Older workers face huge account losses, but if you’re young, there’s still time
By Karen O’Shea
Staten Island Advance
Sunday October 26, 2008
STATEN ISLAND, N.Y. — Despite recent losses in their retirement funds, young and even middle age people with 401(k) plans and lots more years of work ahead of them have an unprecedented opportunity to buy low, financial experts say. Money that continues to come out of their pay checks each week for those retirement funds is already buying more stock at much cheaper prices — a process known as dollar cost averaging.
Call it looking at the economic glass half full.
But those who are within five years of retirement and still heavily invested in stocks might be looking at the glass as half empty.
The Wall Street madness has hit those folks hardest and likely means they will need to work longer to recoup stock losses and eventually reshift portfolios to more conservative government bonds and short-term funds such as money markets. The latter, most experts say, is what that demographic should have been in before the financial crisis hit.
But the last thing anyone should be doing now is sticking a head in the sand.
“They should face the situation and take control. It’s their future,” says tax attorney Richard Gabor of the firm Gabor & Marotta.
That’s what 66-year-old West Brighton resident Shirley Henick finally did last week when she met with a representative from Met Life to discuss the status of her 403(b) retirement plan. In an interview a few days before the meeting, she acknowledged being nervous because she didn’t know where her plan stood or what, exactly, it was invested in. Other than the occasional review of statements she receives in the mail, she’s paid little attention to the plan she’s contributed part of her wages to for nearly two decades.
“Maybe I will have to go back to waitressing,” she said with a chuckle.
All her life she’s worked, often juggling waitressing and office jobs. She has money invested in her retirement plan, money in the bank and some dividends from blue chip stock her late mother once owned. Her own parents had access to few such investments and she often felt lucky to have what she had.
In the last few weeks, though, she’s realized that she’s not entirely sure of just what she has. Many people have found themselves in similar situations.
A worker in the office of the Retired and Senior Volunteer Program (R.S.V.P.) in Westerleigh, Mrs. Henick’s plan is similar to a 401(k) but is the kind of plan offered employees of nonprofit, tax-exempt organizations.
“I have to be honest with you I don’t really understand everything and I have to have someone show me and explain it to me,” she said. “Right now I’m just crossing my eyes, my fingers and toes that it will come back, and I hope I live to see it.”
The trillions lost in the market over the last few weeks was not money in the bank — but value.
And Gary Capaldo of FRCT Wealth Management in Travis has been reassuring clients in the last few weeks that the value will return to the stock market because, he noted, that’s how the most wealth is created over time.
For young people, meanwhile, he said it’s a great time to buy more stock at less than half the normal price.
“The stock market is the only place when there is a sale everyone runs away. It really is an emotional thing and that’s the problem. Most people are making emotional decisions or they are making short-term decisions with long-term money,” added Capaldo, who teaches a financial planning certification course at Wagner College.
He even advises older clients to stay diversified and maintain some stock in their retirement portfolios. That’s because stock is the best inflation hedge, he said. Bank certificates of deposits, for example, often offer a rate of return less than inflation.
And Capaldo said most 401(k) plans are lifelong investments that people are not immediately draining upon retirement. They may also have other investments they can tap when they retire.
At the very least, befuddled investors can go on-line and look up their statements and even make changes to their portfolio.
After refusing to look at my own 401(k) for several weeks, I took a peek recently. I found that my account is down 20 percent so far this year and 13.7 percent for the last two years, but I also could see that I was up more than 11.6 percent from 2006 to 2007.
I asked a customer service representative at my investment firm to mail me a history of statements — on-line statements only go back a few years — so I can look at the historical record and see if it matches up with what experts contend: That the stock market always averages up over time.
More than half my portfolio is still dedicated to stocks; the rest remains in more conservative short term investments such as bonds and money markets. The Treasury Department said Sept. 19 that it will back money market retirement funds.
And there’s another important reason not to take money out of a 401(k) plan — you will pay income tax on the withdrawal and a 10 percent penalty.
Personal financial blogger Nina Smith wrote in April: “There’s never a good time or reason to cash out” funds from a 401(k). “Do you really want to give up decades of tax-free compounding?” she said then.
In an e-mail last week, Ms. Smith said she still subscribes to that philosophy.
But in an op-ed piece in the New York Times late last month, Teresa Ghilarducci, a professor of economics at the New School for Social Research and author of “When I’m 64: The Plot Against Pensions and the Plan to Save Them,” argued that the government’s $700 billion bank bailout should have included help for older workers and retirees who’ve seen their “risky 401(k) savings accounts erode.”
Ms. Ghilarducci has argued that the federal government must create a more secure system of investments for retirement accounts, especially since traditional company pensions have disappeared over the last few decades, replaced by 401(k) and other kinds of individual retirement accounts.
Mrs. Henick reported back to the Advance after her meeting Thursday with Met Life on her retirement plan. She learned that the stocks she was invested in were down about 22 percent and she worked with a representative of the company to move about half her portfolio out of more aggressive equity funds into more conservative fixed investments. A small portion of her portfolio remains in stocks.
“It probably won’t make the same return, but I’m too old for that,” she said.
Mrs. Henick said the change in value has not changed her plans for retirement. She wants to work about four more years, or until she turns 70.
“You have to take it for what it is and go on. I’m not going to make myself sick over it,” she added of the market.
