Rebuilding your nest egg after the market cracks it

Media coverage of the 2008 market crash often focuses on investors close to retirement age. The story line is that preretirement investors took some of the worst hits in the crash - and that many compounded their difficulties when they panicked and sold at the market bottom.

That's all true. But here's the underreported story: The lifetime record of these close-to-

retirement investors actually is considerably better than those of other age groups.

New studies by the Center for Retirement Research at Boston College show that these investors - the older baby boomers approaching retirement - have outperformed younger boomers and GenXers because they had substantial assets invested in equities during the long bull market run from 1982 to 2000. Younger investors weren't in the market for that bull run - but they did suffer through the substantial market retreats of 2002 and 2008.

Equity prices fell 57 percent from the market's peak in October 2007 to its trough in March 2009, and balances in retirement accounts fell by a whopping $2.8 trillion. The center's research found that older, or "early" boomers took the biggest hit, losing a full $1 trillion of that total. Late boomers had smaller account balances, so they lost a slightly smaller $0.8 trillion, while GenXers lost $0.4 trillion.

But the center also compared internal rates of return on lifetime contributions by workplace retirement savers in three different age brackets. The researchers constructed portfolios for hypothetical investors in each age groups, then looked at where each stood in February this year after the strong recovery in stocks that started in 2009.

The analysis showed that an early boomer invested 100 percent in stocks had a 9.8 percent lifetime return in early 2010. The comparable late boomer's return was 5.5 percent, and the GenXer's return was only 0.3 percent.

Can these younger investors still catch up to early boomers by the time they retire? Only if they're very lucky. The center's hypothetical late boomer would need to average a nominal compound return of 13.2 percent, and the GenXer would need an 11 percent return - a rate of growth that can't be counted on.

The center's scenarios assumed that all three employees began contributing 6 percent to their 401(k) at age 30, and their employers made matching contributions of 3 percent; the employees' starting salaries were based on national median earnings for people in these age groups.

What about workers who haven't been so disciplined - people who haven't saved anything for retirement? Is it ever too late to get started? T. Rowe Price published a report examining this question from the perspective of a 55-year-old earning $80,000 annually but with no retirement savings. Could she build a solid nest egg by age 65?

The conclusion: It can be done - if some rosy assumptions are used.

T. Rowe's report indicates our hypothetical investor could retire with a portfolio valued at $444,000 under the following circumstances:

She saves the maximum allowed annually in her 401(k) plan - $16,500;

She takes advantage of the catch-up provision that permits an additional $5,500 annual contribution;

She receives a 3 percent salary increase every year;

The market returns 8 percent annually.

I asked T. Rowe to run a few scenarios with more conservative assumptions. Assuming our hypothetical investor continues to make the maximum contribution, gets a 2 percent annual raise and the market rises 5 percent a year, the portfolio would grow to $314,000 at age 65. Lower the annual market return to 3 percent, and the portfolio at age 65 would hit $274,000.

Can investors recover from the crash in time for retirement? The data from CRR and T. Rowe Price show it can be done - but only with a lot of luck and discipline.

Resources: I've posted the T. Rowe Price scenarios with the online version of this week's

column at retirementrevised .com/catchup.

Mark Miller's Retire Smart column is carried on

Tribune Media Services.