401(k) fixes for all age groups

Your nest egg isn't just cracked, it's unrecognizable, crushed by a market as ruthless as a 4-year-old on a Big Wheel. Can you put it back together in time for retirement?

Unless you have a pension or expect to inherit a lot of money, you don't have much choice. But the outlook for your savings probably isn't as bad as you think. A recent study by Financial Engines, a company that provides advice to retirement-plan participants, found that investors with as few as five years until retirement can recover their 2008 losses by making modest increases in savings and working two or three more years. Young investors, meanwhile, have much to gain, because they're years from retirement and are able to invest at bargain-basement prices.

Here's a look at how investors in different age groups can rehabilitate their 401(k) plans:

Gen Y: People born from 1982 through the early 2000s

Gen X: Those born from 1965 through 1981

Boomers: Those born from 1946 through 1964

Gen Y: The 'buy low' advice really works for you

You can afford to be bold because you don't have much to lose, Brett Hammond, chief investment strategist for TIAA-CREF, says of Generation Y— people born from 1982 through the early 2000s.

"The day you start working, the market could just tank and you don't care," Hammond says. "You've got nothing in it. You love for the market to go down because you can buy at the bottom."

That's what happened to Kate Jacobus, 24, a marketing associate for Intimacy Bra Fit Stylists in Atlanta. She started investing in her employer's 401(k) plan in July 2008. Her portfolio has since risen more than 17%. When you're young, she says, "There's nowhere to go but up."

Young workers should invest from 70% to 100% of their 401(k) plans in stock funds, says Dean Kohmann, vice president, 401(k) plan services for Charles Schwab, a financial services firm. For a "moderately aggressive" young investor, he recommends investing 45% in large-company stocks, 15% in small-company stocks, 20% in international funds, 15% in bonds and 5% in a money market or stable value fund.

Chris Jones, chief investment officer of Financial Engines, believes young investors should put 85% to 90% of their money in stocks, and invest 10% to 15% in bond funds. Of the stock allocation, he recommends investing 40% to 45% of the portfolio in large-company stocks, "because they represent most of the economic activity out there." The second-largest slice — up to 30% — should go into international stock funds, because U.S. stocks now account for only about 50% of the global market. Invest the remaining 15% to 20% in small or midsize company stocks if your plan offers good fund options in those categories, he says.

Gen X: Time is still on your side, so don't panic

While you're starting to think about retirement, it's still probably years away, so you can afford to recover from market downturns — even big, scary downturns like the one we saw last year, Jones says of Generation X— those born from 1965 through 1981.

Some workers in their 30s and 40s who saw their portfolios plummet 30% or more last year "assumed that must mean terrible things for their retirement," Jones says. But if you're looking at a 30- to 40-year time horizon, the impact "is not nearly as much you might think," he says.

A 40% drop in your savings doesn't mean you'll have 40% less to spend in retirement, Jones says. Depending on your age, he says, it could shave as little as 10% from your retirement income — a deficit you can close by saving 1% more a year or working an extra year.

Investors who plan to work at least 15 more years should probably have about 75% of their portfolios in stock funds, Kohmann says. Older Gen Xers should gradually move toward a mix of 60% stocks and 40% bonds, he says. He suggests this allocation for the 60-40 portfolio: 35% large-company stocks, 10% small company-stocks, 15% international, 35% bond fund and 5% stable value or money market fund.

Todd Schoenberger, 39, who runs a money management firm in San Antonio, is taking an even more aggressive approach. He and his wife have all of their 401(k) in stock funds.

That aggressive approach cost them in 2008. Schoenberger's plan plummeted 40% in 2008. His wife's plan fell about 25%. With retirement many years away, Schoenberger believes they can afford to take risks. They have done "tremendously well" since the market turned around in March because they continued to invest during the downturn, Schoenberger says.

Boomers: Assess your risk tolerance, but don't shun stocks

Last year's losses were much more painful for this group, because they have less time to recover before retirement. Many boomers — those born from 1946 through 1964 — who sustained big losses will need to save more, work longer, or both.

But shunning the stock market entirely isn't a good idea, even if you're in your 50s and counting the days until you turn in your office bathroom key.

"You need to recognize that if you become more conservative, you have to be willing to save more to have the same probability of meeting your goal than someone willing" to invest more heavily in stocks, Jones says. "There's a price to being risk-averse. You have to give up more of your current income to save for the future."

He recommends that boomers invest 65% to 70% of their portfolios in stocks, with 35% to 40% in large-company funds, 25% to 30% in international funds, 15% to 20% in small or midcap stocks and 15% to 20% in bond funds.

Your other sources of income play a role in determining your investment mix, Kohmann says. An older worker who will receive a pension can afford to be more aggressive than one who will rely on her savings for most of her retirement income. The first worker may be able to invest up to 50% of her 401(k) in stocks, even if she's only 10 years from retirement, he says. For the worker without a pension, a portfolio of 40% stocks and 60% fixed-income investments may be more appropriate, he says. Here's his recommended breakdown for that investor: 25% large-company stocks, 5% small-company stocks, 10% international and 60% in a combination of bonds and money market or stable value funds.

The recession notwithstanding, many boomers are in their prime earning years, which means they should try to save as much as possible, says John Carl, president of the Retirement Learning Center, a retirement-plan consultant. Workers 50 and older are eligible to make catch-up contributions to their 401(k)s. In 2009, workers 50 and older can contribute an extra $5,500 to their 401(k)s, for a total of $22,000.