Your 401(k) Might Be Better Off Than You Think

From today’s Wall Street Journal:

Get this: Despite the biggest and broadest decline in financial markets in a generation, the median 401(k) retirement account at Vanguard Group on Sept. 30, 2009, was up 7% from where it was two years earlier, when the market was near its all-time high.

The Reason?…

Continued regular savings matter a lot. If you have continued contributing to your retirement account throughout the stock-market debacle—and even better, if your employer continues to match your contributions—your account probably has more in total dollars than you expected. Younger people, who have smaller balances to begin with, will see a bigger impact from their regular savings.

You can read the full article here.

In a way, continued contributions during a down market masks the losses and helps you feel better about where you are. It’s also a good strategy for making the down market work for you. You can even make it work harder for you by increasing your contributions during the down market. That’s the strategy my wife and I took during this downturn. So far it’s paying off. Our account value is about where it was at the high. Our personal rate of return for 2009 is around 30%.

10 thoughts on “Your 401(k) Might Be Better Off Than You Think”

  1. I have to admit that the down market worked out pretty well for me. I’d just cashed out my Roth IRA portfolio and moved it to Fidelity a bit before everything went off the cliff. I’d been hesitating about getting back into the market because it was so inflated – that and sheer laziness had me still in cash when it went boom!

    I think I got back in around July 09 and the funds have been doing really well – up 27 – 30% from when I invested.

    The 401k took a bigger hit since it was invested all the way through, but it’s recovered & appreciated nicely. I upped the contribution amount just 2% to take advantage of the “cheaper” prices and reallocated a bit – it should be nice to see the final balance once the employer match is distributed at the end of the year! (Although I do wish that it was still being distributed & invested per paycheck like it used to, since I think the market will be higher at the end of the year, but that life!)

  2. I also increased my 401K contributions during the downturn, my returns for 2009 were +34.1%! Now I’m pretty much back to where I was in 2007. I’m very glad I stuck it out, bailing out in March would have been a disaster!


  3. If you invest regularly on a weekly, bi-weekly, semi-monthly, or monthly basis, as in a 401(k), I think it is helpful to adopt the following attitude: If the market is down, you are buying more shares at a low price (buy low is half of the formula for making money by investing), and if the market is up, your account value is high (sell high is the other half of the formula). Either way, you have a positive, winning attitude, and that helps you stay the course.

  4. What a way to spin it! The ROR is still undoubtedly negative for the past two years (mine is -8.08%), yet my account value is about even since I’ve contributed (and employer) an extra $16k in those two years.

    Granted my 401k balance is not large, but I suspect someone going into the crash with a $500k (or more) balance is still far, far, below the amount they had two years ago (even if you ignore the contributions like this article did).

    Having my account breaking even after two years of contributions is not a positive thing. I’d have a $16k higher balance today, had I been in Stable Value during the past two years.

  5. I reduced my 401k contributions to more aggresively save for a house down payment late last year. At the time I knew there would be the trade-off that Dave discusses. I keep telling myself I’ll ramp up the 401k once we’re in a house.

  6. JLP: sorry, didn’t mean to imply you were spinning — was referring to the original article you linked to on the WSJ by Karen Blumenthal.

    Having the account balance equal to where it was 2 years ago is still not even a return “of my capital”, much less a positive return “on my capital”.

    You are right, it could be much worse, and we are not out of the woods yet.

  7. JLP,

    You’re right, it COULD be a lot worse. Strike that, it WILL be a lot worse!

    What makes anyone think that we’re suddenly out of the storm? We’re trading completely on technicals right now; it’s nothing but pure emotion and optimism. And while I try to be as optimistic as the next guy, you also need to be realistic.

    The fundamentals are horrible right now. There is almost no positive improvements in ANY part of the economy. The CPI is down; the PPI is down. Credit is contracting at record rates. People are losing their jobs like it’s their job! We’re going to have a decade of structurally high unemployment unless there is a major industry breakthrough similar to the Internet.

    It blows my mind that anyone would continue putting money into the market right now. Look at the risk/reward. This rally has got maybe another 5%-10% to go if we’re lucky. But the downside is a whole lot worse! Would you risk another 30%-50% down just to squeak out a few more points up? I sure wouldn’t.

    If you were blind enough to miss the first huge fall down then what makes you think you’ll see the next one?

    If you have any money in stocks now cash them out, be happy you got back a decent portion of what you lost, and move it to a safer place! Otherwise you will have no one to blame but yourself AGAIN as you watch your dreams of retirement slip away.

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