By John W. Schoen Senior producer
msnbc.com
updated 11/23/2008 6:52:34 PM ET 2008-11-23T23:52:34

The discussion about retirement this week over on Newsvine drew a number of variations on the same theme. What should I do with my 401(k) account now? Sell my stocks at a loss? Or hold on and hope the market comes back?

Should I wait to rebalance my 401(k), and weight it away from stocks? Should I wait for things to get back to where they were, while still putting contributions into the current plan? Or should I put everything into bonds right away? My portfolio IRA and 401(k) has lost 40 percent of its value.
— Alf-734368

As with many questions about personal finance, there are no absolutes. That's why they call it “personal” finance.

In any market, the answer depends heavily on how long you have before you expect to retire. (Or hope to, at least.) The closer you are to needing the money — for retirement, college tuition or the down payment on a house — the greater your risk of holding stocks.

That's why, when it comes to investing for retirement, two people holding the same stocks are exposed to very different levels of risk. I'm 56, my son is 20. His risk is a lot lower than mine because the odds of making money in stocks are much better for someone with a 45-year time horizon than for someone like me with only 10 years left before I may need the money to live on.

But this is not just any market. It's true that if you cash out stocks now, you risk missing the market rebound. Investors who sold into the 1987 stock market crash learned that lesson the hard way. But if you go back a little further in history, the recovery from some financial panics took a lot longer. When the stock market sold off during the Great Depression, it didn't return to its 1929 peak until the mid-1950s. There was plenty of time to “get back in.”

So the decision to stay in stocks rests heavily on whether you think this is a "V-shaped" pullback or whether we're in for a longer, more gradual recovery. That's impossible to predict. But it’s also hard to come up with a scenario that would provide overnight relief for the widespread problems facing the global economy and financial markets. There’s a significant risk that we haven't heard the worst of the bad news yet.

The central question is whether stocks are priced correctly at current levels or whether they've been wildly oversold. To answer that, you have to know how well the company whose stock you own will weather the ongoing financial storm. Some companies — especially those with lots of cash on their balance sheets and products people will need no matter what happens — may come out of this much stronger. Those stocks have already held up relatively well because people who want to stay in the market have moved money into these safer harbors.

Lastly, since no one can predict where markets are headed, you have to consider how much market volatility you can take. For some investors, it's better to realize losses now, get a good night’s sleep and regroup. Take a look at what's left, figure out where that leaves you and see what it will take to get your plan back on track. If the market comes back to life, you can always get in later. If the market heads lower, you've stopped the bleeding.

So, if you have a lot of time, you may want to ride this out. But, with apologies to the Coen brothers, this is No Market for Old Men.

My question (comment) is that it would seem to me that paying the penalties and tapping into money that is already ours is less costly than putting the mortgage payment, grocery bills and other day-to-day expenses on credit cards and racking up that kind of debt, which ends up being way more costly in the long term. Am I wrong?
Christiane

This is another good example of a personal finance question that doesn't come with a one-size-fits-all answer. There are just too many variables in each household budget to say there's a "right" or "wrong" choice.

So you really need to do the math: If the cost of borrowing outside your retirement account exceeds the cost of paying penalties for "early withdrawal," you may be better off using those savings. Over the longer term though, you're going to have a much harder time rebuilding those savings.

A lot depends on the immediate circumstances that force you to consider pulling money out of a retirement plan. If you've lost your job and need the money to tide you over to the next one, tapping retirement funds may be the best option. If you're simply falling behind every month and can't keep up with your bills, spending down your savings is not sustainable. The only long-term solution is to cut spending, increase your income — or both.

So before you tap that savings account, take one more hard look at where the money is going. If you don't have a budget, make one. Before making the difficult choice to withdraw retirement savings, you may be better off making some even harder choices about where you spend your money.

I don't mean any disrespect to people who this has happened to, but who in their right mind would retire and leave their nest egg in high-risk investments? … Anybody who's 55 years old and has just lost 35 percent of his/her nest egg has just got to look in the mirror if they're looking for somebody to blame. The Financial Crisis didn't do this to you. You did it to yourself.
— Bexar2020

In hindsight, it may seem obvious. But it's important to remember why so many people overlooked the risk of carrying too much of their savings in stocks too close to retirement.

For one thing, we've all become conditioned to a powerful, long-term upward trend in the stock market. For most of the past 25 years — the period during which most of today's near-retirees were accumulating their investments — avoiding stocks meant giving up a substantial opportunity to grow a bigger nest egg. Those of us north of 50 also remember the devastating effects of high inflation in the 1970s on fixed income investments. As long as inflation remained a threat, stocks provided one of the few ways to protect a portfolio heavily weighted in cash or fixed income investments like bonds.

The recent market collapse (there's really no other word to use) also underscores a risk that has been building gradually for decades — one that hasn't come into clear focus until recently. That's the risk we all confronted when company-sponsored "defined benefit" pensions were gradually replaced by individual retirement accounts.

Under the old system, the money backing our retirement was pooled in one big account and managed full-time by a team of professionals. It may not be rocket science, but managing investments is a skill that some people have and some don't. The more widely that management responsibility is dispersed, the more likely it's going to fall to someone who doesn't have those skills — whether the individual account holder or the "financial adviser" who is selling the investments.

It remains to be seen whether the destruction of trillions of dollars in retirement savings leads to changes in the current system. It's hard to see how we could go back to company-managed defined benefit plans. But last six months have exposed serious flaws in the retirement system we have and derailed millions of retirement plans.

So maybe it's time to take a look at other ideas. Anyone have any suggestions?

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