If some of the most dire predictions materialize, 2011 will be a tough year for investors.

Next year will be the second year in the “new normal” environment, as originally described by the investment oracles at fixed-income firm PIMCO. And while a year-end rally has the market up more than 10% this year, it’s helpful to remember that stocks are still more than 15% below where they were three years ago.

Furthemore, new problems in state and municipal finances, as well as the prolonged strain on the housing market, have added more stress for investors and individuals planning for retirement.

First described in a PIMCO investment presentation in May 2009 by CEO Mohamad A. El-Erian, the new normal described investment conditions which would be in effect over the next three to five years. In this new environment, financial markets would be characterized by:

• Muted growth in G-3 (developed world) countries and improving growth in emerging economies, led by China.

• A shift towards the public sector’s new role in providing “goods that belong in the private sector.”

• More challenges for central banks and treasuries to reverse the negative impacts of their unprecedented infusions of new monetary and fiscal stimulus, which were needed to provide liquidity.

• Less confidence in the U.S. dollar as the world’s reserve currency.

Since then, however, other key investment sectors have continued to deteriorate. Today, this deterioration is being seen in:

• The end of the home as an investment. While this is a great time to buy a house, based on low interest rates and prices, people should not buy a residential property “because you think the price will go up and it will be a great investment.” According to Alan Levenson, chief economist for T. Rowe Price, “If there are any people thinking like that after what we have been through in the past couple of years, they shouldn’t. You buy a house because you want to live in it. It is not an investment.”

• Changes in pension and 401(k) plans. Although most Americans covet a more stable retirement income, the number of pension plans is decreasing. In 2007, there were 48,982 defined benefit (pension) plans in the U.S., compared to 113,062 in 1990, according to the Department of Labor. In those same years, there were 668,805 defined contribution 401(k) plans compared to 559,245 in 1990.

Increased risks of municipal bond defaults. Since the recession began in 2008, the nation’s 50 states have collectively spent almost $500 billion more than they collected in taxes. In addition, the states collectively owe about $500 billion to their respective state pension funds. While the states have patched together temporary fixes from federal loans, analyst Meredith Whitney, said that next to the housing crisis, the current deficiencies in state finances are “the single most important issue in the U.S., and certainly the largest threat to the U.S. economy,” Within the next year, Whitney predicted 50 to 100 “sizeable” municipal bond defaults, amounting to “hundreds of billions of dollars’ worth of defaults.”

Not only is the new investment world more challenging for active, knowledgeable investors, but it’s likely even more confusing for less sophisticated investors, many of whom are years away from securing adequate retirement funds. A survey this month by Wells Fargo found that the median retirement savings of respondents age 50 to 59 is $29,000. If this amount was extrapolated for a 20-year retirement, the savings would amount to only $190 a month (assuming a 5% rate of return).

More bad news came from another poll conduced by Hartford Financial Services (NYSE:HIG), which found that 69% of those surveyed reported their primary retirement concern is paying for food, shelter and other basic needs. This was significantly greater than the 24% who provided that answer in a 2007 survey.

About 79% say they are less than confident that all of their sources of retirement income combined (government pension plan, employer pension plan, and personal savings/assets) will be enough to pay the retirement bills. This is an increase from the 69% in a 2006 survey.

This pessimism is also affecting people’s quality of life. The survey found that fewer people are getting enjoyment out of life. The number of people who said they are enjoying life fell to 13% this year from from 43% in 2007. This year, only 16% see their retirement lasting more than 20 years, plummeting from 46 % who said so in 2005.

Not surprisingly, 39% of respondents said Social Security is the most important retirement income component, but 85% said it won’t be enough to cover their expenses.

According to John Diehl, senior vice president of The Hartford’s Wealth Management division, “The growing dependence on Social Security indicates a search for certainty in an uncertain world. For many people, Social Security represents the last remaining pillar of predictable retirement income after their pension plans were terminated and their retirement savings were devastated. People are desperately looking for something they can count on.”

Evidence is mounting that 2011 will be a pivotal year for everyone in the financial markets. As some critics question the value of holding financial assets, it has become clear that the few wealth-building engines which exist for most individuals — home equity and housing price appreciation, personal savings, pensions/401(k)s –have either been seriously stressed, depleted or are not producing sufficient returns to make a meaningful contribution to providingfor a secure retirement. This helps explain why more individual investors have become more desperate to replace the lost income or appreciation and are now moving into more risky investments.

What remains unanswered is how long the “new normal” will take to develop and how quickly it will take for a new investment and fiscal model to emerge. PIMCO’s el-Erian said last year the world economy collapsed because the global monetary system hit a “dead end.” It then was unable to make “even a modest recovery” because consumers stopped spending, while lending dried up and massive central bank loans proved inadequate to quickly revitalize economies.

History has not seen many challenges like this as the world’s developed nations have been forced to rebuild their economic and financial growth engines.

While constructing the “new normal” could take years, investors may find that managing their individual stress and fear levels in 2011 will become as important as making good investment decisions.