My portfolio: 64 going on 40
I gaze back at 2008 in amazement: a borderline recession until September, then a cataclysmic series of events that saw old institutions “wamoose,” investment banks fail and the U.S. government acquire the trappings of a mutual fund.
After a 30% to 40% decline in equity prices last year, the opening months of 2009 have brought another 10% decline. The Federal Reserve’s quarterly estimates of the net worth of households and nonprofits have declined by more than $7 trillion since its peak in the third quarter of 2007 and that does not include the dismal fourth quarter of last year. The net-worth declines encompass a wide range of asset classes — homes, mutual funds and directly owned stocks. In Portland, the most recent Case-Shiller home price index shows that median prices fell 13% from December 2007 to December 2008.
At this juncture in our history, the leading edge of the boomer generation (1946-1964) has begun to retire. In the world in which we now reside, most private-sector workers with retirement plans have defined-contribution plans, not defined-benefit plans. This means that the employees, often with a match from the employer, put aside and invest funds. What’s there at retirement becomes the retirement asset.
The Federal Reserve’s 2004 to 2007 Family Finances Survey published in February reported that 52.6% of families had retirement accounts. The move from defined benefit to defined contribution shifts the investment risk to the employee. There are some advantages to portability in a world of constant change in the labor market, but it becomes especially important as people age to pay attention to the asset allocation in the investment alternatives that are offered.
John Bogle, founder and retired CEO of the Vanguard Group, has argued that people should have a proportion of fixed-income investments in their retirement assets equal to their age. (This strategy reduces, but does not eliminate, exposure to 2008, 2001 or 1987 type of events.) My failure to heed this advice has left me a 64-year-old trapped in a 40-year-old’s portfolio.
Years such as 2008 with plummeting equity markets, losses in many fixed-income markets (I had funds in the infamous bond fund in the Oregon 529 program) and falling housing prices are terrifying for people in or near retirement. According to Portland State University’s Population Research Center, there were almost 1 million Oregon residents 55 or older in 2007. This represented about 25% of the total population, and about 65% of this group was between ages 55 and 69.
Hindsight is 20/20: We accepted too much risk. Perhaps the Great Moderation is to blame — the period of relative stability from 1982 to 2007. We were lulled into thinking that this environment would continue. Median net worth rose 17.7% between 2004 and 2007. Now it has declined. How will people react? Already savings rates are ticking up as people recognize the need to restructure their balance sheets. People have been paying down debt for three consecutive months. We can expect a lower level of risk tolerance on the part of many investors, particularly those who are approaching retirement.
A recent paper by President Obama’s budget director, Peter Orszag, indicated that the labor force participation rate for workers between 55 and 64 went from 62% in 1970 to 54% in 1986 and then up to 64% in 2007. The recent boom-bust will be a generation-sh aping event. A generation will think differently about housing and be less willing to strip out equity for other spending. More attention will be paid to diversification and there will be reduced equity exposure with age.
People on the edge of retirement are likely to work longer to make up for some of their losses. The adventure for aging boomers continues.
John Mitchell is the former chief economist for US Bancorp.
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