Everyone seems to want to help workers save for retirement. Employers encourage participants to use automatic payroll deductions to save as much as they can. Investment managers and the financial media stress the importance of retirement planning. The government has created a whole set of tools – from auto-enrollment to default investments – to increase the nation’s retirement plan savings.
Far less attention is paid to what happens when people actually retire. How do they draw out their funds? What investment changes should they make?
American Funds investor Dwight Edwards knows a thing or two about preparation.
He spends his days training sales associates at his company, which means leading webinars and webcasts or speaking to rooms filled with colleagues hanging onto his every word. That also means that, in addition to his training duties, he’s busy coaching newcomers to public speaking in monthly forums as well as continuously planning and updating his own presentations, and so much more.
In the last 25 years, the stock market has experienced several bull markets – from the 1990s tech boom to the current seven-year rally.
In the midst of such bullish periods, it can be tough to reduce exposure to an asset class that’s on a tear because it usually feels like you’re going to miss out on further growth.
When it comes to saving for retirement, perceptions are just as important as reality. Decisions based on inaccurate information can be costly – both for younger generations who could see the impact compound over time and for older generations who have less time to make up for losses.
A survey commissioned by American Funds from Capital Group revealed that investors of all ages aren’t fully aware of the fact that index funds offer no protection from market drops. Although the majority of the 1,200 investors surveyed said they consider protecting against market declines a key priority, only 54% said they were aware index funds exposed them to full market downturns.
There used to be a simple rule of thumb for retirement savers: The percentage of bonds in your portfolio should match your age. So a 65-year-old would have 65% of her retirement in bonds. She’d add more the older she got, deepening her dependency on those reliable payouts as a shield from the more volatile stock market.
But the world has changed, and nothing’s so simple anymore. Slow growth and unprecedented monetary policy have driven bond prices to record highs. In such an era of ultralow interest rates and longer life spans, a one-size-fits-all approach to bond investing just doesn’t cut it.