Despite the recent rebound in the market place, not all is well in most 401k accounts, as MarketWatch reports in “Plenty of Reasons to Worry:”
Happy days are here again, right? After all, the markets are up, Americans are twittering happily about their 401(k) accounts, and life is good, right? Not so fast.
The Employee Benefit Research Institute just rained on our parade.
According to EBRI’s analysis of retirement plans in America, retirement security is anything but a given for the vast majority of Americans.
“Americans have a great deal of work to do after the tremendous loss of wealth in 2008 to ensure financial security in retirement,” said Craig Copeland, an EBRI senior research associate, in a release. Here are some reasons to worry:
* Defined-contribution plans, including 401(k)s and the like: Among all families with a defined-contribution plan, the median plan balance was just $26,578 in mid-June, down 16.4% from $31,800 in 2007. The losses were higher for families with more than $100,000 a year in income — their DC plans fell 22%. And those with a net worth in the top 10% saw their DC plans drop 28%. (Older savers have more in their accounts. Pre-retirees had about $70k in their plans. Assuming a 4% withdrawal rate that gives you $2,800 in annual income.)
* IRA/Keogh plans: Among all families with an IRA/Keogh plan, the median value of their plan was $28,955 in mid June, down 15% from $34,000 in 2007. Pre-retirees had about $52,000 in their accounts.
That’s bad, to be sure. But what’s even worse is that not enough Americans have retirement plans at work. According to Copeland’s analysis, just four in 10 families had a member participating in an employment-based retirement plan — either a traditional defined-benefit pension plan or a defined-contribution plan — from a current job. If my math is right, that means that six in 10 American workers don’t have an employer-sponsored retirement plan.
While that indeed does not sound too encouraging, it is up to each individual to ramp up their savings via a 401k and other means of setting money aside for retirement. No one else is responsible.
What concerns me more are the losses that many have experienced when the markets collapsed in 2008. Feedback from readers confirmed that many have sold their positions at steep losses and stayed out of the market because they were too afraid to jump back in to take advantage of the recent upswing.
By the time investors realize that they need to participate again, it will be too late. I hope I am wrong here, but I believe that current upside potential is very limited and grave downside risks remain setting up a potential repeat performance of last year.
This may not happen right away, but the economic outlook simply does not give me the warm fuzzies. If any future data shows that we’re not moving out of the recession, this rally will be over. I can only hope that investors have learned how to protect their portfolios when the long-term trends show that we are heading south again.