U.S. Recession: Choosing Between Surviving Today or Preparing for Comfortable Tomorrows

In a story last month, "The Incredible Shrinking 401(k)," The Motley Fool noted that the retirement backstop many Americans are counting on to ease them through their golden years had not weathered the storm of the past two years very well:

A recent joint report from the Employee Benefit Research Institute and the Investment Company Institute revealed that the average long-term 401(k) account balance fell 24% last year -- and that even includes the money that employees and employers put into their accounts! The study looked at accounts held consistently since 2003 to get an idea of how longer-term investors were faring. The news is even worse when newer accounts are added into the mix -- newer accounts bring the average 401(k) loss in 2008 up to 30.5%.

This report confirms the dreadful truth that investors themselves have learned -- folks who followed a steady, long-term commitment to their retirement plans still got the shaft. These investors weren't trying to time the market, chase hot recent performance, or invest in speculative areas of the market. It's truly depressing when a portfolio loses nearly a quarter of its value, even after you make your hard-earned annual contributions!

While the rout in markets no doubt caused a great deal of damage, it looks like other fallout from the economic downturn -- the one that isn't over despite what Washington and Wall Street keep telling us -- is also ravaging the nest eggs of many Americans. That's because when it comes to choosing between surviving today or preparing for comfortable tomorrows, as the Pittsburgh Post-Gazette reports in "More Turning to Retirement Plans for Financial Relief," more and more people are being forced to go with the former:

Early returns indicate the recession is causing more people to take withdrawals from their retirement plans for reasons other than rolling them over to other plans or because they've retired.

Investment manager Vanguard reports the number of workers who borrowed money from their 401(k) plans in the first half increased 6 percent. Nonhardship withdrawals, made by workers 591/2 and older while they are still on the job, rose 14 percent during the same period.

"We speculate that the increase in loans and nonhardship withdrawals is related to the general economic conditions," Vanguard said in a report issued in July.

Comments

[Spokaneman:]

Investors have lost 24% from the market high, but that included a very bubble like run up from 2005 to 2007. More discouraging is the fact that the market return for the past 10 years has been effectively 0% and probably around -30% on an inflation adjusted basis.

Sure, people that put new money in the market in 2006 and 2007 have been hammered, but I suspect that represents a small fraction of the total money in the market. For those of us that have been investing for decades and have effectively lost a decade or more to inflation, its a disaster.

Nov 02 01:03 PM