Nearly 80 million baby boomers are rapidly approaching retirement age and many of them have a problem, a very big problem. The problem stares them in the face every month when they look at their retirement plans, savings accounts, and brokerage statements. That problem is money, or more precisely, the lack of it.
Unlike their parents, who earned guaranteed pensions that promised a fixed monthly check when they retired, many baby boomers are responsible for managing their own retirement accounts. The markets have been particularly unkind over the past decade leaving millions of baby boomers woefully short of the amount they hoped to have saved by now.
To illustrate this point, let’s go back to the fall of 1999. We’ll use a hypothetical 52-year-old who wants to retire at age 62, has $500,000 in a 401(k), and makes ongoing contributions of $15,000 annually with an employer match of $3,000 annually. We’ll assume a 10 percent annual return, which is much less than what stocks had averaged for the 20 years prior to 1999. The result is a 401k valued at nearly $1.6 million if everything goes according to plan.
Instead, let’s assume the funds earned the average return of the S&P 500 Index over the previous 10 years. Our hypothetical investor would be very disappointed by the results – they would have less than $700,000 – far less than the $1.6 million they had anticipated.
While only a hypothetical example, in light of the worst decade for stocks in a generation, many baby boomers need to rethink their retirement savings strategy. A growing number of forward thinking investors are utilizing a variety of resources that may help retirement accounts better withstand market volatility.
Targeted Diversification
Until this most recent bear market, many investors thought diversifying among stocks and bonds was enough to cushion the blow from large market declines. That turned out to be a false sense of security as globally stocks and bonds plunged in 2008. Today, financial innovation has opened up new investing opportunities that may allow a better approach to diversification. These new opportunities may enable investors to develop portfolios that are not as closely aligned with the ups and downs of the stock market. Prudent use of these new opportunities may improve long-term performance, or at least help reduce volatility.
Treasury Inflation-Protected Securities (TIPS)
These securities provide protection against inflation and are backed by the U.S. government. The principal increases with inflation and decreases with deflation (as measured by CPI). When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal. So, like the principal, interest payments rise with inflation and fall with deflation.
Advance and Protect Strategies
It’s impossible to precisely “time” the stock market’s often nonsensical ups and downs. However, some strategies have provided “clues” as to the general expected direction of stocks based on a variety of data. The goal is to take advantage of the “advances” in market prices while “protecting” those gains from precipitous declines. While no system can guarantee success, most investors like knowing a strategy is in place that may reduce their exposure to sharp market declines in the future.
All investments carry some form of risk, but there are ways to reduce exposure to some risks by utilizing the appropriate tools and resources. Consult with your financial adviser for details in understanding your options and how to implement the ones that makes sense. By doing so, you may avoid the worst of future financial storms.
John Klevens is the Principal Financial Advisor for Klevens Capital Management in Bellevue. Contact John at 425-453-6353.
