Can too much information be a bad thing? As we enter in the next decade, already eight days old, most of us have broken, or fudged just a little, on the New Year's resolutions we promised ourselves. In many cases, these commitments to change your lifestyle, reverse the bad habits, or embrace some new ones are often loftier than life allows. While change is good and change is constant, it is also incredibly difficult.
Now we have two senators attempting to give 401(k) investors a glimpse of their futures. Currently, the Social Security Administration does this in the form of a projection delivered to you just before your birthday. This statement is designed to help you track your employer contributions. But it also gives you some idea how much monthly income you can expect. For numerous people eyeballing retirement, this is the jumping off point. From here, they make calculations on how much they will need to save on their own to make up the difference in what they perceive as a livable, post-work income. The question is: would this be helpful with your 401(k) balance?
In many cases it would. But in an equal number of instances, it could be more trouble than it is worth. The bill introduced to the Senate by Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis. would require plan sponsors to give a snapshot of the future, a look at how much your 401(k) is worth in real dollars, calculated with inflation in mind. (Even Social Security doesn't take their projections that far.)
AARP, the Women's Institute for a Secure Retirement and the Retirement Security Project all support the idea of giving current workers a glimpse of where they stand in the future based on what they are doing today. Those blessing offer a counterpoint to the criticisms that have arisen to the proposed bill.
Consider where the vast majority of us are. After things went south in 2008 and early 2009, three things happened to the 401(k). One, many of us stopped contributing in part because our employers stopped matching those contributions. Two, we moved to the sidelines taking our losses into cash or other types of conservative investments. Or three, we moved what was left in a target date fund.
This investment interruption will come back to haunt us. But it is an indication that we have not come far enough along in this journey to call ourselves smart investors. Had we done nothing: kept our portfolios where they were, kept investing even if the match disappeared, and even increased that contribution if the match went away, we would be back to even if not further along. But we didn't.
And now, the good senators what to tell you how bad things really are. If you look at the average account balance, which is estimated all over the place by whomever you happen to talk to, the average monthly withdrawal rate from your 401(k) when you retire is around $300 a month. The Employee Benefit Research Institute and the Investment Company Institute made their calculations based on year-end 2008 account balances of $45,519. If you use that number, the monthly distribution would be closer to $225. Scary to think that all your 401(k) will do is pay your utility bills.
The critics fear that this sort of information will force folks to invest in riskier investments to try and regain some of those lost portfolio balances. While that might be an okay maneuver for the younger investor (40 years or younger), the older you get, the more worrisome this is. If you fall into either of these groups, the same advice applies:
1. Increase your contribution. Most of us average about 6-7%. Even a couple of increased percentage points can have some long-range differences in that balance at the time of distribution.
2. Get out of your company stock. Investors remain over invested in one company and no one worth their mettle will tell you this is good idea. Even if your company is on a tear. If your 401(k) matches only with company stock, invest only to the match.
3. Have more than one fund. Many folks are either indexed in an S&P500 fund or fully invested in a target date fund (one that picks the year you want to retire and adjusts your portfolio accordingly). Spread your risk. You will need to take some in order for your money to grow and many of us will want to take more than we should. By spreading it around among three of four funds, you can at least be more helpful to your retirement than harmful.
Paul Petillo is the Managing Editor of Target2025.com
Showing posts with label EBRI. Show all posts
Showing posts with label EBRI. Show all posts
Thursday, January 7, 2010
Wednesday, July 22, 2009
Retirement Planning: Estimated Recovery of Your 401(k)
We all suffered losses in our retirement plans. We all saw the account balances in our 401(k) drop significantly from their lofty heights in January 2008. The biggest problem with the stock market crisis was not who lost the most - according to the Employee Benefits Research Institute it was those with the highest account balances - but why.
Had you been in your employers plan for less than five years, your account balance did drop, by almost 50% in some instances. But because this group generally made much more in contributions than they received in actual returns, their balances did not fail below zero. Even older workers who began to use these plans at age 55, still have positive balances in their accounts.
