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."
