Rescue Your 401(k)!

It's up, it's down, it's up, it's down more ... watching the market's seesaw pattern in recent weeks has been enough to induce motion sickness in even the strongest-willed investors.

While the fallout from the financial crisis will have far-reaching effects on our economy, the stock market has been one of the hardest-hit areas -- and by extension, the retirement prospects of millions of everyday Americans.

Investors in all of life's stages have watched as their hard-earned savings have been whittled away by a panicky market. Fortunately, there are steps you can take now to make sure you're making the most of your 401(k), no matter your age.

For near-retirees
The unfortunate truth is that retiring during a bear market can seriously affect your portfolio's long-term survival rate. Look at it this way: If you retire with a portfolio of $1 million and plan on withdrawing 5% a year to live on, you've got an annual income of $50,000. However, if the bear market has whittled your portfolio down to just $700,000, you've either got to up your withdrawal rate to 7% to get that same $50,000, or make do on just $35,000 a year to avoid drawing down any more on your principal.

Increasing your withdrawal rate even by a small amount can drastically shorten your portfolio's life span. Going from a 5% annual withdrawal to a 7% rate means that your retirement savings could run out nine years earlier! If you plan on retiring in the near future, make sure you're aware of how the bear market can affect your odds of outliving your savings. If you can put off retirement for a bit longer, or make do with smaller dollar-amount withdrawals for a few years, you should seriously consider it.

For investors with years until retirement
While it's not a good idea to pour your money into the market all at once, if you can afford to bump up your contributions now -- while you're young and can let that money compound over many years -- do it. Remember that whole deal about buying low? Well, the market is certainly a lot cheaper than it was a year ago, so every dollar you funnel into the market right now buys a lot more than it used to.

Remember that saving for retirement is a marathon, not a sprint. It may be disheartening now to see day after day of red ink pile up in your brokerage statement, but you're in this game for the long run. In the grand scheme of things, over 20 or 30 years, the small bumps in the road won't really matter. When it comes to investing for retirement, it's the destination, not the journey, that counts.

It's natural to be afraid when we see market plunges like the ones in the past few months, but it's important not to let fear control you.

A fascinating study performed by University of Michigan finance professor H. Nejat Seyhun found that, from 1926 to 2004, 95% of the total dollar returns in the stock market were earned in just 5.1% of the months in that time frame. In other words, if you want to win, you've got to stick it out for the long run. Don't bail now and try to time the market on the way up.

For everybody
Unfortunately, there are probably a lot of people who didn't learn from the Enron and WorldCom debacles several years back -- loading up your own company's stock in your 401(k) is a risky move. While AIG (NYSE: AIG  ) and Fannie Mae (NYSE: FNM  ) weren't Enron-like frauds, they made bad decisions that basically wiped out shareholders. All these examples show that, while it's perfectly fine to own a small amount of your company's stock, it should never grow to become a significant portion of your retirement. Diversification is key to avoiding blowups in your portfolio.

Of course, one of the best ways to get your retirement plan back on track is to load up on the best investments around. If you're into the thrill of picking individual stocks, consider stepping up your allocation to recession-resistant consumer service companies like McDonald's (NYSE: MCD  ) , Kraft Foods (NYSE: KFT  ) , or Wal-Mart (NYSE: WMT  ) . Because we may be entering a period of lower valuations, stable dividend payers like Caterpillar (NYSE: CAT  ) and Altria Group (NYSE: MO  ) are also worth a look.

However, if you want to take the easy path to resuscitating your retirement, top-notch mutual funds are a great bet. If you want the lowdown on the best funds to help you rebuild your portfolio and reach your retirement finish line, look no further than the Fool's Champion Funds investment service. You can preview all our grade-A fund picks with a free 30-day trial today. Simple click here to learn more. 

Days may seem dark now, but with some careful planning, and a few good investments at your side, before long you can be back on your way to enjoying your golden years with plenty of cash on hand.

Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Kraft is an Income Investor recommendation and Wal-Mart is an Inside Value pick. The Fool's disclosure policy is here.

Read/Post Comments (14) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2008, at 9:08 AM, clackey3 wrote:

    I have great disappointment on the abundance of experts offering 401K advise to everyone except those of us that have recently retired and Are supplementing our Social Security with 401K and/or ROTH disbursements. How about some useful advice for those of us who don't have the option to wait 10 years for the market to recover? Although well diversified, I don't know the best way to manage disbursments. I can disburse from fixed income or other market choices. What to do?

  • Report this Comment On November 15, 2008, at 10:47 AM, raylin11 wrote:

    I'm with you clackey3. I see lots of advice for long term investers, I guess thats because no one really knows what to do right now for recent retirees that really got nailed with losses in our 401k's. Since Sep. of 2007 I've lost $170,000 of my retirement portfolio but stay with what I've got since I'm not sure of what to do other than stick it out. I'm not taking any disbursements yet although I need to start probably by March of 2009 when I will have been retired for a year. Our Social Security isn't enough to carry us through all the increases in living expenses. So yes, what do we do?

  • Report this Comment On November 15, 2008, at 11:32 AM, madmilker wrote:

    Amanda....sounds to me of what you's all about investin' in tat Fool's Champion Funds. Maybe if you and this site could write articles in givin' advice to all the investors without pluggin the dang Fool 100% of the time there would be more people not takin tat Fool for a sucker.

  • Report this Comment On November 15, 2008, at 1:26 PM, dudugil wrote:


    You have got to be kidding me. To say AIG is not an Enron-like scheme is a joke. This company has already drained close to $100 billion in government funds. These guys insured credit defaults for the entire universe, collecting bonuses for years, until the laws of probability (yes, there is a chance things can go very wrong at once, and it ought to be priced in your transactions) decided to catch up with them. At this point, I consider it unfair to see Jeff Skilling in jail for another 15/20 years, when the same type of tactics (it is amazing what one can do with volatility and correlation in MTM accounting) were used at the heart of the US economy. Capitalism is a good model, but it seems people finally found a way to trick it, in order to illicitly enrich themselves.

