By Ylan Q. Mui
Washington Post Staff Writer
Sunday, September 19, 2010; 8:31 PM
For decades, Americans have largely counted on the stock markets and real estate to finance life's biggest expenses, from their children's college to retirement.
But discouraging returns over the past decade and a sputtering economy that shows few signs of reviving soon are raising acute doubts about those traditional investments, leaving many families confused and frustrated over how to secure their financial future.
For those in their "nesting years," which financial experts say last from roughly the 20s through the 40s, the loss of this time to build wealth could end up haunting even the most prudent savers well into their old age.
This is one reason the economic downturn has been so wrenching, even for those who pay their bills and have jobs. Arlington County resident Ann Unitas, for one, thought she was on track for a comfortable retirement in about 15 years. But as the recession took hold, she watched her retirement account drop by about half. Unitas, a mother of two, has begun hunting for other places to put her money - she bought an apartment to rent out and is looking into municipal bonds - but remains uncertain that those strategies will work.
"I was terrified when I saw the 401(k) damage," Unitas said. "I can't wrap my head around how it'll grow back."
Some financial planners continue to preach that long-term investing requires riding out the losses as well as the gains. Others are now telling clients to moderate their expectations - work longer, cut spending, downgrade retirement dreams - rather than crossing their fingers and hoping for bigger returns down the road.
"The real advice to individuals is that they have to be working at something they love because the reality is that they will be working longer," said Eleanor Blayney, consumer advocate for the Certified Financial Planners Board of Standards, a trade group.Adding it up
The math alone is sobering. College lender Sallie Mae estimates that a public university will cost $175,000 for a child born this year. A private school is even higher, at $365,000. Meanwhile, the group predicted that the average family will have saved only $48,000 for college by the time a child graduates high school.
Looming beyond the expense of college is an even more daunting cost.
A family earning the Washington area's median household income of about $85,000 must earn more than $2.7 million from its investments if it wants to maintain the same standard of living in retirement and not run out of money, according to an analysis conducted by Fidelity at the request of The Washington Post. To meet that goal, such a family would need to sock away 11 percent of its earnings each year, though it should consider saving more in case the markets perform poorly, Fidelity said.
In the 1980s and 1990s, the stock and real estate markets helped many families amass wealth to prepare for college costs or retirement. But now there is mounting concern among economists and business leaders over whether high rates of return will be sustainable in this century. Even before the financial crisis, business guru Warren Buffett, in a letter to shareholders in early 2008, compared those who swear the stock markets can produce long-term double-digit gains to the delusional queen in "Alice in Wonderland." (Buffett sits on the board of The Washington Post.)
So far, Buffett's prediction has held true. Stock markets ended the past 10 years virtually flat. Meanwhile, the real estate crash has wiped out the gains homeowners saw earlier in the decade. Some economists are now dubbing the era a "lost decade."
"Every time you drink from a glass, you get poisoned, so why would you ever want to drink from a glass?" said Ric Edelman, who runs an eponymous financial services firm in Fairfax.
For his stressed-out clients, Edelman said he employs tough-love advice: "Get a grip."
The fears plaguing modern investors are driven in part by a generational gap, he said. Many families in their nesting years have not seen the sustained economic growth that would give them confidence about what's ahead. And, as guaranteed pension plans become relics of a bygone era, many families are bearing more of the burden of determining their financial future.Change of plans
Matt Queen, 36, of Alexandria had hoped to bow out of the intense pace of his job in government relations for a defense contractor at age 50. He began socking money away into a retirement account as soon as he began working, resisting the temptation to follow his friends into the dot-com bubble and patting himself on the back after it burst.
But his plan hit a wall when the financial crisis struck. His 401(k) had been growing at 16 percent year over year; that plunged to just 3 percent. Meanwhile, certificates of deposit that had enjoyed a 5 percent return fell to about 1.5 percent - making them only slightly more worthwhile than stuffing money in his mattress.
So Queen and his wife, Laura, are considering pulling the money out to buy a home in Florida where they could retire, though that day is now unlikely to come at age 50.
"It was a too-aggressive dream," Queen said. "I think we had a big reality check on it."
Families in their nesting years still have time for their investments to turn around, but surveys show Americans have less confidence that they will be able to finance life's landmark events on their own.
A recent Gallup survey found that the percentage of working adults who think their 401(k) plans will be a major source of retirement income dropped from 52 percent in 2007 to 45 percent this spring. Those who believed they would be able to rely on the equity in their home dropped 10 percentage points to 20 percent.
"People have been hit with a double whammy," said Jack Reutemann Jr., who runs the personal finance advisory firm Research Financial Strategies in Rockville. "Sometimes I feel we're running a financial emergency room."
The same poll showed that those who expect to rely on Social Security in their retirement jumped eight percentage points to 34 percent, despite expectations that the entitlement program will run out of money in the coming decades.
With so much uncertainty about where to invest, some are simply sitting tight.
Justin McNaull of Vienna deposited about $25,000 into a 529 account for his son, Caleb, using the profits from the sale of his home in 2002. Nine years later the balance has barely budged, but McNaull's family has grown to include a 5-year-old daughter, Eliza. Two kids means two college tuitions.
"I'm trying to do what they say to do, which is keep putting it in there in good times and bad," McNaull said of his savings plan.
McNaull's savings strategy has remained the same despite the low returns and the financial crisis. He still has plenty of equity in his home, he said. His retirement accounts total about $200,000, and there's also life insurance. Plus, he is hoping that time is on his side.
Who knows what could happen in 30 years? The stock markets could return to glory, Buffett could go bankrupt, or McNaull's son may not need the nest egg he has dutifully saved up for him.
"When my son actually realizes his NBA dream, then Eliza will have her shot at the money," he joked.