Retirement Savers Lost $2 Trillion in the Stock Market

Stock market turmoil has wiped out roughly $2 trillion of Americans' retirement savings over the past 15 months, according to the Congressional Budget Office.

The value of pension funds and retirement accounts dropped by roughly $1 trillion, or almost 10 percent, in the year ending June 30, the CBO told the House Education and Labor Committee Tuesday, citing Federal Reserve data. Since then, asset prices have dropped even further. The CBO says that retirement assets may have declined by as much as $2 trillion over the past 15 months. 

"To the extent households view balances in defined-contribution plans as part of their overall portfolio of wealth, a decline in those balances could lead people to reduce or delay purchases of goods and services," says Peter Orszag, director of the CBO. "It could also lead some workers to delay their retirement." The CBO says this multitrillion-dollar loss in retirement wealth could further slow the ailing economy.

Individual 401(k) participants' average losses ranged from 7.2 percent to 11.2 percent in the first nine months of 2008, according to an Employee Benefit Research Institute analysis of 2.2 million participants. Over two thirds of the assets in 401(k)-style defined-contribution plans are invested in equities, either directly or through mutual funds. During the first nine months of 2008, stocks were down, with the S&P 500 index losing more than 19 percent. Fixed-income investments fared better, with the Lehman Aggregate index gaining 0.63 percent and three-month treasury bills gaining 1.54 percent.

The recent market turmoil may be disproportionately affecting older Americans. Older employees generally have less of their money in stocks and stock funds than do younger workers, which shields them somewhat against catastrophic losses. But older workers' average account balances are markedly higher, so they have more to lose in a significant downturn and less time to recoup losses before retirement. "In the last few weeks, we've been confronted with older workers' and retirees' lives being turned upside down; their panic tops off an already existing state of chronic anxiety about retirement futures," says Teresa Ghilarducci, a professor of economic policy analysis at the New School for Social Research.

Two potential solutions to retirement losses offered by the CBO are working longer to offset financial declines and sensibly allocating your assets to avoid bearing the risks associated with tumultuous markets as much as possible. For example, most workers should invest in diversified index funds rather than individual stocks.

Here's another potential strategy to insulate yourself against stock market risks.