Every now and then, Art Reichelt hears a voice inside his head. It says that maybe, just maybe, he should not have put 100 percent of his retirement savings in the stock market.
"I've never owned a bond in my entire life," said Reichelt, 74, a retired sales engineer whose retirement account has plunged 40 percent over the past 18 months. "Perhaps that wasn't very smart."
For a lot of older investors, that little voice - the one that says "diversify" - has gotten a lot louder.
The average stock mutual fund plunged 22 percent during the first nine months of 2001; if that figure holds through year's end, it would be the worst calendar-year performance since 1974, when stock funds fell 24.9 percent.
The percentage of Americans who believe they will have enough money to live comfortably after retirement fell to 63 percent in 2001 from 72 percent last year, according to the Employee Benefit Research Institute's annual survey on retirement confidence.
The good news is that it's never too late to create a diversified financial plan, investment advisers say.
The first step is to sit down and calculate precisely how much you will need in monthly income to survive. Usually, investors are surprised by how much they need to sock away to finance retirement. For instance, The Vanguard Group of Boston estimates that the average investor earning $100,000 a year will need to stash about 20 percent of his or her salary over 30 years to retire by age 67 with a $75,000 annual income.
Creating a plan for retirement might sound obvious, but a surprising number of investors don't do it. Just 46 percent of Americans say they have tried to calculate how much money they need to save for a comfortable retirement, down from 51 percent in 2000, EBRI reports.
One big question is choosing where to put their money. Despite the stock market's recent plunge, avoiding stocks entirely is a big mistake for young investors, said William K. Dix, a Raleigh, N.C.-based financial planner. Stocks, after all, have returned an average of 11 percent annually since 1926 - far outpacing inflation or the gains of any other instrument, he said.
But investing in equities doesn't mean putting all your retirement savings in a single stock or mutual fund. Troy Smith, an investment adviser with Lewis Financial Management of Raleigh, recommends that young investors divvy up their retirement account among a dozen different mutual funds, from large stock funds to international to growth. And even young investors should own some bonds as protection in a market downturn.
Twenty years ago, many workers didn't have to worry about diversifying. Most corporations still offered pension plans that guaranteed a minimum monthly income after retirement. But gradually companies began replacing those plans with voluntary 401(k) plans because they were less costly than pensions.
During the market upswing of the 1990s, employees came to like 401(k) plans because they invested in the sort of large stocks and mutual funds that kept growing. But that changed last year when, for the first time in 20 years, the average 401(k) account shrank in value. The average 401(k) account had $58,774 in 2000, compared with $58,850 in 1999, according to the Employee Benefit Research Institute, a Washington, D.C.-based firm.
"People pulled off the covers from their (retirement) accounts and discovered that they owned five mutual funds in the same category," Smith said.
Those who are within five years of retirement should consider avoiding stocks and stock mutual funds altogether, said Brian Orol, president of Strategic Financial Planning Group of Raleigh. "If you're 60 years old and plan to retire at 65, then I suggest you get your money out (of the stock market)" and stick with safer investments such as money market accounts, Treasury bonds and certificates of deposit, Orol said.
Dumping stocks during the middle of a bear market might not seem like a smart idea, especially when selling results in large losses. However, by selling stocks strategically, investors can diversify and save thousands of dollars in income taxes, financial planners say.
Investors who sell stocks at a loss can deduct up to $3,000 of the losses from their taxable income that year. Additional losses can be carried forward to future years.
Reichelt isn't panicking. He watched the stock market rebound from Black Monday (Oct. 19, 1987) and the recession of the early 1990s, and he plans to live long enough to witness another comeback, he said. Besides, he just can't see himself socking away money in CDs or money market funds, which are currently paying less than 3 percent a year in interest.
"I'm an eternal optimist," Reichelt said. "So long as I can sleep at night, I'll stick with stocks."