Folks who had the largest account balances, generally those in the study group aged 55-64 years old were seriously impacted by the downturn, losing on average 17%. According to EBRI, this median number and losses associated with it were due in large part to an overexposure to equities.
Despite all of the cries to diversify, to protect assets from just this kind of market correction, and the attraction to those gains offered by staying in equities far beyond when it would be considered wise, older retirement plan investors felt the pain to a much greater degree than younger investors/co-workers.
So what should you do if you are aged 55 or older? What should you do if you are younger, aged 20-34 or if you fall in-between those ages?
The older investor, had they stayed put in their original investments, continued to contribute and withdrew no monies from the plan either with loans or withdrawals of cash, will see their portfolios - and this is an estimate - recover in two to five years based on a modest market recovery of 5%. If you made moves to diversify after the fact, such as moving assets into safer investments such as lifestyle/target-dated type funds or simply moved into investments with less equity exposure, the recovery time could be twice what it would have been had you done nothing.
According to the EBRI: "Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities: Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 per-cent."
There is a tendency for investors is to concentrate on the short-term rather than long-term performance. This is especially true of younger investors who realized outsized gains in their portfolios during the last four years. They were better suited to risk and were more likely to see those gains as justification to continue to channel money into their plans. Older investors, who may have been good contributors as well, felt larger losses in their portfolios because they had amassed larger balances.
In this type of market downturn, buy and hold may have been the best method of retaining long-term growth - but only for younger investors. Older investors had to learn the lesson of diversification the hard way. But either group, if they have the time and a modest market recovery, should see their balances return in less than a decade.
Had you been in your employers plan for less than five years, your account balance did drop, by almost 50% in some instances. But because this group generally made much more in contributions than they received in actual returns, their balances did not fail below zero. Even older workers who began to use these plans at age 55, still have positive balances in their accounts.Folks who had the largest account balances, generally those in the study group aged 55-64 years old were seriously impacted by the downturn, losing on average 17%. According to EBRI, this median number and losses associated with it were due in large part to an overexposure to equities.
Despite all of the cries to diversify, to protect assets from just this kind of market correction, and the attraction to those gains offered by staying in equities far beyond when it would be considered wise, older retirement plan investors felt the pain to a much greater degree than younger investors/co-workers.
So what should you do if you are aged 55 or older? What should you do if you are younger, aged 20-34 or if you fall in-between those ages?
The older investor, had they stayed put in their original investments, continued to contribute and withdrew no monies from the plan either with loans or withdrawals of cash, will see their portfolios - and this is an estimate - recover in two to five years based on a modest market recovery of 5%. If you made moves to diversify after the fact, such as moving assets into safer investments such as lifestyle/target-dated type funds or simply moved into investments with less equity exposure, the recovery time could be twice what it would have been had you done nothing.
According to the EBRI: "Estimates from the EBRI/ICI 401(k) database show that many participants near retirement had exceptionally high exposure to equities: Nearly 1 in 4 between ages 56–65 had more than 90 percent of their account balances in equities at year-end 2007, and more than 2 in 5 had more than 70 per-cent."
There is a tendency for investors is to concentrate on the short-term rather than long-term performance. This is especially true of younger investors who realized outsized gains in their portfolios during the last four years. They were better suited to risk and were more likely to see those gains as justification to continue to channel money into their plans. Older investors, who may have been good contributors as well, felt larger losses in their portfolios because they had amassed larger balances.
In this type of market downturn, buy and hold may have been the best method of retaining long-term growth - but only for younger investors. Older investors had to learn the lesson of diversification the hard way. But either group, if they have the time and a modest market recovery, should see their balances return in less than a decade.
Friday, April 11, 2008
Retirement Planning and the Disgruntled Worker
You will be able to pick them out much easier in the coming months. You will see them with disappointed looks on their faces, trudging through their day wondering if they will ever be able to retire. Not just because they haven’t saved enough. Some of these folks have and were fully prepared to quit their day job in favor of a new life after work. Instead the angst they wear on their shirt sleeves is because they underestimated the volatility of the equity markets and over estimated the value of their homes.
