That nest egg is feeling fragile
Monday, September 20, 2010
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 '90s, 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."