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, one of the hardest-hit areas has been the stock market -- 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 by even 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 that loading up your 401(k) with your own company's stock is a risky move. While Lehman Brothers and Citigroup (NYSE:C) 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 portfolio. 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 more recession-resistant consumer service companies like Unilever (NYSE:UL), Bunge (NYSE:BG), or Diageo (NYSE:DEO).
Because we may be entering a period of lower valuations, stable dividend payers like Johnson & Johnson (NYSE:JNJ) and General Electric (NYSE:GE) 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. Simply 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.
This article was first published Nov. 15, 2008. It has been updated.
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. Johnson & Johnson, Diageo, and Unilever are Motley Fool Income Investor choices. The Fool's disclosure policy is here.
