Four Ways to Protect Your Retirement From the Ongoing Financial Crisis

By , Money Morning •

By Jennifer Yousfi
Managing Editor
Money Morning

In the depths of a bear market that has carved between $500 billion and $2 trillion from U.S. retirement accounts so far this year, as many as two-thirds of all Americans have stopped contributing to their retirement plans, a new study shows.

And that’s precisely the wrong decision to make at the wrong time. No matter how poorly the financial markets are performing, saving for retirement has to remain a top priority.

“It's not a time for people to stop contributing,” Diane Young, director of retirement and goal planning at TD Ameritrade Holding Corp. (AMTD), the Omaha, Neb.-based brokerage firm that conducted the retirement study, said in an interview with Bloomberg News. “Because time is money, it's important to stay on track.”

According to the Ameritrade study – released yesterday (Tuesday) – 63% of Americans have completely stopped contributing to their retirement plan. Financial strain due to the economic downturn was cited by half (50%) of those who say they have reduced or stopped contributing to their retirement plan. Unemployment (32%) and healthcare costs (25%) also were cited as key factors affecting their ability to contribute to their retirement plan.

Only 54% of survey respondents, which included senior citizens, indicated they had a retirement account. Of that number, one out of three had less than $50,000 in investment assets.

But slacking off on retirement savings now is only going to hurt you more down the road.

Chipping Away at Retirement Assets

Giving up the power of compounding can be the most costly mistake an investor can make when it comes to investing for retirement, but unfortunately that’s just what many are doing in light of the dismal market performance.

And those dismal returns aren’t the only factor hammering the bottom line of retirement accounts these days. Retirees and those close to retirement are feeling as if they are under attack from all sides due to the factors that threaten a comfortable retirement.

The main source of income for many retirees continues to be the Social Security Administration. But the Social Security program has been at risk for years as life expectancies continue to grow and the number of retirees advances in kind. The program will only come under more pressure as the baby boomer generation edges closer to retirement.

"Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires," the most recent trustees’ report said.

Many retirees depend on dividend payments from investments to supplement income. But with a growing number of companies reducing or eliminating dividend payments in the face of poor earnings or a changing business landscape, that income stream is dwindling.

Even companies with long track records of dividend growth, such as General Electric Co. (GE) and Bank of America Corp. (BAC), have been paring back.

Given the current market conditions, selling a stock that has eliminated its dividend is no longer as likely to make up for that lost income. 

“If I'm down 25% in dividend income, but the stock is down 35%, if I sell the stock, can I afford to lose another 10 to 15% by selling?" Howard Silverblatt, a senior index analyst with Standard & Poor’s, told The Associated Press. “Younger investors can wait the market out and sell the stock when it bounces back. But older people are really stuck in a bad spot.”

Companies with poor earnings are also cutting back on company contributions to 401(k) plans, which can downright wreck your expected retirement calculations. General Motors Corp. (GM) recently announced that it would discontinue company-matching contributions for non-union employees until economic conditions improve.

According to a recent survey by Watson Wyatt Worldwide Inc. (WW), 2% of companies surveyed have already decreased 401(k) contributions, while another 4% are planning to do so in the 2009.

Retirees with defined benefit or pension plans aren’t in much better shape.

According to Adrian Hartshorn, an actuary with Mercer, a business consultant subsidiary of Marsh & McLennan Companies Inc. (MMC), the pension account assets of companies in the S&P 1500 are shrinking. At the end of 2007, the companies Hartshorn tracks had a collective surplus of $60 billion. But stock-market losses have transformed that $60 billion surplus into a $35 billion deficit.

Protecting Your Retirement

If you find yourself the victim of a cutback in company contributions or a loss of dividend income, make sure you take the initiative to safeguard your retirement. 

“Redo your financial planning and figure out if you need to save more now,” Robyn Credico, Watson Wyatt's national director of defined-benefit consulting, told The Washington Post.

Here are some more steps you can take to help protect your retirement account, even during difficult market conditions:

  • Be Aware: AARP’s website has a number of interactive financial calculators that will help you estimate everything from how much you need to save for retirement to how much income you can expect during retirement. While you want a long and healthy life, you don’t want to outlive your money, so be sure you don’t underestimate your time horizon.
  • Be Proactive: If you think you’re going to come up short when it’s time for retirement, reconsider your options. Some workers are delaying retirement to give their assets more time to grow. Other retirees are supplementing their income with part-time work or curbing expenses by cutting back on unnecessary expenditures.
  • Be Thrifty: Save as much as you can. Make sure you’re getting the most out of your company 401(k) plan by maximizing the company match. And try to save the maximum annual limit for your company’s 410(k) plan or your traditional IRA. Contributions to your retirement account often reduce your taxable income, so it might not be as much of a sacrifice as you think. Indeed, some investors do double damage to themselves by ending their retirement plan contributions, but forgetting to also adjust their tax withholding. That can make for an ugly surprise at tax time – either with a smaller-than-expected tax refund or a bigger-than-expected tax bill.
  • Be Investment Savvy: Align your retirement investments with your time horizon and risk tolerance. Generally, younger investors can tolerate more risk, while those closer to retirement need to choose more stable options. Money Morning Investment Director Keith Fitz-Gerald recently recommended American Century Capital Preservation Fund (CPFXX) as a “safety-first” investment choice for investors close to retirement. And don’t be overly dependent on dividend income or a company pension fund, both of which could be affected by overall poor market conditions or weak company earnings.

News and Related Story Links:

  • CNNMoney.com:
    Dividend cuts eat away at retirement income