Most future retirees see the recent plunge in share prices as a disaster. They’ve watched their nest eggs shrivel, and are bracing themselves for even worse. Some have ditched their stocks altogether and are now in ultra-safe CDs yielding a few percentage points at best.

A few brave souls, however, are wondering whether the current crisis presents an opportunity. Following the traditional contrarian mantra of “buy when everybody else is selling and sell when everybody else is buying,” they’re looking for bargains amid the wreckage of the stock market.
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By now, the fact that the recent stock market volatility is wreaking havoc with 401(k) plans is old news. But the drop in asset values isn’t the only thing plaguing the popular accounts.

According to a recent Wall Street Journal article,

• Many investors in the pre-retirement phase have far too much of their nest eggs invested in stocks. This means that if a downturn hits, they may suffer large losses with little or no time to recoup them.
• Companies have increasingly been pushing so-called “target date” funds as a simple solution to the asset allocation problem. But these funds have recently been performing poorly.
• Downturns scare many workers into dialing back or eliminating contributions to their 401(k)s. This means that they may miss out on the very buying opportunities that could help them recover from losses more quickly.
• Employers sometimes reduce or eliminate their “match” or contribution during difficult times.

The last possibility is particularly worrisome, since it entails, essentially, robbing employees of their safety nets just when they’re teetering on the tightrope.

At AAFR, we believe that the inherent risks in 401(k)s do not in and of themselves make them bad investment vehicles, but rather, that 401(k)s should only be depended upon for supplemental income. Workers should be able to depend on Social Security for basic income regardless of market conditions. This is why we stand in particularly strong opposition to Social Security privatization.

According to a recent article in the Wall Street Journal, increasing numbers of baby boomers are no longer contributing to their retirement plans, and are expecting to delay their retirement.

The gradual demise of defined-benefit plans, and uncertainty surrounding Social Security have made 401(k)s, 403(b)s, IRAs, and similar defined-contribution accounts the primary source of retirement support for most boomers. Numerous studies have already shown that the vast majority of workers, especially baby boomers, are not contributing enough to these plans to provide for a traditional retirement at age 65. The new trend toward forgoing contribution to the plans altogether is therefore all the more alarming.

Nonetheless, the ongoing economic downturn is making it harder to meet current living expenses such as rent or mortgage payments, food, and gasoline. For many, there simply isn’t anything left over to save.

With neither significant savings nor a traditional corporate pension to count on, tens of millions of baby boomers will be depending on Social Security to save them from abject poverty. Which was, of course, the reason it was created—and why it needs to be preserved.

Times like these aren’t easy for retirement investors. Every day, it seems, brings unsettling news and commentary. This bank failed. That stock tanked. A bailout is necessary. A bailout would be a reward for those who caused the problem. And so on.

The news is accompanied by increased volatility in the financial marketplace. Sudden drops in value of stocks and bonds are followed by equally unpredictable rallies. Investments are starting to look less like piggy banks and more like lottery tickets.

What’s a future retiree who doesn’t want to gamble, but merely to safely build a nest egg, to do?

AAFR offers these guidelines for investing during troubled times
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The recent wild gyrations—mostly downward—of stock market prices have badly shaken many future retirees. Some have seen their nest eggs drop precipitously, and are wondering what to do.

Our advice: whatever you do, don’t panic. Attempts to “time the market,” i.e. to “buy low and sell high” usually fail, for two reasons. First, there is no reliable way to predict what the market will do next no matter what the situation. (If there were, anyone who possessed it could quickly become a billionaire.) Second, emotions tend to cloud judgment, making matters even worse. Right after a big dip, many investors are tempted to bail out at what often turns out to be the worst possible moment (think of the people that sold stocks in 1932, which was the best buying opportunity of all time). Similarly, when markets go up, up, up, there’s a big temptation to buy at what may well be the peak.

If you decide that the market’s volatility is unacceptable to you, you may wish to reallocate some of your assets. This usually means exchanging riskier investments for safer ones: selling stocks and buying fixed-income investments. Shop around for the best rates on CDs or bonds. Then take a calm look at your stocks and stock mutual funds, and decide how much you wish to sell. If it’s a large portion, consider selling gradually, and transitioning into fixed income investments. But don’t engage in “panic” selling. In uncertain times, more than ever, you need to keep a level head.