The Woeful State of the American Saver

June 27, 2011

One of the biggest financial changes over the last generation has been the assumption of retirement savings risk by individuals.  A generation ago, many workers in both the private and public sectors had defined benefit plans that were quite generous.  (As we are finding out, the public pension plans were so generous that they are now bankrupting states, counties, and municipalities.)  Even the private corporate pension plans had great benefits—often nice payouts along with retiree healthcare.

As automation and productivity increased, fewer workers were needed to reach the same production level and corporations found themselves with fewer current employees trying to support a large base of retirees.  This is the same demographic situation that plans like Social Security find themselves in, by the way.  The cost pressures became unbearable, especially if the corporations intended to survive in an increasingly competitive global economy.

Corporations looked for ways to shift the retirement cost burden and over the past generation have moved to defined contribution plans, most often 401k and profit-sharing plans.  With a 401k plan, much of the onus of saving is shifted to the employee, although many of the best employers have excellent matching programs.

Alicia Munnell, the director of the Center for Retirement Research, recently penned an article in Smart Money that lays bare how Americans are doing on the path to retirement.  She writes:

In theory, a typical worker who ends up at retirement with earnings of slightly more than $50,000 and who contributed 6 percent steadily with an employer match of 3 percent should have about $320,000.

In fact, the typical individual approaching retirement had only $78,000, far short of the simulated amount.

She pulls data from a number of other sources to support the $78,000 number as realistic, but whatever the actual number, it is clearly far short of $320,000.  The amounts Americans have saved will produce a very meager retirement.

Using the SCF [Federal Reserve Survey of Consumer Finances] figure of $78,000, 401(k) balances will produce about $400 per month of income in retirement if the participant buys a joint-and-survivor annuity; $260 per month if the participant applies the “4-percent” rule.

$400 per month, even with some kind of Social Security benefit, is still going to put a lot of retirees squarely into the Alpo zone.  And you’ve got to hope that the Social Security benefits will still be intact.

Not recommended for retirees

source: www.easyfoodandlaundry.com

This is not an outcome that is good for anybody.  It’s not good for the retiree who is trying to eke out an existence on an insufficient level of income.  And it’s not good for responsible savers who do have adequate assets—that’s the first place the government will look for money to redistribute.

What can you do to help your clients avoid this problem?  As with most simple problems, the solution is fairly simple too.

1) Save more. 6%, as in the example, is probably not enough.  Most experts recommend a minimum of 10% of your income be saved.  I’d go for 15%.  It would not be tragic if I had too much money saved for retirement and had to work down my balance by taking Mediterranean cruises, for example.

2) Invest for growth. You might have to embrace a little risk, but the ultimate payoff may be well worth it.  Higher investment returns compounded over a long period of time can make a huge difference.  (Hint: relative strength is an excellent return factor for growth.)

3) As you near the withdrawal phase, transition to a less volatile portfolio mix. Studies show that less volatile mixes provide steady income for a longer period of time.

None of this is new—the same policy prescription was advocated in Andy’s Short Course in Financial Planning way back in 2007, before the financial crisis was a gleam in Ben Bernanke’s eye.  And eternal truths don’t change.  Get your clients on the right track, and push to keep them there.

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Dorsey, Wright Client Sentiment Survey Results – 6/17/11

June 27, 2011

Our latest sentiment survey was open from 6/17/11 to 6/24/11.  The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support! This round, we had 128 advisors participate in the survey.  If you believe, as we do, that markets are driven by supply and demand, client behavior is important.  We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients.  Then we’re aggregating responses exclusively for our readership.  Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample.  Most of the responses were from the U.S., but we also had multiple advisors respond from at least four other countries.  Let’s get down to an analysis of the data!  Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

Chart 1: Greatest Fear.  From survey to survey, the S&P was down -2.2%, and client fear levels ticked higher from 93% to 94%.  Right now, the market is down -5% from its recent May highs, and 94% of investors are afraid of losing money in the market.  As we continue to point out, the S&P is up nearly 25% in less than a year, but client sentiment continues to be dominated by fear.

In addition, since hitting fear levels in the mid-90s last summer, the market is up +25%.  We can only hope that history repeats itself here.

Chart 2. Greatest Fear Spread.  Another way to look at this data is to examine the spread between the two groups.  The spread nudged higher, from 86% to 88% this round.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  Average risk remained the same from survey to survey, sticking at 2.44.  Last survey we saw a huge drop in average risk appetite, as the market fell.  This round, despite a similar move of -2%, average risk appetite seems to have found its footing.  We’ve still got a ways to go until we reach our all-time lows from September 2010.

Chart 4: Risk Appetite Bell Curve.  This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  Here we see more evidence of a fear-dominated atmosphere.  There was only one wayward 5, and nearly half of all respondents wanted a risk appetite of 2.

Chart 5: Risk Appetite Bell Curve by Group.  The next three charts use cross-sectional data.  This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  This chart also sorts out pretty much as expected, with the fear group wanting less risk and the opportunity group wanting more.  You can see the sole 5, which came from the fear group…probably a troll answer.

Chart 6: Average Risk Appetite by Group.  Here we see both groups’ average risk appetite remain basically the same.  Same as the overall average risk appetite, the risk by group numbers sort out even from last survey’s results.  It may be that the initial plunge in risk appetite from two weeks ago was large enough to buffer any additional market downside.  Despite another move lower in the market, average risk stayed the same in both camps.

Chart 7: Risk Appetite Spread.  This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  Same as average risk, the spread for average risk stayed the same.

This round, fear continues to dominate investor sentiment, as we have now had a total of three surveys (6 weeks) of down moves in the market.  All of our indicators are pointing towards heightened levels of fear, with an eye towards perceived safety (and lowered risk appetite).  What’s interesting about this survey’s numbers is that the market fell by the same degree as last round, but both fear levels and average risk remained mostly the same.  It seems as though investors are now in “hunker down” mode, and it’s anyone guess as to whether clients will become even more bearish (they can, if the market continues to go down).

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride.  A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments.  Until next time, good trading and thank you for participating.

 

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Weekly RS Recap

June 27, 2011

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (6/20/11 – 6/24/11) is as follows:

High RS stocks outperformed by a huge margin last week.  Hopefully the high RS universe can close the quarter on a high note.

Materials and technology led the way last week as high RS stocks were in control.

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