Taking on Retirement
Perspectives Newsletter Q3 2013
By Laurence D. Fink, BlackRock Chairman and CEO
For years, people have been saying we have a Social Security problem in America, but that's only part of the story. We have a retirement crisis.
Consider these facts: Americans are living longer—the average 65-year-old has nearly two decades of life ahead, and one in every four will live past 90. But we're also producing fewer workers. The result is a bigger bill for longer retirements that we're already struggling to pay.
Social Security was never intended to be the primary source of income in retirement. It was meant to complement private pensions and personal savings. Yet, more than one-third of retirees are getting 90% or more of their income from Social Security.
Why? Because traditional (defined-benefit) pensions are disappearing, and only about half of private-sector workers are covered by an employer-sponsored plan of any kind, including 401(k)s. The Employee Benefit Research Institute reports only two-thirds of workers have saved anything for retirement; most have set aside less than $25,000.
Even conscientious savers are struggling. Many are scarred by the financial crisis and subsequent economic woes and are more fearful of losses than enthusiastic about gains. As a result, they are putting too much of their savings in seemingly "safe," but low-yielding investments.
I'm not one to point out a problem without offering solutions. In fact, I have put out a public call to make the retirement crisis America's No. 1 national priority. Instituting default enrollments into 401(k)s was a good first step. We should also consider adjustments to the cost-of-living formulas embedded in Social Security to help restore that program to health. Beyond that, we need a national savings program, probably a mandatory one, to supplement Social Security's basic protections and ensure that future generations have the means to provide for longer lifespans.
A look at private-sector investment returns vs. those earned by Social Security illustrates the merit in this combined approach: Someone retiring at 65 today who made the maximum contributions to Social Security will collect annual benefits of roughly $28,500 a year. To produce that amount, the retirement saver and his/her employer had to contribute more than 12% of eligible yearly income to the Social Security trust fund every year.
Now assume that same amount of income had been invested in a diversified portfolio of 90% US stocks and 10% US bonds when the worker was 30, gradually adjusting to a more conservative mix of 40% stocks and 60% bonds as retirement approached. In this scenario, the retirement income after 35 years (based on the actual historical returns of the S&P 500 Index and the Barclays US Aggregate Bond Index) would be around $42,000.
Of course, past performance is no guarantee of future results, and a portion of the return difference reflects Social Security's disability and survivor benefits—protections that need to be preserved. But a greater share reflects access to a broader range of investments, an advantage that should be offered to all Americans.
To those conscientious savers who find themselves battling investor psychology and coming up short, we would offer these suggestions:
- Break from tradition: The traditional "retirement assets"—core bonds and cash—are not likely to give you the growth you need to outpace inflation. Even those who are already retired should consider other assets, such as equities, commodities and alternatives, as options to help generate income and deliver returns over the long run.
- Go global; be flexible: By investing narrowly across a limited number of asset classes or sectors, you are effectively concentrating your risk. Adaptable strategies (often called "unconstrained") with the flexibility to exploit opportunities around the world and across asset classes offer built-in diversification. While diversification does not ensure profits, it has been shown to spread out risk and smooth the ride for a more consistent experience over time.
- Think long term: Many investors make the mistake of reacting to the daily headlines and market swings. For a 30-year-old retirement saver, today's moves in the market averages will have little bearing on the end game. But retreating to the sidelines now could have a negative impact on a portfolio in the long run. Consider the cost of missing just a few of the stock market's best days.
Ultimately, long life is a blessing. To ensure it is not a mixed blessing wrought with financial hardship, it is critical that we adjust our thinking now and take steps to proactively address the retirement crisis.
- ViewPoint: Addressing America's Retirement Needs
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