The Great Retirement Scare


By: Unknown Author

Wall Street Journal, August 2, 2002

The run of bears on Wall Street is being exploited for all kinds of political ends. But the most disreputable is the campaign to scare grandma, and the rest of us, from investing in the stock market for retirement. The people selling this line are the real threat to a secure old age.

"With stocks plummeting ... Americans' financial futures are in peril," avers Time magazine, implying that Baby Boomers will have to work, oh, until they keel over on the factory floor. Then there are those using the bear market to discredit Social Security reform: "If you needed any understanding of why it's a bad idea," intones House Minority Leader Dick Gephardt, "I'm sure you got that from what you've seen happen in the stock market in the last year."

To which the best reply is: Stop trying to scare people out of a good deal. Stocks have long been, and will continue to be, essential to building a secure retirement -- and there's no reason to think that has changed.

As scary as some of the recent numbers look, it's worth putting today's stock market in perspective. It's true that the Dow Jones Industrial Average is down some 28% from its peak in 2000, but that was after several years of 20% returns. Even taking into account the past year's losses, the Dow is still trading at what it was as recently as 1998.

Moreover, to look at today's market in isolation is like looking at your bank balance only once a year. Economists and financial advisers have long explained that profitable investing is a long-term affair. According to Ibbotson Associates, a financial consultancy in Chicago, an analysis of the Standard & Poor's 500 over the past 76 years showed a 29% chance that an investor would lose money if he invested for only one year. The risk dropped to 10% over a five-year period, to 3% over a 10-year period, and to 0% over 15 years.

The long-term investor has always fared better with stocks than with any other type of investment. According to the Ibbotson analysis, investors who held stocks for 20 years saw compound annual returns of about 11%, in comparison to 5.3% for government bonds or just 3.8% for Treasury bills.

Yes, there is always an issue of timing, especially when retirement looms amid a bear market. But that, too, goes to the heart of long-term investing strategy, and the ability to change a portfolio over 40 years. Younger investors can bet aggressively on stocks, riding out the ups and downs. Older investors -- those close to, or in, retirement -- can shield themselves from short-term fluctuations by shifting part of their holdings to less risky investments like bonds.

That's a strategy the new investor class is slowly, but surely, learning. According to 401(k) administrator Hewitt Associates, in 2000 the share of 401(k) money invested in stocks was 74%, as investors sought to maximize wealth. That number has since fallen to 65%, as investors realize that the goal isn't just to make money, but to make it and keep it.

Which returns us to Mr. Gephardt and the attacks on Social Security reform. The case for voluntary private retirement accounts has never hinged on 20%-a-year annual returns. The core of the argument is about using stock-market investments to diversify Social Security assets and put the program on a more financially stable path for the long run.

As for individuals, allocating a portion of their payroll taxes to personal accounts would give them more control over their own destinies. Social Security is currently little more than a political promise. The money that evaporates today from workers' checks isn't going into a future pot, but is financing current retirees, and the program is set to start running a deficit in just 14 years.

Personal accounts would allow workers to build an asset that depended on more than some future political mood; they would have a legal property right to their retirement funds that they could, say, pass along to heirs. Americans who now die early in retirement never see any of the money they worked so hard to earn.

If politicians and the media want to talk about "risk," they should talk about all kinds. One type is the market risk, in which investors control their own retirement funds, riding out short-term price fluctuations but with the expectation of solid long-term returns. Another type is political or government risk, in which taxpayers pay into a system that is slowly going broke and won't have enough money to pay them when they retire, unless the politicians cut benefits or raise taxes.

That's the retirement debate we really ought to be having, bear market or bull.

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