Personal Finance: Yes, time can heal 401(k) pain

Question: I keep hearing about how much the stock market has gone up. But when I look at my 401(k), it has hardly budged. I don't think I'll ever be able to retire. What's wrong?

Answer: It's true that the stock market had soared after March 9, with the Standard & Poor's 500 index climbing nearly 40 percent before falling more recently. But you have to put that into perspective. Although that is a huge rally, it followed losses of more than 50 percent from the peak in October 2007.

Some people think that if the stock market goes down 50 percent and then climbs about 40 percent, they will be almost back to even. But the math doesn't work that way. Say you had $10,000 in a stock market mutual fund in your 401(k) in October 2007. But then came the crash. Your $10,000 turned into $5,000 if the stocks in your mutual fund declined 50 percent.

Recently, the rally in the stock market would have helped you. You would have roughly $2,000 more than you had at the worst point in this market. But adding that $2,000 to your $5,000 means the rally brought you back up only to $7,000, still quite a distance from the $10,000 you once had. To regain everything lost in a 50 percent decline, you need the market to climb 100 percent.

That is why it takes so long to recover after a serious bear market, and why, instead of hoping for a recovery, it pays to look at your money and ask yourself what you can do to make a difference.

Because the stock market goes up and down - even in a recovery - gaining 100 percent takes time. In the average bear market, people lose 37 percent, then the market surges 47 percent during the year after the market hits its worst point, according to researchers at the Leuthold Group. It takes an average of 21/2 years to regain what's lost.

But that is in an average bear market, not a serious one caused by a financial crisis. After the 1973-74 bear market, it took about seven years to get back to even after the stock market fell roughly 45 percent. After the Great Depression, it took more than 20 years for the market to return to where it had been before it dropped 86 percent. Still, if a person had had a simple stock market index fund, dividends would have helped get the investor back to even in about 16 years, according to data from Morningstar Inc.'s Ibbotson Associates Inc.

So here's what to do. Do not wait for the stock market to do the healing for you. Save more.

Say you had $300,000 in your 401(k) and were planning to retire in 10 years when the market started ruining your plans. Now, you may have $200,000 left.

If your annual salary is $50,000 and you typically save 6 percent of your pay, in six years you would have rebuilt what you have lost. That's assuming that your employer provides a 3 percent match for your money and that you make an average of 5 percent on your investments each year.

If you keep investing 6 percent of your pay for the next 10 years, your savings would approach $400,000. And if you can keep working for 15 years, you would have more than $500,000. You can check how you would actually end up by putting your salary and investment assumptions into this calculator: http://go.philly.com/crunch. If, in that example, you decided to save 10 percent of pay instead of 6 percent, you could amass close to $600,000 by retirement.

It is infuriating to have to save more after a stock market crash that was created by Wall Street's greed and neglect. But keep in mind that you amassed some of the $300,000 you once had because of the stock market. And both the good graces and the mean streaks come with the territory when you invest in the stock market. Taking control by saving more gets you further than simply waiting for your leftover money to heal.