amount excludes the value of their home.)

My household will face a new generation of college expenses in about a year. Those bills are sure to test my savings resolve in a way that the financial crisis did not. I might have to reduce my 401(k) contributions in favor of near-term tuition bills.

If I do, I’ll try not to fret. My nest egg may be more chicken-like than ostrich-sized, but at least it’s bigger than a robin’s. Even more important, my confidence has grown that retirement will not be out of my reach.

Contact Mike Armstrong at 215-854-2980 or marmstrong@phillynews.com, or @PhillyInc on Twitter. Read his blog, “PhillyInc,” at www.phillyinc.biz.

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