To Restore Nest Egg Cuts, Keep Working

(McClatchy-Tribune Regional News delivered by Newstex) -- You are thinking of retiring, but your 401(k) is in the tank. What should you do?

That's easy, says Dallas Salisbury, president of the Employee Benefits Research Institute, a research organization in Washington.

Don't retire.

"Working one additional year, a person can make up for the entire market loss," said Salisbury, assuming that the 401(k) accounts (or 403(b), the version for people at nonprofit companies) don't erode much further. "That's because they didn't spend the money" they would have had they retired.

"All it takes is one year," he said. "You say that to somebody and it's like a light bulb goes off. You can look at your account balances and it looks like 'Gosh, the sky has fallen.' But for most people, even those on the verge of retirement, those losses can be made up."

Here's his thinking: Suppose someone aged 62 making $50,000 wants to retire in the next few months. His $180,000 401(k) lost 20 percent of its value, or about $36,000. In that extra year of work, the person could contribute 10 percent—or $5,000.

At the same time, Salisbury said, the retiree keeps paying his living expenses with his wages and does not draw on the fund. The $5,000 contribution, coupled with not drawing $31,000 or so for food, car payments or other daily expenses, lessens the blow.

Delaying retirement also means the employee will get a larger share of his Social Security payment and his health benefits may be covered longer.

The immediate situation may not be as scary as it looks. Trisha Brambley, president of Resources for Retirement, an advisory firm in Newtown, recommends that those close to retirement analyze their needs for immediate cash.

Instead of drawing down their 401(k) plans to pay for daily living expenses in early retirement, she advised trying to cover those bills other ways -- maybe through Social Security, pensions, certificates of deposits, or income-producing investments, such as income from rental properties or dividends from stocks.

"They may have more time than they think" to allow the market and their 401(k)s to rebound, she said. "They are not going to be cashing it in all on one day."

Brambley also suggested that people nearing retirement "have part of their nest egg in an annuity." More 401(k) plans, she said, are offering annuities as a component of their investment options.

Annuities are structured in various ways, but they provide a guaranteed income stream—as long as they are solvent. "You have to really review it," she said. "You have to talk to an expert," she said.

It is vital that the annuity, which is a type of insurance, include backup or re-insurance, and perhaps even backup to the backup. That can protect the annuity in case of a meltdown, she said.

Both Salisbury and Brambley said that this down market was a good opportunity to really assess one's tolerance for risk and to respond accordingly.

"In the past, people have said they wanted risk. That's easy for people to say when the market is up," Brambley said. "If you don't like this volatility at any age, you have to look at where you are invested."

Brambley recommends picking a date—perhaps a birthday or anniversary—to rebalance one's portfolio based on risk-tolerance.

Contact staff writer Jane M. Von Bergen at 215-854-2769 or jvonbergen@phillynews.com.