Market volatility could threaten retirement security
Oct 31, 2018 @ 10:28 am
Who needs to watch
reruns of "Friday the 13th" horror movies for cheap Halloween
thrills? A quick glance at the financial news, including the heart-stopping
900-point swing in the Dow Jones Industrial Average in intraday trading Monday,
is enough to make the average investor shriek. Focus on those 401(k) owners
within striking distance of retirement, and the scene looks more like a cameo
from the "Walking Dead."
This year marks the
40th anniversary of the legislation that paved the way for 401(k) plans, and
the first generation of workers who spent their careers saving in personalized
accounts are on the verge of retirement. Unfortunately, extreme stock market
volatility, even by traditionally spooky October standards, and historically
low bond yields mean those who retire in the next few months or
years could face some scary financial times.
Market performance
in the first few years of retirement determines financial security throughout
one's golden years. Investors around the age of 65 are in what David Blanchett,
head of Morningstar's retirement research, calls the "retirement red zone."
"If things go
wrong, they can't make it up," Mr. Blanchett said earlier this year at
the InvestmentNews Retirement Income Summit in Chicago.
A new Legg Mason
Global Investment Survey for 2018 shows some baby boomers may be trying to make
up for lost time by investing heavily in equities in their 401(k) plans. Based
on a survey this summer of more than 1,000 investors who plan to invest a minimum
of $50,000 in the next 12 months, respondents were overwhelmingly bullish on
equities in their retirement holdings.
"It is
surprising to see employed baby boomers with substantially higher allocations
in retirement accounts (60%) compared to their other non-401(k) accounts
(34%)," said Adam Petryk, president of Legg Mason affiliate QS Investors.
"In general,
as individuals get closer to retirement, their portfolios are more vulnerable
to market volatility as they have less time to recover from a large downturn,"
Mr. Petryk said. "Boomers may be making large allocations to equities in
order to reach their retirement goals, but in doing so are not protecting the
capital already accumulated from a potential market shock."
"The people
near retirement need to be real concerned about what happened over the past few
weeks," said Gary Kleinschmidt, head of retirement sales at Legg Mason.
"When the
market is down when you are 25, you are buying shares on sale," Mr.
Kleinschmidt said. "When you're 60, it's scary."
Sequence of returns
matters. For a portfolio nearing retirement, a bad sequence of returns in the
last few years can be devastating.
For example,
Investor A, who starts with $50,000 and adds $20,000 each year, earns the
actual S&P 500 returns from 2000 to 2017 and begins retirement with a
healthy $1 million nest egg. Investor B earns the same returns but in the
opposite order, as if the market decline of 2000-2002 had happened from 2015 to
2017. Even though their average return of 7.03% is the same, Investor B ends up
with about half as much as Investor A. Starting withdrawals from a shrunken
nest egg can hasten portfolio exhaustion.
A separate survey
of older workers conducted by Schwab Retirement Plan Services also found strong
confidence in their retirement investments. Among workers age 54 to 70 who are
currently saving in a 401(k) plan, 75% believe their 401(k) is in better shape
now than ever before.
The Schwab survey
also revealed, though, that not every worker who is approaching retirement
feels fully prepared. More than a third of respondents — 36% — still do not
know how much they need to save for retirement, and a quarter are not sure how
much they should be contributing to their 401(k). In addition, one-fifth of
boomers say they do not understand the process for withdrawing money from their
401(k) in retirement.
Asked what they
would do if their portfolio came up short of their retirement funding target,
more than one-third of respondents in the Legg Mason survey said they or their
spouse would work longer or participate in the gig economy. In
the Schwab study, only 16% of respondents said they expected to work during
retirement because they think they will need the money, but 40% plan to work in
some capacity because they want to.
"Forty years
ago, we might not have anticipated that the weight of Americans' retirement
would rest so squarely on the shoulders of the 401(k) plan," said
Catherine Golladay, senior vice president of participant services and
administration at Schwab Retirement Plan Services.
"While it is
encouraging to see that so many boomers are confident in their ability to
retire comfortably, it is not surprising that a large percentage of them are
feeling unprepared as they approach the end of their careers," Ms.
Golladay said. "If you are unsure of your retirement income needs, asking
for help can make all the difference."
No comments:
Post a Comment