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Not so safe after all

By Jennie L. Phipps ·
Sunday, September 1, 2013
Posted: 6 am ET

Has your retirement savings recovered from the hit it took when the economy soured between 2007 and 2009?

Retirees who tried to live off a modest amount of interest and dividends in the last few years had to tighten their belts and are probably still feeling the pain, concluded the Center for Retirement Research at Boston College in a recent analysis of the effect of the financial crisis on retirement.

The researchers divided retirees between the ages of 60 and 69 into five economic categories. The lowest category had almost no savings and kept what little they had in a savings account. This group lost almost nothing between October 2007 and March 2009, when the stock market hit bottom.

One step above them were people with a small amount of savings worth an average of $3,000. A few of these savers invested in stocks and bonds, but 80 percent had all their money in some low-return savings account. The downturn took away about 9 percent of their total savings.

In the middle was a group of savers with accounts worth about $34,000. Of that money -- 45 percent was sitting in savings accounts and the remainder was in stocks and bonds. The downturn ate up 21 percent of this group's savings.

Above them were people who had saved an average of nearly $162,000 -- putting 30 percent of it in short-term savings, 13 percent in bonds and 57 percent in stocks. The meltdown swallowed nearly 30 percent of their nest eggs.

Then there was the wealthiest group with an average of about $903,000 squirreled away, allocating 15 percent to short-term deposits, 13 percent to bonds and 72 percent to stocks. This group watched 36 percent of its nest egg disappear during the market snarl.

Researchers point out that the two lowest groups were practically unaffected by the downturn because they didn't have anything to lose. While the wealthiest group appeared to be hard hit, most people in this category had their losses offset by the recovery in the stock market and dividends from stocks.

Those people who felt the most pain were in the middle with portfolios that were heavy on short-term savings. For instance, in 2007, a retiree with $100,000 in short-term deposits would have earned $4,100 in annual interest. That return would have fallen to $640 a year by March 2009, and $150 a year by June 2013. If their retirement lifestyle was dependent on that income, these savers had to either struggle along without this money or reduce their principal and risk more shortfalls in the future.

What's the retirement planning lesson going forward for those of us who are living on our assets? Researchers conclude that the savers who survived the downturn with the least pain had balanced portfolios -- stocks, bonds and a little cash. Those who were hardest hit were those who were the most conservative -- too heavily invested in short-term savings. This was a strategy most likely to be chosen by those who had modest, but still substantial, savings.

Think about that the next time the stock market goes crazy and you're tempted to take your money out and stick it under the mattress. Being too conservative can backfire when times are tough.

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