If you’re saving for retirement, remember this: It’s really just 20 years of unemployment

If you’re saving for retirement, remember this: It’s really just 20 years of unemployment

October 22, 2019

A happy, healthy retirement is most everyone’s dream. We imagine lazy mornings over a cup of coffee and a good book, days relaxing on a tropical beach, exploring foreign lands and playing with our grandkids. No stress. No worry.  

We would be better served to think of retirement as twenty years of unemployment.  That’s because when it comes to retirement savings, the majority of Americans generally come up short.

According to Northwestern Mutual’s Planning & Progress Study 2019, only 16% of the adults surveyed had saved $200,000 or more for retirement. One in five Americans have less than $5,000 saved for their post-work years and 15% have no nest egg at all! So much for no stress, no worry.

Add to those sobering statistics of under-saving is the fact that most Americans have unrealistic expectations about their standard of living in retirement.

Gallup has found that 57% of working Americans expect to retire “comfortably” and only one-third of those surveyed expect to rely on Social Security as their major source of income. But retiring comfortably with a modest dependence on Social Security will require significantly higher retirement balances than the average working American has set aside.

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As members of the baby boom generation age into retirement — approximately 10,000 Americans turn 65 every day — more and more are relying on pension benefits for their main source of income. Millions of aging teachers, firefighters, sanitation workers, and other state and local government employees depend on the income owed to them through defined benefit pension plans. Such plans require employees to contribute a portion of their salaries to a pool of funds that is invested on their behalf and is paid out to them in retirement. Poor management of the pension funds at the state and local levels, however, has put those benefits at risk for many future retirees. According to nongovernmental organization The Pew Charitable Trusts , state pension systems currently have, on average, less than 70% of the assets they need to be able to pay out benefits owed to current or retired public employees. In some states, the gap is significantly smaller, while in others the pension funding gap is far worse. To rank the severity of each state’s pension crisis, 24/7 Wall St. reviewed the average pension funding ratio — the market value of a pension fund as a percentage of the total benefits owed to current or retired public employees — for all 50 states as of 2017 with data from The Pew Charitable Trusts . For more on state budgeting and economic performance, see the states with the best and worst economies , the best and worst states for business , and the best and worst run states in America: a survey of all 50 . (Photo: Milkos / Getty Images)

When preparing for your twenty years of unemployment consider the following: 

Take enough risk

During a career in investing which spans three decades — through bull and bear markets —I  have observed that investing in stocks is not the risky activity. It’s not investing that contains the most risk to our future security.

Though the following study was conducted in 1998, the principles remain relevant. TIAA-CREF’s study, “Investing for a Distant Goal: Optimal Asset Allocation and Attitudes toward Risk”, asked three prominent investors to recommend asset allocation models over a 40-year period based on years to retirement. For people who had ten years until retirement, the strategists (Burton Malkiel, Jack Bogle and Jane Bryant Quinn) recommended 50%, 70% and 80% allocation to stocks respectively.

Quinn advocated the most aggressive allocation to equities over the 40 years. It is no surprise (employing historical average returns for stocks and bonds) that the study found Quinn’s portfolio performed significantly better than the other two strategists’ portfolios. One must take risks to generate returns.

Don’t over diversify

Warren Buffett famously said “diversification is protection against ignorance. It makes little sense if you know what you are doing.”

In 2003 I gave an interview recommending five high-quality stocks across five sectors. I discovered that interview ten years later and decided to measure the performance of that small portfolio of securities.

The names of the companies are not important, but what is significant is the performance of the five stock: Three underperformed the Standard & Poor’s 500 stock index from 2003 to 2013 and two dramatically outperformed it. Collectively the five stocks generated a 130% premium to the market over the ten years (which, it should be noted, included the bear market of 2008-2009).

Whether buying stocks, ETFs or mutual funds, pick the very best and stick with them. 

The reality of retirement

The average lifespan in the U.S. is 78.7 years. If you stop working in your 60s, retirement is indeed 20-plus years of unemployment. To enjoy your golden years comfortably requires retirement savings significantly higher than the majority of Americans have amassed. 

Save aggressively, take enough risk and face the facts.  

Nancy Tengler is chief investment strategist at Tengler Wealth Management, ButcherJoseph Asset Management. She is the author of “The Women’s Guide to Successful Investing.”

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