Get rich slow!

Everything you ever wanted to know about your 401K -- but didn't know how to ask.

By Amy Reiter

Read more: Amy Reiter, Money, Economy, Recession, Life

Christopher Walsh/Salon

Dec. 3, 2008 | It's hard not to feel despondent about your dwindling 401K these days. Gazing on that crushingly puny number on your statement each month can snap you right out of your post-election afterglow and start you on a miserable chant: No, I can't.

And hearing your parents and neighbors carp about their diminished means doesn't help -- they have guaranteed pensions to rely on, after all, something that may be all but obsolete by the time those of us in our 20s, 30s and 40s even think about retiring.

So is there any hope to be found on the retirement front? Is there anything you can do to right your listing 401K ship and steer happily toward that blissful retirement horizon? Like so many others, I was curious. And also like so many others, I don't really understand half of what I've ever been told about 401Ks -- named, unsexily enough, after a section in the Internal Revenue Code that allows employees to save for retirement by having money taken directly out of their paychecks (before they're taxed on it) and invested in some combination of mutual funds including stocks, bonds or money market funds, as they instruct. I also wondered how to adjust my retirement-planning behavior in response to a plunging stock market, widespread layoffs and even wider-spread declarations of doom.

So David Wray seemed like a good man to talk to. Wray is the president of the Profit Sharing/401k Council of America and author of the book "Take Control With Your 401(k): An Employee's Guide to Maximizing Your Investments." He also happens to be about as upbeat about your chances for a decent retirement someday as a person can be in these economically troubled times.

Sure, things are looking financially bleak and no one knows what further misfortune awaits in the coming year, but, Wray predicts, long-term, America will take two steps forward for every step it has taken back -- and if you plan carefully and play things right, you can see your shriveled retirement account recover, even soar. Yes, Wray says, you might actually come out of this dark time in better financial shape than ever.

The question, of course, is "how"? So I asked Wray to explain in the simplest terms possible why we should all keep chucking our hard-earned money into our 401Ks only to watch it get sucked away, exactly how to "balance" our "portfolios," as everyone instructs us to do, and whether we should just give it all up and surrender to the notion of a destitute old age. Speaking on the phone from his office in Chicago, he patiently did his best to talk to me about retirement like I'm 5 -- a 5-year-old who happens to have a house, a husband, two children and decades to work until retirement, that is.

As someone of modest, solidly middle-class means, who's been putting some portion of my paycheck into my company 401K, which is not matched, I should be panicking right about now, right?

No, you should not be panicking. There is an underlying assumption to saving and investing, and that is that America will continue to be a successful place. That's a fundamental assumption.

But is that a bad assumption?

That's a good assumption. We have over 200 years of experience here. America has the most productive economy -- and the most entrepreneurial, innovative workforce -- in the world. We have tremendous natural resources. So it's a certainty that America will continue to be a very successful place to be, economically.

That's not just patriotic rah-rah? I mean, we made some pretty bad mistakes.

People can make mistakes, and they do. That's why it's not a straight line to the stars. We have cycles of growth and retreat. That is historic. But if you look over time, our country continues to move upward. So am I confident? Absolutely.

But I can't even look at my 401K. I'm sure it's gone way down. And here I am, putting more money into it.

Well, as a young person, you shouldn't look at the values, because the values are not relevant. Let's say you're 40 years old -- I'm 61, so 40 is young to me -- and you have $40,000 in your plan.

Is that a shameful amount?

No, absolutely not. Remember, the goal here is to have money when you retire. Something is better than nothing. So, OK, let's say on Dec. 31, you had $40,000. And that money was invested 70 percent in equities and 30 percent in some kind of fixed investment.

What's a "fixed investment"?

It would be bond funds, money market funds, stable value funds.

So 70 percent in stocks and 30 percent in some version of those?

Right. So what's happened is the value of your equities is down -- let's say it's down 40 percent. So that 70 percent, that $28,000 is now worth -- well, we need a calculator. [Quiet tapping] It's now worth $16,800. The rest of the portfolio is plugging along, giving you a pretty crummy return: 2 percent. So the other part of your portfolio, the $12,000, is worth [an additional] $240. So what you've got in your 401K, total, is ... $29,040.

Down from $40,000 a few months ago? That's pretty cruddy.

That's not good. But you're not selling. You haven't lost anything, because you're not selling anything. Now, for the last nine months, you've been putting money in the plan.

That's true, and the market is nice and low.

Right, so the same amount of money buys you more stocks. Let's say your salary is $40,000. The typical 401K participant is putting in 10 percent of their salary, between them and their employer. So $4,000 a year is going in. So we put in three-quarters of that. So $3,000 is now in the plan, and $2,000 is buying those very low equities. And $1,000 is going into your fixed account, which is giving you another 20 bucks. So what you've done is, the basis on your equity has come down a little.

What does that mean?

The basis is the amount of money you paid for your equities. So you're bringing down the average cost of the stocks. So what happens is when the market goes back up, your portfolio will go up faster than it went down. And certainly if the market gets back to where it was, you're ahead, because you've been buying low.

So I should be putting even more money in my 401K right now.

That's correct. If you are a long-term investor, and you are. The target age for retirement is 67 years old. And for our hypothetical 40-year-old, Social Security is going to give them 100 percent of their benefit when they're 67 years old. That's the rule.

Is that true? Can we depend on that really?

My own view is absolutely. I believe that the benefits promised in Social Security for nearly everyone will be met. There may be some modest adjustment. But the benefits will be there. When you're 67, you're going to get something.

How much will our hypothetical 40-year-old be able to count on, do you think?

It depends on their final income. The median wage worker who retires at the opportunity to get the full Social Security benefit is probably getting around 35 to 40 percent of final pay. You can go onto the Social Security Web site. They have a calculator. It gives you various ways to model what you would get. So you could put our 40-year-old making $40,000, and it will tell you what this person will get when they're 67.

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