-- Seek Help. More employers are offering 401(k) advice--usually a mix of online and telephone services. Workers who are motivated enough to assess their retirement outlook usually end up boosting their savings substantially--from 6% of salary to 10%--says Christopher Jones, a vice-president at Financial Engines, which offers such services. If you need a push to get moving or are dealing with $200,000-plus in assets, personal advice from a financial planner may be worth the extra expense.
-- Expand your Horizons. Even after the hammering that stocks have taken, most investment pros think long-term investors still need to be heavily weighted in stocks. "Equities are at bargain prices," argues Roy Komack, owner of Family Financial Architects, an advisory firm in Natick, Mass. But investors will need to look beyond the Dow Jones industrial average and the Standard & Poor's 500-stock index. Small- and mid-cap stocks are outperforming the large-cap darlings of the '90s, and bonds have the potential to deliver good returns at far less risk over the next decade or two.
-- Mind the Basics. Whatever your asset mix, it's not working if you let it drift along with the market. Schedule reviews once a year, at a minimum, for your portfolio. Rebalancing--selling investments that have risen to lock in gains and buy cheaper assets--adds precious percentage points to your return. And when gains are smaller, you can't be sloppy about monitoring such investment expenses as commissions and mutual-fund fees. For a $100,000 mutual-fund portfolio with a gross return of 11%, the difference between a 1.5% expense ratio and a 0.5% charge over 20 years is $122,460--not small change.
After the beating they've taken, investors may feel like small change is what they're scrounging for. You can't do anything to turn the market around. But you can take steps to plan your retirement and position your portfolio so that your dreams and your means will intersect. In an era of reduced expectations, it's up to you to make the best of your plans.
These are bleak times if you're thinking about retirement. With major stock indexes back to their 1998 levels, the gains of that heady boom--or was it a bubble?--have vanished. Executives who grabbed the brass ring while their portfolios were fat are brushing up on their consultant buzz words. The few workers who can stand to face their shrinking 401(k) balances are recalculating their retirement projections to grapple with new realities: later retirement, a part-time job after they accept the gold watch, stingier plans for travel, second homes, or leisure.
In this era of reduced expectations, BusinessWeek is here to help. We can't make the markets go up or the crisis of confidence in Corporate America go away. But our Annual Retirement Guide, produced this year in association with USA Today, can help you make the best of these harsher times--with advice on everything from adjusting your retirement plans to withstand pay cuts to making the most of one asset that has shrugged off the bear market: your home. Whether you're looking for direction while you build up your 401(k) or figuring out a strategy to cash out, you'll find the expert tips you need.
The vast psychological gulf between yesteryear's bull market and today's reduced expectations shows up clearly in a new BusinessWeek/Harris Poll (chart). In a reprise of our 1998 retirement survey of high-income respondents 45 and up, we found that both current retirees and those thinking about it are feeling the pinch: Workers expect to be on the job longer, retirees are taking more part-time jobs, and they all expect to earn less from their portfolios.
The poll shows retirees are bearing the brunt of the market's fall. They're far less confident that their assets and earnings will support them in their golden years: 85% say they're somewhat or very confident, down from 95% in 1998. Little wonder, since 56% of retirees say their investments have lost nearly one-quarter of their value in the past two years.
While fewer retirees are working for post-retirement pay than in 1998, those with jobs are working harder. And they're more likely to say they're working because they need the money (37% give that reason now, vs. 25% in 1998). The bottom line: As market returns drop, Social Security and employment earnings loom larger in the income of retirees, accounting for 26%, up from 22% in 1998.
By contrast, today's workers portray a mix of realism and optimism in the BW/Harris Poll. Respondents admit they're likely to stay on the job longer: Their average expected retirement age rose to 65 this year, up from 63 years and 1 month in the 1998 poll. (That's higher than the age at which current retirees say they quit--an average of 54 years and 6 months.) Today's workers see a stock crash as the second-largest threat to their retirement security, trailing only catastrophic medical expenses.
And, like retirees, workers report much reduced hopes for what their investments will earn. Their expectation for long-term stock returns fell from 16% a year in 1998 to a more realistic (but perhaps still unachievable) 11% in the latest survey.
Yet today's workers are still upbeat. There's no real change in the share of workers who say they're somewhat or very confident that their benefits, savings, and work will support them throughout retirement. In sharp contrast to current retirees, fewer of today's workers think they'll be working for pay after retirement (65% predict that now, vs. 75% in 1998). About one-third say they'll work in retirement because they'll need the money, down from 43% in 1998.
Are today's workers deluding themselves? Unfortunately, there's plenty of evidence that too many investors are caught like deer in the headlights--of a market that's thundering south (table). For the first two years of the markets' tumble, most 401(k) participants sat on the sidelines, according to data from plan manager Hewitt Associates. "People just don't know what to do," says Lori Lucas, a pension consultant at Hewitt.
As a result, many employees are letting their 401(k)s bounce about in today's volatile markets, rather than actively managing the allocation of assets in the accounts. Take the share of 401(k)s invested in stocks: It rose with the market to 74% in late 2000, only to fall to 65% now. For most workers, having three-quarters of their assets in stocks was probably too high. What's more, a worker who had maintained today's 65% stock allocation during the boom--by selling enough appreciated stocks to keep the allocation in line--could have avoided thousands of dollars in losses.
Most worrisome: Even after the collapse of Enron and its 401(k) plan, workers are still dangerously overexposed to employer stock. It made up three-quarters or more of account value for 29% of the 401(k) accounts Hewitt managed--and that figure rose to 33% for employees who are 60 or older.
Not all investors are paralyzed. Web site traffic at Diversified Investment Advisors, which manages $50 billion in pension and 401(k) assets, was 65% higher in 2002's second quarter than in the same period last year, according to David Evans, vice-president at the firm. Financial planners report that it's easier to convince clients of the benefits of diversifying their portfolios and to accept lower projected rates of return. "From '95 to '98, if I ran a projection that only had 10% returns from equities, the client would say: `Get me a better investment,"' says Ian Bishop, a senior adviser at American Express Financial Advisors in Upland, Calif. (While stocks returned 12.2% from 1946 to 1997--7.5% after inflation--many market pros predict returns will be 1 to 2 points lower over the next 20 years or so. The reason: They don't think stock prices can continue to grow 2.5 times as fast as corporate earnings.)
You, of course, want to be among the awake and aware--and to take the necessary steps to adjust your portfolio, your expectations, or both. Here's how:
July 22, 2002
DJIA 7784.58 -234.70
Nasdaq 1282.65 -36.50
S&P 500 819.85 -27.91
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.