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
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
