Who Got Hit Worst in the Market Crash
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
Equity prices fell 57 percent from the market's peak in
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?
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
-- She saves the maximum allowed annually in her 401(k) plan --
-- She takes advantage of the catch-up provision that permits an additional
-- 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
Can investors recover from the crash in time for retirement? The data from CRR and
Available at Amazon.com:
- European Debt Crisis Affects Investments
- 7 Valuable Lessons For Investors
- The Reality of Mutual Fund Returns
- Mutual Funds and a Changing Landscape
- Assembling a Sturdy Retirement Portfolio
- Funds for Recent College Grads
- Many 'Wide Moat' Companies Losing Competitive Advantage
- Who Got Hit Worst in the Market Crash
- Utility Stocks: Trade Flash for Dependable Payouts
- Formulate Strategy Before Diving Into Higher Risk Mutual Funds
- Contrarian Investors Target Promising Out-of-Favor Stocks
- Income Investors Face Challenges as Economy Shifts
- Can SEC Beat Goldman Sachs?
- Business Schools' Great Ethics Debate
- Investing for Retirement A Balancing Act
- Fees Can Take Big Bite Out of Retirement Fund Contributions
- Small-Cap Stocks Poised For Big Comeback
- John C. Bogle's Old-fashioned Investing Advice Still Applies
- 10 Great Mutual Funds You've Never Heard of
- Mutual Funds Fees & Expenses Only One Factor
- Why Investors Are Flocking to Index Funds
- Trend Setting Companies Target Hip Young Consumers
- Weakening European Stocks Offer Some Bargains for U.S. Investors
- Investing: What to Do About Inflation and What Not to Do
- Kick-Start a Portfolio With Just a Little Cash
- Exchange Traded Funds Offer Low-Cost Diversification
- Fresh Look at Socially Responsible Mutual Funds
- Technology Opens Doors for Investors
- Make the Most of Your Mutual Fund Money
- Fiduciary Standard for Giving Investment Advice
- 'Investment Rewards' Credit Cards Well Worth A Look
Investing - Who Got Hit Worst in the Market Crash | Successful Investing
(c) 2010 Mark Miller