Retirement Savings: How Safe Is Your Nest Egg?

Your 401(k) is back! Unless, that is, you actually are going to need it soon. That seems to be the takeaway message from recent studies from investment firms like Fidelity Investments and Vanguard Investments showing that most workers have seen their retirement accounts recover to precrash levels, thanks to continued contributions and rising stock prices. Both firms, which provide 401(k) accounts, reported that most of the workers in their programs now have more money than they did when the stock market started its slide in 2008. The primary reason, they reported, was that continued employee contributions helped to offset declines in balances. The one group that isn't wholly back consists of older workers who have been on the job longest; that is, workers who are closest to retirement and will probably need to tap those funds sooner.

That's not irony, it's simple mathematics. Roughly 10 percent of workers who are between the ages of 55 and 64 and who have been at their jobs for at least 10 years still have less money than they had at the end of 2007, according to a recent report from the Employee Benefit Research Institute and the Investment Company Institute.

Accounts acquired over many years had more to lose to begin with. The small regular contributions that most workers have continued to make aren't big enough to make up for those losses. EBRI has reported that it expects it to take between three and five years for those workers to recover their balances. That is the same time frame in which many of them thought they would be retiring. (Workers can get a rough idea of how long it will take them to recoup their losses by checking the calculators at and Principal Financial Group.

That leads to a paradox for those near retirement. At an age when they are typically told to eschew risk, older workers may need to take on a bit more investment risk in the hopes of snagging bigger returns going forward. People who are five years away from retirement should have 60 percent of their portfolios in stock, argues Christine Fahlund, a senior financial planner at T. Rowe Price. And some of that should be in faster-growing investments such as small- company stocks and shares of companies in emerging markets like Brazil and China. Even folks who are one day away from retirement can't afford to keep all of their money in safe but low-interest bonds and banks, unless they are so wealthy they don't have to worry about how much money their money earns. That nest egg may well have to last for 30 years after retirement has started, so it needs to keep growing and earning the returns more typical of stocks over the long term.

People who lost savings can also protect their retirement lifestyles by insuring against the twin risks of living for a long time in a healthy state (thereby needing steady cash for living expenses, for a long time) and of falling ill and needing big chunks of money for long-term care, says Frank Todisco, of the American Academy of Actuaries. Pre-retirees can insure against the illness scenario by buying long-term care insurance. And they can insure against running out of money for a long, healthy life by buying "longevity insurance." That can include an annuity that doesn't start paying off until the later years of retirement, say 85 or so. But one of the most affordable and accessible ways of getting longevity insurance is by deferring the start of Social Security benefits, says Todisco. For every year between 62 and 70 that a person defers collecting their benefits, those benefits will rise by about 8 percent, and then they will rise with the cost of living forever after. It's far from a sure thing that 401(k) investors could do better than that in their own portfolios, so some workers may want to defer starting their Social Security benefits even after they retire. They can start to draw down their retirement funds and defer collecting those benefits until they've hit 70.

Sadly for pre-retirees who were already crossing out their remaining workdays on their calendars, most experts agree that the best route toward total recovery is working longer. Every additional year worked can add 7 percent to retirement income, says Fahlund. That extra year of work gives a near retiree one more year of income, a longer work history upon which they can grow their Social Security benefits, and another 12 months for making contributions that can help rebuild their 401(k) balances to the 2007 levels they fondly remember.