STEVE INSKEEP, host:
We're going to follow up this morning on the personal effects of the very public disaster that was the financial crisis.
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Ms. KATIE COURIC (CBS News): Good evening, everyone. And the question everyone is asking is: How low will it go?
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Mr. BRIAN WILLIAMS (NBC News): Stocks fell off a cliff, the largest single, point drop in history.
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Unidentified Woman: The bloodshed continued overseas. Shares sank to their lowest levels since 2003.
INSKEEP: Stocks lost around half their value, from the top of the market to the bottom. Some, but not all, of that value has come back. So this week, we're asking how Americans save and invest for retirement now. NPR's John Ydstie will be our guide. Good morning, John.
JOHN YDSTIE: Hi, Steve.
INSKEEP: So how have Americans responded to the changes here?
YDSTIE: Well, there's no question that it's been financially and emotionally devastating. Not as devastating as losing your job, as millions of Americans have, but difficult nonetheless. After all, when we hit bottom, the value of American retirement savings in 401(k)s and IRAs had shrunk by $2 trillion.
And in a survey done for the Center for Retirement Research at Boston College, some people said the collapse in their retirement savings was equal to the stress they felt after the 9/11 attacks.
INSKEEP: Wow, because you keep getting those statements, your money is just disappearing that you've worked and saved...
YDSTIE: Very scary.
INSKEEP: And two questions come up. One is - did people change their investment strategies? And should people change their investment strategies?
YDSTIE: Well, that's what we're going to look at this morning, with the help of some experts and some regular folks. Let's start with Victoria Banales, an educator from Idaho. She and her husband lost 40 percent of their retirement savings in the crash.
Ms. VICTORIA BANALES (Educator): It was really frustrating and we discussed wow, should we stop investing and invest all the money in a vacation home?
YDSTIE: Banales told me that she's lost confidence in the market.
Ms. BANALES: I distrust it but on the other hand, I also keep investing, hoping that somehow, we'll find some kind of combination that will still help us save for retirement.
YDSTIE: Steve Meier says he and his wife lost close to 30 percent. That was typical for 401(k) investors during the crash.
Mr. STEVE MEIER: It was scary and then, you know, from there, you didn't know what was going to happen.
YDSTIE: Meier, who's 46 and works in Silicon Valley, says he and his wife may delay retirement because of the losses.
Mr. MEIER: Hopefully, the market will come back and otherwise, we can just adjust our spending - both now and in retirement.
YDSTIE: Working longer to make up for losses was one of the most common strategies cited in the Retirement Research Center survey.
But given the shock investors absorbed, a surprisingly small number of people moved out of stocks after the plunge.
Ms. ALICIA MUNNELL (Director, Center for Retirement Research at Boston College): I think people were paralyzed with fear.
YDSTIE: Alicia Munnell is director of the Center for Retirement Research at Boston College.
Ms. MUNNELL: Remarkably little movement occurred. On net, there was a slight movement out of stocks. But most people stayed pat.
YDSTIE: Actually, says Munnell, after they start investing, people hardly ever make adjustments to their 401(k) accounts. That meant that when the crash came, lots of Americans nearing retirement were over-invested in stocks or equities, because of the big stock market gains in the 1980s and '90s.
Ms. MUNNELL: If you're approaching retirement, you really don't want to have 65 percent of your assets in equities.
YDSTIE: But what is the right balance of stocks and bonds, risk and safety, in a retirement portfolio? Did the financial crisis change the rules?
John Bogle, who founded Vanguard Fund, says no.
Mr. JOHN BOGLE (Vanguard Fund): The real message, I think, is, you know, we're going to get big rises and big declines in the stock market, and if you keep investing through them, you will build yourself a terrific retirement account.
YDSTIE: Bogle has seen a lot of ups and downs in the market during almost 60 years in the investment business. He says even in this uncertain time, the principle remains the same.
Mr. BOGLE: I'm a great believer in balanced investing.
YDSTIE: And that philosophy is evident in one of Vanguard's flagship funds, the Wellington Fund, which invests two-thirds in stocks and one-third in bonds.
Bogle has this simple investment advice: Own stocks for opportunity, and bonds for safety. And buy them in low-cost index funds, a product he invented. Index funds allow investors to own a broad array of assets - like all the stocks in the S&P 500, for instance.
And Bogle has long told Americans that the percentage of bonds in a retirement portfolio should be roughly equal to your age. That way, your investment gets safer as you approach retirement. So if you're 60 years old, your nest egg should be 60 percent in bonds.
But here's something that might surprise people who've heard Bogle give that advice before. He says you should count the value of your Social Security when you calculate your bond position. And for the average American, the value of Social Security equals about $300,000 worth of bonds.
Mr. BOGLE: If you accept that $300,000 is the value of the Social Security and you had $200,000, that could all be in stocks.
YDSTIE: Since most Americans have much less than $200,000 in retirement savings, that suggests most retirement portfolios should be very heavily invested in stocks. But that's hard advice to follow after the crash, especially if you're close to retirement.
What about international stocks? Well, Bogle is cautious. First, he says, many big American companies have global exposure. And, he argues, in the past 15 years, when U.S. stocks have fallen, international stocks have dropped, too only further.
Mr. BOGLE: International diversification lets us down just when we need it the most. So it's not a panacea in any way, shape or form.
YDSTIE: But Nathan Gendelman, the investment director of the Family Firm, a Bethesda, Maryland-based financial planning company, thinks international investments are very important. The point, he says, is not to have all your investments concentrated in the dollar.
Mr. NATHAN GENDELMAN (Investment Director, The Family Firm): Should the dollar take a very sharp decline, it would hurt quite a few of our other investments. It would hurt our standard of living, quite frankly. And it would be extremely valuable to have investments that were appreciating.
YDSTIE: In addition to international stocks, Gendelman suggests buying a variety of foreign government bonds. There are mutual funds that allow you to do that.
But in the new post-bubble, slower-growth environment that economists are predicting, Gendelman says if you want to make sure your retirement funds grow, you're going to have to do it yourself by saving more - because no one can control the returns the market will give.
Mr. GENDELMAN: Bernanke can't control it; Obama can't control it; we can't control it. But what we can control is how much we spend, and how much we save.
YDSTIE: The other thing you can control is the fees you're charged. They can have a huge effect. An annual management fee of just 1 percent, for instance, can reduce your accumulation by 20 percent by the time you get to retirement.
INSKEEP: We're listening to NPR's John Ydstie going over some of the options for retirement. But John, making any choice, as your report made clear, is difficult for some people. We're just busy. We're overwhelmed, especially now. How do people have time or confidence to change their investment strategies?
YDSTIE: Well, that's true, and if that's the case, life cycle or target-date funds could help. They're a single mutual fund that includes a mix of stocks and bonds and other assets. And here's the key: They're designed to automatically reduce the level of risk in your retirement funds as your retirement date approaches.
INSKEEP: So you don't have to think about it anymore.
YDSTIE: Exactly. And we're going to check out the benefits and drawbacks of those funds tomorrow.
INSKEEP: NPR's John Ydstie, thanks very much.
YDSTIE: You're welcome, Steve.
INSKEEP: And you can find some background reading on this story by way of our Twitter feeds. You can follow us on Twitter at MORNING EDITION. And you can follow me at NPRInskeep, that's I-N-S-K-E-E-P.
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