2008 was a BAD year for retirement funds. Aside from the fact that it was a bad year for pretty much anything financial, retirement funds in particular are suffering for some non-financial reasons as well.

It’s estimated that at this point investors have lost between 30% and 45% of the value of their investments. That wipes out a lot of the last few year’s 10-20% annual gains that were seen by some in the market. These losses are beginning to make many a pre-retiree reconsider their plans for a cozy, no-worries golden years adventure.

So, What went Wrong?

What got us to this point, where the vagaries of the stock market can nearly devastate our retirement nest eggs? The move by businesses from the defined-benefit pension plans, to the market-based 401k/403b retirement arrangements.

The number of companies offering pension plans has continued to dwindle to almost nothing over the last couple of decades, replaced by employee-directed company-sponsored 401k plans. The companies have shifted the burden of responsibility from themselves to their employees. You hear a lot of good buzz that you have “more choices in where to invest” and “you can make a larger profit”, but now we’re seeing the dark side of that PR spin.

It is true that when things are good you can make more money on your own, investing in whatever you choose. The counterpoint of course is you can lose more money on your own, as well. No risk, no reward. The problem is that people are gambling with the money they are going to have to live off of when they are old and possibly can’t work anymore. That’s a dangerous thing to gamble with.

Defined pension plans fell out of favor when businesses realized how EXPENSIVE they become, as your workers become older and actually start using the pension. It was fine when the pension was this far-off cost that would be handled in 20-30 years. But when those 20-30 years passed, and businesses had to actually pony up the money, that became actual COSTS. And don’t mention the costs of administrating the pension, guaranteeing that enough money would be there for the retirees, calculating cost-of-living increases, etc.

Enter the 401k plans. Businesses loved them because it removed the burden of management and administration from them, and employees loved it (sort of) because they got to ‘play the stock market’. While the last few years’ stock markets were going up, it was fairly easy for a novice investor to eke out at least some profits, no matter what they invested in. Now with a full blown Kodiak Bear market, even the seasoned, life-long investment professionals are hard-pressed to break even with their investments. Those novice investors are like deers in a truck’s headlights; Not sure which way to go, and too scared to get out of the way. Next thing you know, BAM! 40% losses, and Bambi is limping into the government bonds ’safe zone’.

Not Out of the Woods Yet

Now, over the long-term, investors are told that stocks will always go up. Many an investment counselor can trot out pretty charts and graphs to prove that over a long enough period, the stock market has always shown an increase. That’s good if you still have 20-40 years worth of work left, but if you’re an older worker, that might not be an option you were planning on.

Workers under 40 years old – This demographic can still take the long-view of the economy and probably will be able to regain most if not all of their investment losses prior to retirement. This assumes that we don’t have a LONG recession, and things get back to stability and normality relatively soon.

Workers over 40 years old – This age group has a more serious problem. Roughly half of their investments have evaporated in less than a year. Even if you were right on track for retirement, this ‘detour’ is going to set everyone back significantly. You’ll have to plan to either work twice as hard to build up the retirement, plan to work longer before retirement, or plan to live on half the amount of income you originally calculated. None of these choices are particularly fun.

Workers over 50 years old – In this age group, things are SERIOUS. There’s not that many years left to accumulate the retirement, and with the economy the way it is now, age discrimination and downsizing threaten this group much more than others. It’s become a concern to just maintain the amounts already accrued. Risking the remaining amounts of money isn’t exactly an appealing option, seeing as how easy it is to lose it. Many in this age group may be very tempted to become risk-adverse, giving up possible gains for a guarantee against loss. But no risk, means no reward. Regaining the losses of 2008 might not be possible before retirement age, no matter what strategy is used.

What’s in the Path Ahead?

I’m going to do a bit of prognosticating now on some future effects of this massive decrease in retirement investments. I may be off, so I’ll revisit these forecasts in 20 years or so.

Less Promotions – I’m betting that many workers will opt to work longer, rather than do with less in retirement. Especially the Baby Boomers, the ones that are used to a certain ‘lifestyle’ that they’ve achieved. Since these people aren’t leaving the workforce, I’m proposing that in the next couple of decades it becomes more difficult to move up the corporate ladder. While age discrimination works against older workers in the middle and lower rungs, it works FOR older workers higher up (more experience and prestige/reputation). If no one leaves, no one can be promoted.

Permanent Adjustment to Frugal Lifestyle – Of course there’s going to be quite a few backsliders, going back to their Conspicuous Consumption roots, but I think that many out there are going to continue the (enforced) habits of frugal living. That equates in a serious on-going decline in demand in this country. And that equates to businesses having years and years of lower sales. People have been burned by a sudden downshift in the economy, and are going to remember that for quite a few years. Look to people storing away money and putting off many major (and possibly ALL) purchases.

Home Ownership Increase - This one seems counterintuitive at first, but let me explain. As the HUGE glut of houses continue to flood the market, these houses are SLOWLY being sold at near-fire sale prices. Banks are taking losses as people return the keys via ‘jingle mail’ (returning house keys to the lender via mail). Those houses aren’t going to evaporate. They are going to be priced down until someone buys them, if nothing else than to get them off the bank’s books. It may take quite a while, but anyone that wants a house at a reasonable price will be able to eventually find something before things settle down completely. The real estate speculators and banks losses are our gains.

Tighter Credit, but Lots of Credit Cards - Banks have been seen by many as the villains in this play; They are the ones that issued the bad mortgage loans. They aren’t loaning any  of the stimulus money they received from Congress. They have frozen lending almost entirely. They are the ones that created the CDO debacle, along with a myriad of other ‘derivatives’ investments that even they didn’t understand completely. Add to that mess, the recent high-profile Madoff 50 billion dollar Ponzi scheme, that has defrauded even the super-wealthy. I’m not thinking there’s a lot of love in the room.  I predict that there will be quite a few new regulations, reviewers, and a whole lot more scrutiny applied to the banking system. This in turn will continue to cause the banks to act VERY conservatively, keeping credit tight.

I expect however that consumer credit cards, while they are going to suffer too with the changes imposed on them by the Credit Card Reform Act of 2008, are going to continue to be plentiful. The reasoning is because the profitability of these consumer loans and the ease in which a bank can create them, will continue to be a significant source of revenue while other sources are drying up.

The times ahead are going to be interesting, and I’m fairly confident that we’ve seen enough upheaval to cause some permanent and/or long-lasting changes. Some things might not be so bad however. Our new financial reality is what it is, and people can get used to quite a few things when they have to.

We’ll make it. We always do.

What do you think the future will look like after this 2008 financial storm? Will you be able to retire or are you making other plans? Leave us a comment and let us know.