Bear Markets and 401k Investing

It's no surprise that the stock market's bear run has cooled the ardor many folks felt toward investing during the bull market.

What is surprising is that the stock market decline seems to be cooling investors' desire to plan for retirement, as well. If this emerging trend persists it could spell trouble for American's retirement future. As Benjamin Franklin once said, "failure to prepare is preparing to fail."

The number of people who said they have tried to calculate how much money they will need in retirement fell to 46 percent in 2001 from an all-time high of 51 percent in 2000, according to the annual Retirement Confidence Survey. This survey is conducted by the nonpartisan Employee Benefit Research Institute, the American Savings Education Council and Mathew Greenwald & Associates.

When pollsters asked whether the individuals had taken concrete steps to calculate what their retirement income would be (from Social Security, pensions and other sources such as a 401k only 39 percent said they had.

Why are people avoiding calculations that would help them plan their retirement, rather than just letting it "happen" to them? What are the implications, and what can be done about it?

Avoidance Strategies

There are three possible answers to the question of why people aren't calculating what they'll need and what they'll have.

Denial: Probably the simplest reason is that deep down inside, they know the news is bad and they don't want to hear it. The market decline is likely highlighting the flaws in many people's plans.

"There are a lot of people that aren't looking at their portfolios. It causes pain," said Malcolm Greenhill, a certified financial planner and partner at Sterling Wood Financial in San Francisco.

"It's more fun to calculate what you'll need when you get an answer you like," said Terrance Odean, assistant professor at the Graduate School of Management at the University of California, Davis.

Too complex: With the market tanking, savers are starting to realize that retirement planning involves more work than just putting their savings in tech stocks and watching the profits roll in.

Donn Sharer, vice president with MetLife Financial Services, believes that many retirement savers take a "Whack-a-Mole" approach to financial planning. In the arcade game, it's impossible to whack two moles that pop up at the same time. Likewise, Sharer says savers have a hard time dealing with more than one financial problem at a time.

Currently, they are bombarded with issues including declining portfolios, tenuous job prospects, and shorter-term financial goals like college and mortgage payments. "You start to get overwhelmed....People are starting to realize that their financial situation has many moving parts," Sharer said.

Wrong goal: Another reason why folks avoid calculating their needs may be that they've been working toward the "wrong" goal. Somewhere along the line it shifted from trying to figure out how to have a comfortable retirement to trying to figure out how to make $1 million.

People have "had it beaten into their heads that they need $1 million" to have a decent retirement, said Dr. Christopher Hayes, a psychology professor at Long Island University.

With the bull market rampaging and retirement portfolios leaping, many folks didn't think that they needed to plan carefully to achieve this goal. They figured they would quickly make $1 million and retire, and that would be enough to sustain them.

With the market down, the chances of reaching that $1 million target are slimmer. "It is scary for people to do (the calculations). Most people think they are at the losing end, that they can't save enough," said Dee Lee, certified financial planner and co-author of Let's Talk Money and The Complete Idiot's Guide to 401k Plans.

But having a simple numerical goal like $1 million is missing the point, says Lois Vitt, founding director of the Institute for Socio-Financial Studies. "The goal is to have a comfortable retirement," she said. "To think you need $1 million ... is not reasonable."

Long-term Impact

By refusing to accept realities in their portfolios and refusing to plan, Americans could be setting themselves up for longer-term problems.

"People don't treat (retirement) as seriously as they should and it's going to bite them," Lee said.

The question is would you rather know what your retirement will be like and have the chance to plan and compensate for a shortfall, or do you want to simply sit back and hope that your dream materializes?

Unfortunately, if you wait until retirement looms before you figure out your needs, the number of options available to improve your retirement will be limited.

Remain Confident

Because bear markets have been short-lived during the two decades that 401k plans have been around, many investors haven't learned how to deal with this pain.

As the market languishes it may be hard to believe that planning could actually bear fruit. But folks need to remain confident that their goals are attainable, Vitt said. They need to remember that, historically, the market has always rebounded sooner or later, she added.

The conventional wisdom is that for the long-term, savers should remain invested in the stock market because, historically, that asset class has offered the best rate of return.

This "advice to stay in the market for the long-term and stay confident in the market supports the notion that the goal is attainable," she said.

Plan Ahead

So, if you want to take charge of your retirement, the key is to sit down and do some planning (as painful as it might be). Just doing a quick calculation of your retirement needs can increase your confidence and the chances of reaching your goals.

People who have done a calculation are "better prepared and more confident. They are more likely to save and save larger amounts," said Ruth Helman, senior research associate with Mathew Greenwald & Associates.

True, it can be tough to estimate how much annual income you will need, especially if retirement is more than a few years away.

Here's a plan to get started:

1. Find out how much you should receive in Social Security benefits. The Social Security Administration mails statements every year. If you can't find yours, go to their Web site (ssa.gov) and request one, or use their online estimator.
2. If your employer offers a defined benefit pension plan, get a copy of your annual benefits statement.
3. Have your most recent 401k and IRA statements handy.
4. Determine whether you have any other savings that will be used as retirement income.
5. Visit the American Savings Education Council Web site (asec.org) and use their "Ballpark Estimate" worksheet.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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