Despite the Economy, You Can Afford Retirement

By now, many retirement savers have seen the grim math: lose 50 percent of your portfolio and you have to earn 100 percent to get back to where you should be. How long is that going to take?

For many investors it could take years. From its peak in October 2007, the Standard and Poor's 500 Index lost 57 percent until finally bottoming out on March 9 of this year. It has since rallied, but the S&P is still down about a third from its high.

Retirement accounts have fared a bit better. Buoyed by continuing contributions (most workers did not cut their contributions or change their investment choices during the rout, according to a survey by Hewitt Associates published in May), and because very few 401(k)s are invested solely in the hard-hit S&P, they've lost less and recovered more. At the end of the second quarter of this year, the average 401(k) account was off about 22 percent from where it stood at the end of 2007, according to Fidelity Investments. That means a middle-of-the-road retirement saver could recover in less than two years, if she continued to make contributions, received a company match, and saw typical long-term returns in her well-balanced portfolio. At least, those were the findings of a study published earlier this year by the Employee Benefit Research Institute.

But the recovery time for anyone who isn't Ms. Median could be far shorter or longer, and which it is depends on how old you are and how much money you had before the crisis began. The younger you are and the less you'd saved, the faster you'll recover—some of the youngest workers may have already recovered. Older savers who are already in or near retirement will take longer to rebuild. Folks over 56 who had all their money in the stock market "really got creamed" and will take the longest to regain what they lost, says Jack VanDerhei of the Employee Benefit Research Institute.

Investors who want to crunch their own numbers can try some of the new how-long-to-recoup calculators that have started populating the Web. There's one designed by the investment firm T. Rowe Price at Kiplinger.com, another at Principal Financial Group, and a third at the financial software group Ativa's site.

What's the best way to rebuild your nest egg? According to most financial advisers, don't lament the tumult of the last year or try too hard to profit from short-term share prices going forward. Instead, they say, clients should simply stick with their plans: save and invest more, spend less, and try not to worry about the ups and downs that will always be a part of the financial markets.

Young investors have the best shot at getting back to whole quickly for a variety of reasons, says Michael Doshier of Fidelity Investments. Because they have the least amount saved, their regular contributions will quickly make up a larger percentage of any amounts they lost. With decades left to invest, they can afford to take bigger risks, putting more money into stocks, which have a higher long-term expected return than safer investments like bonds. It's actually a benefit to them to be contributing and buying into a bear market: they are able to invest at what most experts expect will be great prices when seen from a vantage point 20 or 30 years out.

For older folks, the news is less good. Some of them—those already in retirement—may never recover. But older workers who take corrective action can regain their resources in three years or less. The question for most of those older savers is what kind of corrective action to take. "There are only four things you can do to reach a financial goal," says David Hultstrom, a financial adviser in Woodstock, Ga. "You can save more money, delay the goal, lower the goal, or try to get a higher rate of return. The only one not in your control is the last one, and that's where people spend all of their time."

Reaching for returns by investing more and more in riskier investments like gold and small-company stocks is probably not the way to go, most experts agree. Neither is cutting off your ability to earn money by putting all your savings into supersafe (and low-yielding) instruments like bank certificates and short-term bonds. Instead, sticking with the plan of continuing contributions, investing in a diversified mix of U.S. and foreign stocks, bonds, and cash, and saving more should get you there more quickly. Older workers can, for example, use "catch-up" provisions in tax law to invest extra money in their 401(k)s and personal retirement-savings accounts, and can work a year or two longer than they originally planned.

Even people who are already retired should keep some of their money in stocks. If they depend entirely on bonds, they stand a less than 50 percent chance of their nest egg lasting 30 years, says a report by T. Rowe Price. New retirees should cut their spending and retirement-fund withdrawals as much as possible in the next few years to get back on track. And then hope that the math continues to work in their favor.