The latest release form the Employee Benefit Research Institute portrayed an American worker who has lost confidence in their ability to save enough to retire. According to the report, “The percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008, the biggest one-year drop in the 18-year history of the survey. Retiree confidence in having a financially secure retirement also decreased, from 41 percent to 29 percent, a drop of 12 percentage points. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.”
Those that had already retired, also part of the survey were just as concerned as though who seem to be putting off their plans until the markets recover. Among those 54 percent told the surveyors that they left the workforce because of health problems or disability. What incomes they received from pensions and savings was largely eaten up by expenses, with 44% of those who responded telling that they spent “more than expected on health care expenses”.
Once retired, the primary concern is not outlasting your savings. It is what we focus on, mostly in the abstract while we are working. But once we leave the workforce, those concerns become very real. The EBRI found that “More than half of retirees (54%) say they are now more concerned about their financial future than they were right after they retired, a 14 percentage- point increase from a year ago (40 percent in 2007)”.
While health concerns both while working and retired have deeply impacted this confidence indicator, the real day-to-day expenses have begun to erode the average workers ability to save for retirement.
Cost of living wage increases have all but ceased, with number showing that over the last seven years, the average worker has lost one percent in the category of take home pay. Premiums for health insurance, while workers were still employed have grown by an average of 6% and those number look to increase. Couple that with wage stagnation and you can see why some workers feel as though they were moving in reverse.
The housing crisis has shaken many people to the core, even if they are confident that they are well positioned with their mortgages. Even if your debt level is manageable, the economy will make its downtrodden presence known to even you. Fuel costs will make an ever-increasing impact. Inflation will erode not only your current dollar but future ones as well. And if the economy seems bad now, wait until the job market begins to deteriorate as the credit markets continue to tremble with fear. That fear is very real. Creditors wonder, almost out loud, will they get paid back?
One bright spot: those fears seem to lessen with income. The fewer dollars you gross, the report seems to indicate, the lesser the chances are you are worried about retirement. Perhaps that is because you may never know what retirement is.
The latest release form the Employee Benefit Research Institute portrayed an American worker who has lost confidence in their ability to save enough to retire. According to the report, “The percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008, the biggest one-year drop in the 18-year history of the survey. Retiree confidence in having a financially secure retirement also decreased, from 41 percent to 29 percent, a drop of 12 percentage points. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.”
Those that had already retired, also part of the survey were just as concerned as though who seem to be putting off their plans until the markets recover. Among those 54 percent told the surveyors that they left the workforce because of health problems or disability. What incomes they received from pensions and savings was largely eaten up by expenses, with 44% of those who responded telling that they spent “more than expected on health care expenses”.
Once retired, the primary concern is not outlasting your savings. It is what we focus on, mostly in the abstract while we are working. But once we leave the workforce, those concerns become very real. The EBRI found that “More than half of retirees (54%) say they are now more concerned about their financial future than they were right after they retired, a 14 percentage- point increase from a year ago (40 percent in 2007)”.
While health concerns both while working and retired have deeply impacted this confidence indicator, the real day-to-day expenses have begun to erode the average workers ability to save for retirement.
Cost of living wage increases have all but ceased, with number showing that over the last seven years, the average worker has lost one percent in the category of take home pay. Premiums for health insurance, while workers were still employed have grown by an average of 6% and those number look to increase. Couple that with wage stagnation and you can see why some workers feel as though they were moving in reverse.
The housing crisis has shaken many people to the core, even if they are confident that they are well positioned with their mortgages. Even if your debt level is manageable, the economy will make its downtrodden presence known to even you. Fuel costs will make an ever-increasing impact. Inflation will erode not only your current dollar but future ones as well. And if the economy seems bad now, wait until the job market begins to deteriorate as the credit markets continue to tremble with fear. That fear is very real. Creditors wonder, almost out loud, will they get paid back?
One bright spot: those fears seem to lessen with income. The fewer dollars you gross, the report seems to indicate, the lesser the chances are you are worried about retirement. Perhaps that is because you may never know what retirement is.
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