But what are the brutal facts that must be faced? Here's a look at six:
1. Don't neglect this bit of advice ever again: Have a rainy day fund
Since time immemorial, financial advisers and personal finance columnists have told Americans to set aside three or six or nine months worth of living expenses in a rainy day fund -- just in case, you know, the economy collapsed. Well, plenty of Americans didn't listen to that advice and now they find themselves raiding their 401(k)s, IRAs, insurance policies and the like to make ends meet.
What seemed like trite advice now seems too important to ignore and dismiss again. Indeed, if you don't have six or even nine months set aside in a rainy day fund, do so now. You won't regret it.
2. It's going to take time to get back to even
The question on everyone's mind is how long will it take to recoup the losses in 401(k) plans or IRAs. Well, let's say you had $100,000 in your account before this mess began and it was worth $65,000 at the end of 2008. Christine Fahlund, vice president and senior financial planner with T. Rowe Price Group, made the following calculations: It would take, assuming a 5% nominal pretax return and no further contributions to your retirement account, nine years for your retirement account to grow back to $100,000.
Sadly, however that's in future dollars and not adjusted for inflation. To get the same purchasing power as $100,000 today, she said it would take more than nine years.
Now let's assume that you contribute $4,000 per year to your $65,000 account and it grows 5% annually. According to Fahlund, it would grow back to about $100,000 in just 41/2 years. Now, if by chance, you have the ability to double the amount you invest to $8,000 instead, it would grow back to $100,000 in three years. Said Fahlund: "It doesn't shorten the rebound time that much, because there is no time for these contributions to compound significantly."
3. Don't count on your pension
My prediction is that defined-benefit plans will disappear over the next 25 years and that you might want to think about a Plan B if you have traditional pension. At present, there are some 44 million workers and retirees who have a traditional defined-benefit pension plan and there are more than 29,000 such plans in existence, according to the Pension Benefit Guaranty Corporation (PBGC), the federal corporation that insures defined benefit plans.
But many of those plans, even with the latest pension law changes, are in deep trouble.
Here's what consulting firm Mercer said in a recent release: "The chaos that has been observed in the world's financial markets over the last 12 months has had a major adverse impact on pension plan funding and will negatively impact corporate earnings in 2009. Pension plans sponsored by the largest U.S. companies have seen a decline in funded status -- the ratio of assets to liabilities -- from 104% at year-end 2007 to 75% as of Dec. 31, 2008. This equates to losses of an estimated $469 billion over 2008, causing an aggregate surplus of $60 billion at the end of 2007 to be replaced an estimated aggregate deficit of $409 billion at the end of 2008."
And that bad news comes on heels of this bad news: The PBGC noted recently that 4% of all single-employer pension plans, or 1,225 companies, terminated their pension plan in fiscal 2007. In addition, the PBGC became the trustee of 110 "insolvent" plans that were sponsored by financially distressed employers that same year.
According to the PBGC, 75% of plans ended in what it calls "standard termination" as opposed to financial distress were small plans with fewer than 25 participants. While it's important to check the financial health of your defined-benefit pension plan no matter whether you work for a large or small employer, it would appear especially important if you work for a small firm.
Of note, small-plan sponsors often terminate their plans because the business owner dies or sells the business. Sponsors also shut down their defined-benefit plans as part of retirement-program restructuring or because of the expense of the benefits, adverse business conditions, the expense of plan administration, the sale of the company or liquidation. Learn more about the PBGC and what it does at this
Web site.
4. Good-bye 401(k) match
Perhaps it's PR ploy. If so, it worked for a bit. Republic Bank of Louisville just broke ranks with nearly every company in America that sponsors a 401(k) plan: It actually increased its 401(k) match and improved its vesting schedule for workers from six years to two years. See the
release.
By contrast, dozens upon dozens of firms -- Mohegan Tribal Gaming Authority, The Denver Post, Sears, and Starbucks to name but a few -- have eliminated their 401(k) match because of bad business conditions. The takeaway: You may need to make up the difference and you may need to forget about your company putting back the match for a long time to come.
5. It's the taxes that will kill you
Many pundits warn about health-care expenses in retirement, suggesting that the average 65-year-old couple retiring today would need more than $200,000 set aside to cover such expenses. But according to research from Securian Financial Group, taxes consume a bigger slice of retirees' spending pie than any other expense.
Michelle Hall, manager of marketing research for Securian, noted that high-net-worth Americans, those with $1 million, paid an average of $25,226 in personal income tax per year. When you add in real estate, capital gains, and personal property tax, the total average annual tax expense was $40,578 or about 4% of their net worth. By contrast, actual health-related costs came in at $6,681 on average per year, or less than 1% of their net worth.
The takeaway: Make sure you work to reduce your tax bills, not just cover your health-care expenses in retirement.
6. It's time for some post-modern portfolio theory
We've all be led down the primrose path thinking that we should put 60% of our money in stocks and 40% in bonds. Well, somehow, that theory didn't work out in reality. And now it's time for some new thinking on the subject, such as that espoused by Moshe Milevsky and Zvi Bodie. Those professors and others are talking about the need to transfer and insure risk long before we discuss the reward side of the equation.
No doubt there are other brutal facts that must be confronted in the post-Madoff, post-recession era. Thankfully, there's space below for other pundits to post their comments. Confront away.
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.