Where you are in the retirement planning stage of life has more of an impact on your chances of recovering your pre-2007 portfolio values than you might think. Having enough to retire on is important. But some Baby Boomers had an added boost that may not be available to younger investors, even if they work longer and contribute more to your 401(k).
The old “time is on your side” adage often applied to the earliest investor may only be partially true. While time does play a role in how much you recover should your investments falter in a downturn, it may only do so because you have a longer contribution horizon.
The newer “I’ll just simply work longer” response many middle aged investors are reciting of late may not be enough either. The result of their longer careers will have a similar impact on their retirement portfolios that their younger cohorts will experience: more lifetime contributions.
None of these two previously mentioned groups, what the Center for Retirement Research at Boston University describes as the Gen Xers (30-year-olds) and the Late Boomers (40-years-old), will ever equal the earning power of the stock market that the Early Boomers received. This group of fifty-plus-year-old investors, had they been invested during the heyday, or what is referred to in the report as the “run-up from 1982-2000″, will have benefited greatly. In terms of real retirement, they are far better off because of those years than their younger cohorts may possibly ever be.
The report by Alicia H. Munnell and Jean-Pierre Aubrey understands that everyone suffered the financial consequences of the crisis. But the thinking that the younger investors would most likely be the beneficiaries of the time element and that middle aged investors would benefit from higher contributions may not be true. It was also assumed that the younger investor would not have lost much in terms of any real accumulated portfolio balance and the middle aged investor would have had more but may not have had accumulated enough to declare a disaster.
Both groups were hurt but not as badly as their older cohorts, the Early Boomers. Or at least they thought.
This, they say, was why, the people who lost the largest portion of their retirement were given the greatest amount of airtime and print in the news. They may have lost a sizable chunk of their retirement accounts but there was something different about those assets in the portfolio.
The authors realized, this group was so much farther ahead in terms of real portfolio gains because of that run-up that they were actually better off even if they had less time to recover fully the value of those accounts. they were so far ahead that to reach parity with the oldest investor, the Late Boomers would have to attain a 13.2% gain in their portfolio – year over year. The Gen Xers would need only gain 11%.
The authors don’t suggest it is impossible. They do think it is unlikely.
So here we have the Early Boomers with the run-up in their portfolios that may not ever repeat itself. And because they were invested in a more balanced way when the crisis hit, may have come close to where their account balances were at the end of 2007.
We also know that downturns of late are increasing in frequency [seems like every five years or so] and they seem to be getting more severe. We do know that recoveries are quicker than they were in the past. Does this mean that there is a chance for the Late Boomers or Gen Xers to get to where their older cohorts are?
Yes and no. The battle you will wage will be counterintuitive to what you really want to do. You may want to retreat to the safety of something less risky, even conservative. The Early Boomers studied in the report had a balanced portfolio of half equities, half bonds. This sort of asset diversification gave them around an 8.5% return, much of it received as stocks saw steady increases, even soared during those 18 years.
While that allocation seemed conservative, trying to mimic it will not net the same result. Yet, many of these younger investors are doing just that with target date funds and index funds. Although I am not a fan of the target date fund and I like index funds when used as a future hedge against taxes, removing that much risk so early in the investment life of these workers will mean they will have to work longer, invest more and hope for longer periods of good market returns accompanied by shorter, less-severe downturns.
The report does offer a suggestion to policymakers to get more people invested sooner, encourage companies to drop vesting periods, allowing new hires in when the first begin work, and involving current workers who have not yet joined through auto-enrollment.
By no means should you be discouraged. No matter which group you belong to, you can’t afford to be.
Read the full report here.
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