  • Report this Comment On November 15, 2008, at 2:10 PM, 181736065 wrote:

    Amanda, Amanda, Amanda.....

    How on earth can you say this based on the fact that every "diversified" portfolio I have seen in the last four months has been decimated? Bond funds, stock funds, blue chip dividend funds, precious metal funds have ALL gone down.

    "Diversification is key to avoiding blowups in your portfolio." That just isn't true nowadays.

    There has been nowhere to hide except. perhaps, currency plays and shorting.

  • Report this Comment On November 15, 2008, at 2:46 PM, FinancialFellow wrote:

    Amanda provied basic, solid advice. I would have liked to see her talk more about low cost index funds but overall it is still a good thing to see someone encouraging people to stay in the market - particularly in this market. Here's another good article on retirement:

  • Report this Comment On November 15, 2008, at 5:13 PM, TimothyVR wrote:

    It would be helpful to have some numbers put in to help understand what is meant by "near retirement". The world is not divided between those who are "young" and those who are already retired. I am about 18 years from retirement - a cushion, definitely, as I had no plans for early retirement, but I am in my mid 40s and not in the position of someone who is 30.

    So some clarity on definition would help.

  • Report this Comment On November 17, 2008, at 2:51 PM, knighttof3 wrote:

    Clackey3: here's some disbursement advice. Probably worth what it cost you to get it :-)

    If you've have enough fixed income to last you for 10 years, disburse for next 5 years from it and leave your stocks alone. Among fixed income, first liquidate low-interest safe bonds (treasury, agency); then cash/CDs; then junk bonds.

    At the end of 5 years, sell part of your winners in stocks and all of all losers you don't think will ever come back, then move all that money into fixed income like you had at the beginning (same proportion in cash, CDs, safe binds, junk bonds, REITs).

    Instead of 5 years, you can also choose to liquidate stocks whenever you think the market is too overpriced. But don't buy stocks even when you think the market is underpriced since (IMHO) you cannot afford the volatility.

    All this is valid if you've enough fixed income for 10 years. If not, judge for yourself how you want to change this strategy.

    I am not even remotely connected to financial industry so take all this with tons of salt.

  • Report this Comment On November 17, 2008, at 2:53 PM, knighttof3 wrote:

    One important point is don't sell your stocks in chunks. Dollar-cost-averaging is a winning stratgey when you are buying; but by the same token, terrible if you are selling. Just choose some point ofwhen you want to lock into profits (or have had enough loss) then sell all of the losers and some part of winners all at once. Don't tough the remaining winners until you run out of fixed income. My 2 C.

  • Report this Comment On November 19, 2008, at 4:44 PM, daherbie wrote:

    "While it's not a good idea to pour your money into the market all at once, if you can afford to bump up your contributions now -- while you're young and can let that money compound over many years -- do it. Remember that whole deal about buying low? Well, the market is certainly a lot cheaper than it was a year ago, so every dollar you funnel into the market right now buys a lot more than it used to."

    Really? do you think investing in the neikki in in 1992 after it had fallen over 60% was a good value? its now worth half of that 16 years later.

  • Report this Comment On November 21, 2008, at 9:09 PM, olRoger wrote:

    I think there is a presumption that there is some flexibility in 401.k or 403.b. I recall one company (Telos) that had all 401.k issued in shares in that company which did not trade on any board (i.e. only over the counter). Currently I have a choice of CREF or Fidelity. No one talks at all about CREF. and Champion has minimal coverage in Fidelity. OK, it is not so hot -- but it is the only pond I can swim. No, the Fools do not need to cater to my situation. But the attitude that is typically presented is that there are many choices. That is not always so true. Yes I can go many ways with my Roth and investments outside my 403.b, but that is not much. Fools did enable me to have a mainly cash position coming into the peak, but I foolish (NOT Foolishly) got back in too soon (10 K plateau). I am not as battered as some, but ....

  • Report this Comment On November 22, 2008, at 11:14 AM, BigDwane wrote:

    Lot's of discussion about diversification. Bet most of you never did divest into the precious metals arena, in the holding of the real deal such as rare coins. It's still not late to turn some of those 401(k)s into precious metals IRAs. The IRS has approved using proofs of American Eagle Gold and Silver for IRA accounts. Down the road folks will make up some of their their losses by doing so. Ownership of precious metals offer security, stability,affordability, liquidity, and profitability among others for the invester. It's worth the look.

  • Report this Comment On November 23, 2008, at 9:07 PM, goldenbeacon wrote:

    I'm retired. Age 64. In June I sold all my investments in my 401k and bought a Money Market. At the time, it paid 4%. It will soon pay 1%. Although I haven't earned much, I would have lost about 40% of my portfolio if I would have stayed with the investments. Is there anything I should fear about hanging in there with the Money Market?

    daherbie's comment was interesting about the Nikkei. If the market falls to 4000 as some "experts " are predicting, wouldn't it be wise to move your investments to a money market now? What's the downside?

  • Report this Comment On November 23, 2008, at 9:27 PM, oldman1937 wrote:

    Well dang it, I am 71 years old .... never quit my day job ..... and I thank the Good Lord I did not ..... but then I did not like retirement .... Plan on keeping it as long as can find my bu** with both hands ....... What has happened to honor and honesty on Wall Street ??????? I reckon it was never really there .... GOD HELP THE UNITED STATES OF AMERICA

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