Media coverage of the 2008 market crash often focuses on investors close to retirement age. The story line is that pre-retirement investors took some of the worst hits in the crash--and that many compounded their difficulties when they panicked and sold at the market bottom.
That's all true. But here's the under-reported story: The lifetime record of these close-to-retirement investors actually is considerably better than those of other age groups.
New research by the Center for Retirement Research at Boston College (CRR) shows that these investors--the older baby boomers approaching retirement--have out-performed younger boomers and GenXers because they had substantial assets invested in equities during the long bull market run from 1982 to 2000. Younger investors weren't in the market for that bull run--but they did suffer through the substantial market retreats of 2002 and 2008.
Equity prices fell 57 percent from the market's peak in October 2007 to its trough in March 2009, and balances in retirement accounts fell by a whopping $2.8 trillion. CRR's research found that older, or "early" boomers took the biggest hit, losing a full $1 trillion of that total. Late boomers had smaller account balances, so they lost a slightly smaller $0.8 trillion, while GenXers lost $0.4 trillion.
But CRR also compared internal rates of return on lifetime contributions by workplace retirement savers in three different age brackets. The researchers constructed portfolios for hypothetical investors in each of these age groups, and then looked at where each stood in February this year after the strong recovery in stocks that started in 2009.
The analysis showed that an early boomer invested 100 percent in stocks had a 9.8 percent lifetime return in early 2010. The comparable late boomer's return was just 5.5 percent, and the GenXer's return was just 0.3 percent.
Can these younger investors still catch up to early boomers by the time they retire? Only if they're very lucky. CRR's hypothetical late boomer would need to average a nominal compound return of 13.2 percent, and the GenX'er would need a 11 percent return--a rate of growth that can't be counted on.
CRR's scenarios assumed that all three employees began contributing 6 percent to their 401(k) at age 30, and their employers made a matching contribution of 3 percent; the employees' starting salaries were based on national median earnings for people in these age groups.
What about workers who haven't been so disciplined--people who haven't been able to save anything for retirement? Is it ever too late to get started? T. Rowe Price recently published a report examining this question from the perspective of a 55-year-old earning $80,000 annually but with no retirement savings. Could she build a significant nest egg by age 65?
The conclusion: It can be done -- if some rosy assumptions are used.
T. Rowe's report indicates our hypothetical investor could retire with a portfolio valued at $444,000 under the following circumstances:
--She saves the maximum allowed annually in her 401(k) plan--$16,500;
--She takes advantage of the catch-up provision that permits an additional $5,500 annual contribution;
--She receives a 3 percent salary increase every year;
--The market returns 8 percent annually.
I asked T. Rowe to run a few scenarios with more conservative assumptions. Assuming our hypothetical investor continues to make the maximum contribution, gets a 2 percent annual raise and the market rises 5 percent annually, the portfolio would grow to $314,000 portfolio at age 65. Change the annual market return to 3 percent, and the portfolio at age 65 will hit $274,000.
Can investors recover from the crash in time for retirement? The data from CRR and T. Rowe Price show it can be done -- but only with a lot of luck and discipline.
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Similarly, 50 shares of GE bought at the same time (at $4.50/sh) would have returned $593 in dividends (or 263% of the total investment) and would be worth $863 today. In this case, though, you probably would have been better off selling the shares in 2007 for >$2000...well before they shamefully slashed their dividend payout)...and then possibly buying them back in 2009 for about $6/sh (or - maybe better - using the proceeds to buy the stock of a more reliable dividend-paying company). You would have still gotten paid $480 in dividends (twice you original investment) in the 20 years that you owned the shares.
Investing in DIVIDEND-GROWING stocks (and preferably RE-INVESTING the dividends, if possible) is a great way to achieve high returns on your investment over the long haul (i.e. in an IRA or 401k).
http://www.northstarinvest.com/FNRI/default.aspx
Just as an example, the stock of United Technologies began paying an annual dividend of $0.175/sh in 1987 (when the stock was trading for about $6/sh...so the annual yield was about 3%). Since then, UTX has consistently raised their dividend about once every 1.5 years...such that they are now paying $1.70 share annually - and the stock is currently worth $69/sh (so now only yielding 2.4% annually). If you had bought 50 shares of UTX stock in 1987 for $6/sh (and held it until today), you would have been payed a TOTAL of $12.30/sh (or $615...more than double the original cost of the shares) in dividends so far...and your 50 shares would now be worth $3450. Furthermore - although the calculation is too complex for me right now - if you had RE-INVESTED your dividends in UTX stock along the way, you would have made even more...since the stock price has appreciated faster than the dividend payment.
My point was simple: buying the stocks of companies that regularly increase their dividend payouts can be a good idea...particularly during a time when savings otherwise parked in, say, a money market account might only return 1% (or less). It's quite possible that the current rates paid on mma's and interest-bearing bank accounts might not even be high enough to maintain its buying power over time - regardless of how low inflation is right now.
Frankly, I don't see how one could interpret what I wrote as a "put-down," when it was really just a recommendation accompanied by illustrative examples.
I know many people who really have no hope to "catch up," no matter how well their investments may have done years ago, because they have no income now and must use their shriveled investments well before their expected retirement at 65 or 70.
Let's not pretend that the young have it so bad or the Wall Streeters and CEOs are not to blame; the real victims are those who are older, who worked hard and lost it all thanks to lax regulations and greedy upper-level employees who wanted more than their fair share of the pie.