Attention Generation X!
Are You Taking Enough Risk with Your 403(b) or
457 Plan Account?
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Generation X is known to be independent, resourceful, ambitious and self-sufficient. But risk-averse? That’s a new one. Yet several recent surveys indicate that members of Generation X – those born between the late 1960s and early 1980s – may not be taking enough risk with their investments.* And it’s a characteristic that could have dire consequences when it comes time for retirement.

The Obstacles They See

As investors, Gen Xers are often the least comfortable taking on risk for a shot at higher returns. In one survey, nearly 60% of affluent people age 18-34 described themselves as conservative investors – more than any other age group, including retirees.**

Experts suggest that their inclination toward safer investments comes largely from their life experiences. