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.