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Investment returns are down: Now what ?
Financial advisers say we have to increase our savings for retirement. Some firms are helping workers to do it.
By Todd Mason
Inquirer Staff Writer
Sam Scuderi had modest expectations for his stock portfolio as he began preparing for retirement three years ago, in the depths of the bear market.
"You get to thinking that if you can get 8 percent to 10 percent a year again, it's a great number," he said.
Retirement savers, once wildly optimistic about the stock market, are swinging to the opposite extreme, researchers and financial advisers say. But most aren't acting on their new caution by saving more.
In a recent survey by Vanguard Group, most retirement savers said they expect stocks to generate modest average annual returns of 8 percent over the next decade.
In previous surveys, investors expected double-digit investment returns. A few haven't gotten the message. "There is a small group of people who still believe it is going to be 15 percent," said Stephen Utkus, director of the Vanguard Center for Retirement Research.
Retirement savers are painfully aware of this lower return after reading their account statements. As of June 30, the typical saver at Vanguard eked out a five-year average annual return of 2.7 percent, according to a recent study by the Malvern fund family.
Reasonable investment expectations are making life easier for financial planners like Patti Brennan of Westtown, who advises Scuderi and his wife, Carmel.
Back in the bull market, she recalled, clients were put off when she assumed their investments would earn an average of 8 percent a year.
"Now they are looking at the same data and asking 'Where are we going to get 8 percent?' " she said.
The law of averages smooths out returns over periods of 20 years or 30 years, Brennan said, meaning that low returns in recent years are offsetting the big returns of the 1990s.
Scuderi, 61, of Willistown, who retired this year, said he worries less about his investments. "You always have a concern. You don't ever think you have enough money," he said.
White-collar workers tend to be in good shape for retirement, according to a study last year by the Employee Benefit Research Institute. But many other workers are not.
"You get huge, huge numbers, particularly older single women, who don't have a prayer in the world of saving enough money," said Jack VanDerhei, an author, Temple University professor, and retirement savings expert.
Overall, the institute's study forecast that, in the decade of the 2020s, retirees will fall about $400 billion short of meeting their basic needs plus major health-care outlays, such as nursing-home stays.
According to the institute, the average 401(k) account balance held by workers in their 60s was $127,130 in 2003, down from $139,317 in 1999. But that's not true for many Americans, because 43.3 percent of workers in 2002 had no retirement plan at all.
It is one thing for savers to lower their expectations, said Utkus, the Vanguard retirement researcher. "Part 2 is what you are going to do about it," he said. "In a world in which returns are going to be less exuberant than they have been, the answer is to put more money away."
That is not happening in retirement plans managed by Vanguard, Utkus said. The typical saver's contribution level of 6 percent of pay hasn't changed in four years, he said.
Employers are searching for ways to encourage workers to save more. Electronics Boutique Holdings Corp., of West Chester, for example, asked workers to agree to an automatic annual increase in contribution rates to their 401(k) plan.
The computer-games retailer offers a generous plan, matching 75 percent of the first 6 percent of employees' contributions. The plan is popular, but participants "are staying at 6 percent," benefits director Debra Maher said.
But when the company asked them to bump contribution rates by a percentage point a year to a maximum of 10 percent, "a lot of people signed up for it," Maher said.
Workers spend little time thinking about retirement, said Jim Hageney, a principal at Sterling Investment Advisors Ltd., the Berwyn manager of Electronics Boutique's plan.
Participants "will make their choices, and they'll never make another change," he said.
A new crop of autopilot 401(k) plans hope to solve this problem by enrolling new employees in appropriate investments by default, and stepping up their contributions each year, unless workers object.
T. Rowe Price Group Inc. has incorporated automatic annual increases in plans for 13 clients, vice president John Doyle said, but employees must agree to the arrangement.
VanDerhei, the Temple professor, said the autopilot 401(k) plans could make a difference eventually. "I've only seen limited results so far," he said.
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Contact staff writer Todd Mason at 215-854-5679 or tmason@phillynews.com. |
