If you look closely>, you ll see some good news these days about retirement finances.
And that has me worried.
I say this from the vantage point of The Wall Street Journal, where I ve been lucky enough to cover the retirement beat for the past decade. Lucky because it s an opportunity most journalists dream about: a big, sophisticated audience that s hungry for information about, in this case, how best to plan for and enjoy later life. So when SmartMoney asked me if I would like to share some of my reporting and ideas with readers of these pages, I couldn t say no.
The good news? To start, about 80 percent of companies that suspended or reduced their 401(k) matches in 2009 are expected to restore them by year s end, according to Hewitt Associates. Health care reform will offer some relief to early retirees who purchase individual policies. Insurers, for instance, are now prohibited from imposing lifetime dollar limits on essential benefits, including hospital stays. And on the labor front, a recent study out of Northeastern University asserts that baby boomers seeking a reduced workload in retirement might well have their pick of jobs. (See After the Recovery Help Needed
The investing world looks a little better too. If markets take their sweet time climbing back to precrash levels (as most observers expect), the next few years should prove to be a blessing for long-term investors who contribute steadily to retirement savings, says Henry Hebeler, author of AnalyzeNow.com, a retirement-planning Web site. Regular deposits provide the well-known benefits of dollar-cost averaging, he notes.
Perhaps the best news involves household finances. According to a recent report from the Pew Research Center, the savings rate has more than doubled since the recession began to 4.3 percent in 2009 from 1.7 percent in 2007 and average household debt is down 6 percent. This recession was the first time baby boomers faced some scary realities, says Kelly Ferrin, a gerontologist and the author of What s Age Got to Do With It?
So why am I concerned? Because we ve seen this movie before. We know how it ends. As good news builds on itself and as the economy and our nest eggs recover, we will forget quickly, if history is any guide the lessons of 2008 09. Brett Hammond, chief investment strategist for TIAA-CREF, is already seeing backsliding among investors, he says. He recounts a day this summer when the Dow had fallen about 300 points being approached by an anxious client. He asked me, What should I do? in light of the sell-off, Hammond recalls. I told him, Nothing.
That advice is spot on. If you save regularly, diversify and minimize expenses, daily swings in the market, however nerve-racking, shouldn t affect your investment strategy one whit. And yet, just two years after the sky fell, we read about investors fleeing to the safety of cash one week and snapping up bargains in stocks the next.
So make a pact with yourself: No fleeing; no snapping up. Rather, tape the following advice someplace where you can read it regularly the most important lessons to take away from the economic collapse about saving for retirement.
Greed is not good.
In 2007, on the eve of the market meltdown, almost half of workers ages 56 to 65 had 70 percent or more of their 401(k) funds in stocks, according to the Employee Benefit Research Institute. Excuse me, but what were these people thinking? You re getting ready to retire and you re chest-deep in risk? The lesson: Gordon Gekko was wrong about greed, at least when it comes to saving for later life. It s not about chasing every last dollar, every hot fund, says Hammond. Rather, modest is good aiming simply for a fulfilling retirement and reducing your chances of dying broke.
Another meltdown is coming.
When? I don t know. No one does. It could be in 10 weeks or 10 years. In just the past decade, we ve been hit with two of the five worst bear markets in the past century. Instead of trying to divine when the next collapse might occur, remind yourself (frequently) that it will occur, and design your long-term investment strategy accordingly, says William Bernstein, an adviser and the author of The Investor s Manifesto. To that end, diversification and an asset allocation tied primarily to your age (where you gradually reduce your exposure to stocks over time) are still your best friends.
When it comes to building a nest egg, the most important ability is emotional discipline, says Bernstein. In other words, let s assume or hope that you had a well-thought-out investment strategy before 2008. When Armageddon arrived, did you abandon your plans, or did you have the emotional stamina to stay the course? It s not easy, especially amid the din. We re fed information every minute, from the news, from friends, Bernstein says. And you re constantly wondering, Should I hit the sell button? How best to develop that discipline? By periodically forcing yourself to sell when the sun is shining and to buy when everyone else is running for cover.
Washington, inexplicably, is still debating whether to hold all financial advisers to a fiduciary standard, meaning they must place your interests ahead of their own and disclose any conflicts of interest. (Memo to Washington: Duh.) But don t wait on Washington to act. If you work with an adviser, work only with a fiduciary. In 2008 09, fiduciaries performed much better than other advisers; they were far more defensive, says Lou Harvey, president of Boston-based Dalbar, a financial-services-research firm. I think this is dawning on more people. They re learning that some advisers have their [clients ] best interests at heart, and others have their [clients ] money at heart.
It s the income, stupid.
Sure, capital gains are wonderful: a possible source of returns before we retire and a possible source of distributions afterward. But as we now know, we can go a decade or more without any. That s why your nest egg also must generate income. For too long, individual investors have followed an approach that is essentially very risky hoping for or anticipating capital gains in their portfolios without any concern for the income return, says Charles Farrell, an adviser and the author of Your Money Ratios. But, he says, this income component is critically important once investors need to live off their portfolios.
How to create that component? We ll tackle that in next month s column.