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Economic crisis scrambles retirement math

The 401(k) model of saving is under duress as stocks slide. Home equity losses don’t help.

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In one sense, the setback for the typical household is smaller than the bear market in stocks implies. Many Americans have no retirement account, and those who have work-based accounts don’t put all their savings in stocks.

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Savers lose 25 to 30 percent

Since January 2008, people who have been saving in a workplace plan for a period of 10 to 19 years have seen their account balances fall, on average, by 25 to 30 percent, much less than the S&P index during that time, according to numbers gathered by the Employee Benefit Research Institute in Washington.

But for many families, the home itself is the largest asset, one that may have declined a lot in value, depending on where they live.

“Millions of middle-class homeowners still have little or no equity even after they have been homeowners for several decades,” write economists Dean Baker and David Rosnick, of the Center for Economic and Policy Research, in a new report on baby boomers and the housing collapse.

Coping strategies

Americans are already beginning to adapt by working longer, saving more, and in some cases rethinking how exposed they want to be to the stock market.

Most Americans haven’t lost all appetite for investing in stocks, as occurred for a generation following the market crash that began in 1929. But some people with low risk tolerance are getting out of stocks for good, Miller says.

At the least, the bear market – worse than any since the Depression – serves as a reminder that stocks can go down even if you hold for a decade or more.

“I do believe it’s true that stocks have higher returns” than other investments, in general, Miller says. But “a lot of people had the view that was a sure thing.”

Whether people stay in stocks or not, what’s vital is to have contingency plans, such as fixed-income investments, in case stocks do badly, he says.

Alan Lancz, an asset manager in Toledo, Ohio, says he’s been putting more client money into bonds over the past 18 months, even as he sees a buying opportunity for stocks if share prices dip further.

Financial publications nowadays are matching investment tips with advice on how to spend less, such as a “101 ways to cut expenses” article on the investment website Morningstar.

Americans saving 5 percent

America’s savings rate, as measured by the Commerce Department, rose to 5 percent of income in the most recent quarter. Many economists expect that number to go higher still.

And workers are postponing retirement. According to a new survey sponsored by the investment firm ING Direct, 4 in 10 Americans believe the current economic climate will force them to retire as many as 10 years later than originally expected or not at all.

Some retirement experts call for new savings vehicles that do better at guaranteeing a modest but reliable stream of income. Ideas such as that were among those raised at last week’s congressional hearing.