3 Ways to Get Your 401(k) Back on Track

Here is how employees are attempting to fatten up their nest eggs

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We’re all searching for a quick way to fatten up our nest eggs. But all the potential remedies require discipline and patience. And the closer to retirement you are, the more difficult it will be to recoup stock market losses. Two new reports released today chronicle how long it will take to recover investment losses and how workers approaching retirement age plan to cope. Here are the 3 difficult, but not impossible ways to get your 401(k) back on track.

Rebounding returns. The easiest fix would, of course, be a full recovery of the stock market. But the returns necessary to repair your retirement accounts are unlikely to happen any time soon. Baby boomers over age 55 who wish to retire in the next two years will need annual investment returns of 13.64 percent to recoup their losses between January 1, 2008 and April 30, 2009, according to calculations released today by Mercer, a benefits administrator and consulting company. Investors who have 5 years to recover will need returns of 5.44 percent annually to get back to where they were a year and a half ago. Those with a longer time horizon will need only a 2.72 annual rate of return to recover over 10 years and just 1.81 percent annually over 15 years.

Do it yourself. Since it is highly unlikely that most of us will see double digit returns this year, higher contributions to retirement accounts will be a necessity for those who want to retire. Some 69 percent of workers age 50 and over believe they will need to save significantly more for retirement as a result of the economic crisis, according to a survey of 2,232 employees by consulting firm Watson Wyatt. The average participant Mercer analyzed is already saving 8.8 percent of their salary for retirement. Participants over age 55 who wish to retire in 2 years will need to contribute an additional 16.5 percent of their salary annually simply to recoup their losses between January 1, 2008 and April 30, 2009, Mercer calculated. Alternatively, workers could also save an extra 6.6 percent of their salary over 5 years, 3.3 percent over 10 years, or 2.2 percent over 15 years to recover from the market drop, according to Mercer calculations that assume a flat rate of return. While all workers with traditional 401(k) plans can contribute up to $16,500 in 2009, some employers offer their workers age 50 and older the opportunity to make catch-up contributions worth up to an extra $5,500 in 2009.

What retirement? Delaying retirement isn’t an option for all retirees. But if you can, working an extra year or two is a sure way to pad retirement accounts and reduce the number of years your savings must last. Some 44 percent of workers aged 50 and over have increased their planned retirement age in the last 12 months, Watson Wyatt found. Many workers age 55 to 64 (34 percent) plan to delay retirement for 5 years or more. The rest say that retirement must be postponed between 3 and 5 years (20 percent), 2 years (23 percent), or 1 year (13 percent). The top reasons given for delaying retirement were a 401(k) decline (76 percent), the high cost of health care (63 percent), higher prices for basic necessities (62 percent), and to keep health care coverage (56 percent). Workers without a traditional pension generally expect to retire later. About 57 percent of the workers surveyed by Watson Wyatt with a traditional pension plan to retire at age 65 or younger versus 44 percent of those with only a 401(k) or similar retirement plan.

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