Retirees tell me they have lost over 50% of their 401K Balance in the last year! (55, pension)

[Refugee56]

The company I work for has hired quite a few ex retirees in the last few months. These are people who were enjoying their retirement but must of had made some bad retirement choices in their investment. A few people in the media have stated they had lost most of their retirement money in their 401K in the current BEAR MARKET.

The Stock Market has lost on average 25% of its value since Summer of 2007. Assuming the average retiree has 40% of their 401K Money in stocks and 60% in Bonds and fixed income, the most they should have lost on paper is 10% of their money. This assumes no change or income in their bond or fixed income assets.

How are the current retirees losing all this money in today's market?

[Tesaje]

I'm just waiting for the little bubble this big bailout will generate to pull the rest of my stock money out of the market before the next big crash. I'm glad I pulled a lot of it out last summer.

[sweetana3]

you are assuming they had a diversified portfolio across the whole market.

Those who have lost big time were holders of usually large positions in one company or sector. For example, banks or investment companies. Remember Enron. They did not learn to spread the risk. You will reduce the return but reduce the risk. Many 401K accounts have large positions in the companies the employees work for and have their retirement plans with. Not a good scenario when something goes bad.

We have 25-30% in case in super safe CDs at over capitalized credit unions. The rest we have in a fully diversified portfolio and do not expect to need it for decades.

It is a scary time but if everyone buys high and sells every time they are afraid, they have the worst of both worlds.

[cdelena]

You are assuming that bonds have not gone down (many are down 7 - 20%) and that the average equity portfolio matches the broad market. There are a number of well managed diversified portfolios that are down more than 20% in the last 12 months... mine is.

People are down heavily in this market because all segments are down. Many of us are not fortunate enough to have defined benefit retirement plans and have little choice but invest in the economy. Annuities and conservative fixed income instruments are stable but have returned so much less on average that people look at the long term and take more risk on average.

It is not unusual for someone to look for a 7-9% return from their portfolio... 4-6% to fund withdrawals and 2-3% to cover inflation. A one million dollar portfolio will only provide $40-50k sustainable income over the long term so any substantial drop in value is very unnerving.

[HappyTexan]

The 60/40 rule though was pushed on the side during this bull market run. The financial magazines (Kiplingers and Money) were telling people they should have more in equities to beat the inflation.
They were touting a more riskier approach IMHO with a heavier investment in equities.

Even when the market turned bearish they still advised people to hang in there.
What people didn't see what that this is one angry bear !

[PNW-type-gal]

Originally Posted by cdelena

It is not unusual for someone to look for a 7-9% return from their portfolio... 4-6% to fund withdrawals and 2-3% to cover inflation. A one million dollar portfolio will only provide $40-50k sustainable income over the long term so any substantial drop in value is very unnerving.

And that's assuming that true inflation is 2-3% - by more reasonable measures, it's up around 6-11% and you won't get that kind of return from a CD, t-bill or bond.

One of the reasons that the stock market is so over-valued (IMO) is that people had to, perforce, put money in "riskier" investments, because "safe" investments don't return enough to keep up with inflation.

[texdav]

If they lost 50% then they have too much of thier money i9n stocks. That is a risk you take and same thnig happened in the recession in the past.

[knoxgarden]

Some may not have had the option to pull the money out of stocks or may have under-reacted.
The Supreme Court has give employees the right to sue companies if the 401K accounts are not handled in the best interest of the employees.
High court allows workers to sue over 401(k) losses - Los Angeles Times
Lehman Brothers employees filed a suit about this summer.
Lehman Brothers 401(k) Losses
It's going to get interesting.

[katie45]

I pulled a large amount out of my 401k and invested in CDs and a high-yield savings account. Since I'm over 59-1/2, there was no penalty, just paying the taxes, which have to be paid eventually anyway. Have seen a larger return just on the savings account alone than I did from the 401k.

[RichCapeCod]

Originally Posted by katie45

I pulled a large amount out of my 401k and invested in CDs and a high-yield savings account. Since I'm over 59-1/2, there was no penalty, just paying the taxes, which have to be paid eventually anyway. Have seen a larger return just on the savings account alone than I did from the 401k.

Katie:

Wouldn't it have been better to have done a lateral move, while still in your protected qualified retirement account, into a MM fund. That would have kept your monies growth under the umbrella of the tax protected retirement account instead of pulling the funds out into a taxable environment?

Rich