How's that IRA and 401(k) working for you?

By Dian Vujovich

At the end of my last blog I suggested readers ask what I consider to be the first and likely the most important question anyone can ask you relating to investing: When are you going to need your money back?

The operative word there is “back” because once upon a time not so many decades ago anyone who invested in the stock market understood well in advance that there were inherent risks to buying shares of a company’s stock.

In those once upon a time days many thought playing the market was akin to legalized gambling. And in a sense there is some truth to that notion given that every time someone lays their money down and purchases shares of a stock, mutual fund or an ETF there is absolutely no guarantee that they are going to get their money back.

On the other hand, unlike gambling where once a bet is placed all is lost unless your bet is a winning one, investors are usually able to get all, some or more than the amount of money they originally invested back when their securities are sold.

If there is a similarity to draw between the two it’s that there are no guarantees whether you’re playing the markets or the ponies.

Then came the 70s and 80s and the introduction of defined-contribution retirement plans like IRAs and 401 (k) s and the risk of investing was overshadowed by the hype of possibilities.

Both vehicles gave individuals an opportunity to choose the investments that they wanted to and thus create their very own big fat golden retirement nest egg. So, instead of counting on their employer to provide them with a pension, (provided the company offered one and the employee worked long enough to be vested and qualify for that pension upon retirement), all decision making was left up to them. Most of them, btw, financially illiterate with little to no experience or education regarding how to invest for the near- or long-term.

But the sales pitch for defined-contribution retirement accounts was a slick one that came with charts and long-term investment promises. The trend line on many mutual fund mountain charts, for instance, showed that long-term performance basically was an upward one, albeit not a straight upward line.

The question of how difficult selecting a good performing stock or mutual fund is wasn’t much addressed back then and still isn’t today. What was and is still addressed is the importance of diversification, i.e. owning both equity and fixed-income investments and the power of compounding over the long-term.

During the past three decades we’ve seen the number of companies offering defined-benefit plans such as pensions to their employees dwindle. A survey in 2010 by the consulting firm of Towers Watch revealed that only 17 percent of Fortune 100 companies still offered direct-benefit plans—down from 67 percent in 1998.

And as for that golden nest egg Americans were supposed to be building via IRAs and 401(k)s, well, for many that egg looks more like a goose egg than nest egg.

According to figures from the Employee Benefit Research Institute:

• In 2009, the median 401(k) account balance was $59,381.

• In 2008, the average IRA account balance was $54,863. The median IRA account balance was $15,756.

• And in 2009, 53 percent of workers in the United States had less than $25,000 in total savings and investments.

Given the markets today and the financial problems within the U.S., I’m going to venture a guess that a lot of Americans are in a world of hurt with respect to the money they’ve saved or accumulated for retirement. Money issues aren’t easy to face because they come with no easy or quick fix solutions. Or guarantees.