Shrinking nest eggs: How the ailing economy affects yours
USAToday, May 16th, 2008
Patty Stewart of Redlands, Calif., is beginning to think she won't be able to retire at 65. Or 67. Or possibly ever.
Like millions of other people, Stewart is
counting on her 401(k) and her home equity to pay for retirement. But
since the start of the year, the value of her 401(k) has fallen about
4%, and rising consumer prices have forced her to reduce her
contributions to it. Meantime, home prices in her neighborhood are off
about 25% over the past two years, making it less likely she can rely
on her home equity to supplement her retirement income.
"The calculators tell me I'm going to need $1.3
million to $1.5 million" for retirement, says Stewart, 49. "That
doesn't seem like it's something that will ever happen."
She might be right. For years, stock investors
have been led to expect average annual returns of 8% to 10%. Similarly,
many people have assumed that their homes would appreciate by roughly
10% a year.
Both assumptions, though, rest on two decades of
outsize returns — returns that were inflated by low interest rates that
fueled bubbles in the values of stocks and real estate. Now, many
financial analysts are predicting a prolonged period of below-average
returns on both stocks and home equity.
If they're right, Americans need to face a
sobering fact: They're not likely to have as much money for retirement
as they'd projected. Which means that many of us will have to save
more, expect less and work longer than we'd planned.
Investors who rely on historical returns for the
past 50 years will "probably overestimate what we're likely to see in
the future," says Chris Jones, chief investment officer for Financial
Engines, a retirement-plan consultant.
"As much as we'd like to say history is a good guide to what the future holds, it's simply not true."
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