Ten years ago, America experienced a financial crisis of unforeseen proportions. The Standard & Poor’s Index SPX, +0.63% lost 57% of its value, with many people’s investments declining significantly and wiping out some retirement funds completely.
While the overall economy and the stock and job markets have largely recovered and are even thriving, the recovery came too late for many who had spent their lives planning for retirement. With a decade of perspective, it’s time to take a deeper look at the way you’ve been saving for the long-term. While there is no surefire way to completely “crash-proof” your retirement savings, there are ways to prepare for the future — not just as you near retirement, but at any age.
Read: 10 years after Lehman collapse, people changed their approach to money
Millennials: Risk can be your friend
In 2008, most millennials were either not working yet or just entering the workforce. While Americans overall have become more risk conscious in the 10 years since the market crash, younger generations still have decades before retiring. Millennials: despite enduring most of your early professional years awash with bad news cycles and market uncertainty, you should still view risk as your friend. The higher potential returns from equities can significantly boost your savings over time. For instance, money that grows at a compound annual rate of return of 7% doubles every 10 years.
And with millennials now the largest generation in the workforce, make sure you’re participating in employers’ 401(k) plans. Consider target-date funds, which may help you manage risk over time as you accumulate your retirement nest egg. Target-date funds employ “glide paths,” which automatically allocate your assets between a mixture of equity and fixed investments, taking a more aggressive approach when you’re younger and gradually becoming more conservative as you approach and enter retirement.
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Generation X: Time is on your side
What happens if say, you’re 35 years old and you lose half of your retirement assets in a sustained, deep market correction like 2008? History says that time is again on your side as markets recover, sometimes within months, sometimes within years. The S&P 500 hit its precrisis peak in October 2007, and fully recovered by March 20131. Gen Xers: Even though most of you have likely experienced major life events such as marriage and becoming parents in the time since the crash, you should not be reluctant to build a portfolio that takes on a reasonable degree of risk.
Investing some money in assets such as real estate or bonds that perform differently than equities may help you hedge your retirement savings against losses. You may want life insurance to protect your family or pass on a financial legacy.
Approaching retirement: It’s all about preservation
Boomers were perhaps hit the hardest by the crash. It not only directly damaged their decades of savings, but they felt the collateral damage of having children forced to enter a horrible job market and live at home for much of their early, postcollege lives. Many financial advisers recommend pursuing preservation over growth for mature workers and retirees when it comes to their investment strategy. Suffering a significant loss from a market correction may irreparably reduce your retirement savings and with it, your income and quality of life. Many people suffered this fate after 2008.
According to MassMutual’s Retirement Savings Risk Study, nine in 10 preretirees and retirees at least “somewhat agree” that it is important to take steps to avoid major stock market losses right before retirement. Boomers: As you enter middle age and approach retirement, it may be prudent to begin backing off your exposure to equities by directing more of your savings to fixed-income investments such as bonds. Some advisers suggest that your percentage of fixed income investments should approximate your age, depending upon your individual risk tolerance and expected time to retirement.
Read: These 4 called the last financial crisis. Here’s what they see causing the next one
If you’re still unsure of how to begin preparing for retirement — or simply want additional advice on how to ensure you’re taking the right amount of risk — you may consider working with a financial adviser. The same MassMutual study found that those who worked with a financial adviser (46% of preretirees; 57% of retirees) said their adviser recommended they change their investment strategy. Overwhelmingly, the recommendation was to become more conservative, the study found.
In the decade after the financial crisis, the focus on risk has become more acute than ever, especially when it comes to retirement. While it can be advantageous to take some risks, even in retirement, you should understand what risks you’re taking, what those risks may mean for your retirement, and how you can best manage them.
Tom Foster is head of strategic relations for retirement plans at Massachusetts Mutual Life Insurance Co. (MassMutual).
