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Hey, Dude, Where’s My Money?

Jan 11, 2009
In the year between October 2007, when the market peaked, and October 2008, more than $2 trillion worth of stock value held in 401(k)s, IRAs, and “defined-contribution” (e.g., pension) plans was wiped out, according to the Boston College Center for Retirement Research. This amounts to something in the neighborhood of 40 percent of their value.

An article in last Thursday’s Wall Street Journal, “Big Slide in 401(k)s Spurs Calls for Change,” by Eleanor Laise,1 has 35-year-old Kristine Gardner, an IT project manager from Longview, Washington (is there irony in that place name?) bewailing her losses: “There’s no guarantee that when you’re ready to retire you’re going to have the money. You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”

Maybe Kristine will be ready to listen now to that simple piece of advice one hears at every Prepare-For-Your-Retirement seminar one attends: The closer you get to retirement, the less of your nest egg should be placed at risk. The market is for the long run, not for the home stretch to retirement. From our mountaintop perspective of 63 years, we can reassure Kristine that if she doesn’t lose her nerve and bail out when the market is in the basement, things should look rosier in 30 years—although “past performance is no guarantee of future results.”

The tanking of the market—the most precipitous drop most of us can remember—has indeed been a disaster. At least one billionaire who didn’t get bailed out (the only one?) committed suicide last week.2 The important point made by the Journal article, however, is in the headline. The market decline has produced all sorts of calls for change in retirement instruments. 401(k)s essentially replaced pension plans provided by companies. The latter were like an annuity or Social Security, in that they guaranteed a specified amount to a retiree for life. You knew where you stood. 401(k)s, on the other hand, guarantee nothing, and require workers to manage their own money. And even the most level-headed and least greedy among us took a hit in the recent downturn.

Some are now arguing for federalizing retirement funding, limiting the maneuvering room workers have to manage their savings, and other fairly radical proposals. The barn door has violently banged open, the horse—40% of our riskiest assets—is history (at least for now), and naturally everyone is screaming in pain. It is going to get worse, but it is also going to get better. Best we should calm down and try to take the long view (see above).

The progressive view—at least this progressive’s view—is that just as the worker is worthy of their hire, the retiree is worthy of a secure and comfortable retirement, free from anxiety over the money running out. The present arrangement does not provide that. Market volatility is too great for people who should be more risk-averse than many are, and many people simply don’t put aside enough—too often because they don’t earn enough—to assure a worry-free retirement.

With the Boomers living longer and facing retirement in huge numbers (the first generation heavily dependent on 401(k)s), the last thing our society needs is a horde of destitute old people. However, that may be exactly what we are in for. Therefore the current alternatives available to us must be enhanced, and we must, as a society, protect one another from destitution however we can.

The problem is a complicated one, and the sooner we begin discussing it calmly and progressively, the sooner we will come together with a solution.

Note: In an effort to recharge our batteries and prepare for the dawn of a new political day in America, we will take a week off All Together Now. We expect to be back on Monday, January 19—Inauguration Eve. Until then, thanks for reading!
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1 The Wall Street Journal, Thursday, January 8, 2009, pp. 1, 12
2 Banks rescue suicide billionaire’s interests, from CNN.com, January 7, 2009, accessed January 8, 2009
tags: Retirement | Economics

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