Yahoo Finance’s Kerry Hannon details the decline in retirement accounts amid recent market volatility as people seeking to retire aim to minimize impacts on 401(k) returns, in addition to how millennials are approaching retirement and Social Security savings.
DAVE BRIGGS: This recent market selloff has millions of Americans shielding their eyes, shuddering in fear of what it means for their retirement. Yahoo Finance contributor Kerry Hannon here with the bottom line for your 401(k), your IRA. Scary times, Kerry.
KERRY HANNON: Not kidding. I definitely am not looking. So I don’t know about you two, but I’m not looking.
DAVE BRIGGS: Nope.
SEANA SMITH: No way.
KERRY HANNON: But the fact is, a lot of people do have to look. If you are a retiree, you have to be paying attention because if you have to take those required minimum distributions from your retirement accounts this year, you’re going to be selling, and that’s not going to be a pleasant situation for you. So it’s pretty rocky and pretty scary. But frankly, if you’re young, you’ve got time, right? We’ve been through these cycles. You have time for things to bounce back. Even if you’re nearing retirement, you have time for it to bounce back.
But what’s– it’s pretty scary, these massive drops, though, that have really alarmed people, and because we had such big buildups last year, to be honest with you. And so it’s kind of almost like giving money– you’re going back to where we were in a way. But it is starting for people to see their accounts drop 20%.
And what’s happened, really, that’s new in recent years, really, is more and more people have more equity holdings in their 401(k) plans and in their IRAs. It used to be, you had this equation. You would say 100 minus my age is going to be the percentage I’m going to have in equities. Not so much anymore. You know, people have, like, 2/3 of their retirement accounts invested in equities. And it might be people in their 50s, 70%. And it drops down a bit as they get older.
But people are still holding a lot of equity in these accounts. And I must say, just a caveat to that, is, it’s not necessarily a bad thing because with longevity, we’re living longer lives. You need that stock to give it that bump, that equity boost that where we can get extra growth, but you have to be patient and you have to be willing to take that risk.
SEANA SMITH: Well, Kerry, is there a way to protect your 401(k) from volatility, from losses, like we saw in the past couple of weeks?
KERRY HANNON: That’s a good question. It’s just so difficult in today’s world. Yes, you can shift to more conservative investments. You can move as target funds, which is a big thing these days, sort of gradually shifts you into bonds. But as we know, that’s not necessarily a panacea. So often, in today’s world, if you’re invested into your 401(k) plans, chances are you’re heavy into equities. And you’re just going to have to– I personally like index funds. But those took a hit as well. But at least you have a bit more balance there. And you save– and you can save on costs and fees in many ways, so.
RACHELLE AKUFFO: Well, and speaking of sort of trying to make up for some of these costs, we did see this study by Healthy Services that says millennials, if you’re, say, a 35-year-old earning about $100,000 a year, that you ‘re going to see a 20% lifetime reduction in Social Security benefits. You’d have to save an inflation adjusted $33 a week over the course of your career to make up for that. What should millennials be thinking right now in terms of what they might have to do to make up that difference?
KERRY HANNON: You know, thank you for bringing that one up because that is really a very real possibility. I mean, if things don’t change by 2035, we’re going to see that 20% dip in what the retirement community can expect from their Social Security benefit, as those millennials move into the system. The fact of the matter, it’s pure population. We don’t have the younger workers coming up to support the growing number of retirees. Something’s got to happen.
And they’re talking about, OK, well, this is one thing we might increase the retirement age to 69 from 67. But you know what? All that’s really doing is kicking it down the road. Millennials will still have less in terms of their benefit from Social Security. So, you know, here’s the thing. Pay attention right now. Start saving a little bit more. I think that’s the best advice we can give.
RACHELLE AKUFFO: So then if you’re someone who’s perhaps not right at retirement, but you’re sort of looking ahead. You’re seeing what’s happening. And you’re seeing down the road, you might have to have that make-up of 20% there. What should you be investing in? What is the best strategy? If you’ve not started at all in terms of thinking for your retirement, how should people start? What’s the first step?
KERRY HANNON: yeah. Well, that’s good. You know, I’m still a believer in going– you need to have equities, especially if you’re younger. And so you need to pay attention to that. And what that model from Health View that you mentioned, they’re, you know, saying about a 6% average return and having your employer kick in 50% to get you even to that 20% when you chip in an extra 33 a month . What I like to say is just bump up. If you can be setting aside 15% of your income into a retirement account, that’s probably a good number.
And so when you’re younger, it’s hard to say, I can’t possibly live without that if you’re not earning a lot. But you can automatically adjust that up each year. Most employers will allow you to do that. And I really encourage people to do that. And definitely put as much into your retirement account as you need to get your employer match. I mean, employers are– actually, right now, they’re even upping their matching benefits to sort of attract new workers. So that’s getting to be better. And those are really the best ways to start. But do not ignore it. Make sure you do something.
RACHELLE AKUFFO: Definitely not the time to put your head in the sand. We do appreciate you always coming on. Kerry Hannon there for us. Thanks so much.