A recent Wall Street Journal article opened with, “The 401(k) generation is beginning to retire, and it isn’t a pretty sight.” If your retirement account balances have taken a beating from the recent recession and stock market collapse of late 2007 to early 2009, you are not alone.
Shortfalls and More Work Ahead: Approximately 60% of households nearing retirement have 401(k)-type accounts, and this represents the majority of their savings.
- In households headed by individuals aged 60 to 62 that have a 401(k) account, less than a quarter of those households have the necessary assets to maintain their standard of living throughout retirement.
- Put a different way, the median 401(k) plan holds just under $150,000 according to the Center for Retirement Research.
- If that individual were to purchase a $150,000 fixed annuity to generate income for life that amount would generate a little more than $9,000 a year.
- Combining the maximum social security benefit of about $28,000, this leaves retirees with just $37,000 a year for living expenses.
- As a result of this shortfall, many are forced to postpone retirement, find cheaper housing, buy less-expensive food, reduce travel, take undue risk with their investments, and make other unexpected and sometimes unimaginable sacrifices.
- Of those individuals aged 45 to 59 who had substantial retirement assets before the downturn, 40% planned to work longer according to the Center for Retirement Research.
Savings Example: Say you want to have $60,000 a year to spend in retirement.
- If you have 30 years until retirement, a 4% inflation rate, and a 10% return on your investments.
- You would need to save $15,500 a year to get to the required $2.5 million.
- If you have just 10 years to retirement and the same assumptions:
- You would need to save more than $130,000 a year to get to that same $2.5 million.
- A Schwab survey last year found that 70% of 401(k) participants who received investment advice nearly doubled their savings.
Schwab also discovered that 53% of investors were more confused by their 401(k) benefits than by choosing their health-care plans.
- A Harvard professor recently asked Harvard staff members and MBA students at Pennsylvania’s Wharton School to select the best S&P 500 Index Fund.
- Since all of the funds invest in the same strategy, most survey participants chose the fund with the best performance since the fund’s inception.
- Since the funds were started at different times, this was not an “apples-to-apples” comparison.
- Even with a cheat sheet, only 10% of the Harvard staffers and 20% of the MBA student picked the fund with the lowest expenses.
Past performance is not indicative of future returns. So why would you pick a fund based on just past performance? There are many things to consider:
- Expense ratios:
- Look for funds with the lowest fees.
- Paying excessive expenses for a fund will eat away at your gains.
- Management Tenure:
- Knowing the fund’s management has been responsible for the fund’s performance is important.
- You may think you’re getting a fund with a tremendous track record, only later to discover it is being managed by someone with little to no investing and portfolio management experience.
- Consistent Investment Style:
- Building a diverse portfolio often requires investing in a variety of asset classes, whether it be Large Cap funds, Mid Cap funds, International funds, and so on.
- If you purchase an international fund, but management opts to invest in domestic stocks, you now have zero international exposure and the management has strayed from their area of expertise.
- Granted you may not have the resources to perform this kind of research, the Henssler Financial may be able to offer you some assistance