2020-03-30_Bloomberg_Businessweek

◼ FINANCE Bloomberg Businessweek March 30, 2020

27

ILLUSTRATION BY MARTIN GROCH. *ASSUMES THE DOLLAR AMOUNT OF THE INITIAL WITHDRAWAL IS ADJUSTED FOR INFLATION. PROBABILITIES BASED ON

RANDOMIZED,

SIMULATED

RETURNS.

DATA:

DAVID

BLANCHETT,

MORNINGSTAR;

CENTER

FOR

RETIREMENT

RESEARCH

AT

BOSTON

COLLEGE

contributionplansthanoldercohortsdidatthe

sameages.Middle-incomelateboomershadless

than$30,000savedintheirearly50s,vs.$55,787

forearlyboomersand$50,787formid-boomers.

Thisresultwaspuzzlingandperverse.Themore

timeAmericansspentinthe401(k)system,theless

theyweremanagingtosave.Theprimeculprit,

researchersconcluded,wastheGreatRecession,

whichhitthe401(k)-reliantlateboomersharder

thanoldercohorts.Theyoungerboomerswereactu-

allydoinga goodjobofsavinguntiltheirmid-40s.

Thenthe 2008 financialcrisisdestroyedtheirwealth

justastheresultingrecessionderailedmillionsof

careers.Intheaftermath,theyearnedlessandsaved

lessthanolderboomershadatthesameages.The

studywarnsthatGenerationX andmillennialsseem

tobeona similartrajectory.

Now,anothereconomicshockis puttinglivelihoods

and retirement savings in jeopardy. The ultimate

damage is impossible to predict, with U.S. stocks

more volatile than anytime since the start of the

Great Depression. The sell-off highlights “the vul-

nerability of workers relying on defined contribu-

tion plans, where they absorb all the risk,” Munnell

says. It also highlights the importance of Social

Security, the economic lifeline created during a sim-

ilarly grave crisis 90 years ago. “Those checks are

going to go out every month and continue no matter

what happens to the stock market,” she says. “That

really is the backbone of the retirement system.”

Social Security can be credited with creating the

very notion of retirement. For centuries before the

program was launched in 1935, only the wealthy

could afford to stop working. As the U.S. recovered

from the Great Depression and then boomed, a new

retirement system for the middle class took root.

Employers attracted workers with pensions that,

like Social Security, guaranteed income for life.

Starting in the 1980s, however, the 401(k)—almost

an accident of the tax code—began replacing pen-

sions, pushing more risk and responsibility onto the

shoulders of American workers.

The system was a boon for many thrifty

upper-middle-class professionals, but showed flaws

early on. Many amateur investors made big bets on

high-promise, zero-profit tech stocks in the 1990s and

got slammed when the bubble burst. Wide swaths of

the workforce never got access to a 401(k) at all, and

those who had one often paid high fees and received

paltry contributions from their employers, which were

often slashed during hard times. There were reforms

on the edges: Automatic sign-ups helped encourage

higher savings, and new rules helped nudge savers

into more diversified funds.

Still,evenaffluentAmericansfaceda persistent

problemwiththe401(k)system—onethat’shitting

hardrightnow.It’sknownassequenceofreturn

risk.Foranyoneabouttoretire,whatmattersto

theirfinancialwell-beingis notjustthelong-term

returntheirportfoliocandeliver,butalsowhathap-

pensinthemarketsinthosefirstyearsafterthey

stopworking.A bigblowatthestart—evenif it’sfol-

lowedbya rally—cansetyouoffcourseforgood.

Toseewhy,considera commonfinancialplan-

ningshortcutcalledthe4%rule.It saysyoushould

beabletowithdrawabout4%ofthestartingvalue

ofyournesteggeachyear.Soif youhave$1million

savedbyretirement,youcanliveonanincomeof

about$40,000.Now,ofcourse,manyAmericans

whoweremillionairesatthebeginningoftheyear

arebacktosixfigures.SpectremGroup,a research

firm,estimatesthenumberofU.S.millionairesas

ofMarch 20 droppedbyatleast500,000,froma

record11 millionatthebeginningof2020.

Thelossesforretirementsaversdependonhow

exposedtheyweretostocks.TheVanguardTarget

Retirement 2020 Fund,splitroughly50-50between

equitiesandbonds,wasdown13.9%year-to-date

throughMarch24.Rightthere—andthisassumes

nofurtherdecline—a$40,000-a-yearincomefor

someoneretiringnowhasfallento$34,440.That’s

a considerablechangeinlifestyle.If youcan’tmake

thatadjustment,youcandrawdownmore,but

everydollaryoupulloutnowwon’tbethereto

takeadvantageofa futureriseinvalue.Andyour

oddsofrunningoutofmoneybeforeyoudie

Assumeannualwithdrawals of 4% of your initial balance. According

tocalculationsbyretirement researchers at Morningstar, here’s the

chance* of your money lasting if you are hit with a 25% loss^ ...

... in the 30th year of retirement

... in the 20th year

... in the 10th year

... in the 5th year

... in the 1st year

75%

65

55

47

41

All in the Timing

The sell-off

highlights “the

vulnerability

of workers

relying on

defined

contribution

plans, where

they absorb all

the risk”

1930-41 1942-47 1948-53 1954-59 1960-65

$226k

$322k $291k

$328k

$274k

Retirementassetsat

ages 51-56 for medium-

wealthhouseholds,by

birthyear

◼Definedcontribution

wealth(401(k)s,etc.)

◼Definedbenefit

wealth(pensions)

◼Social Security wealth

After a postwar boom, the nest eggs of typical Americans in their mid-50s have been shrinking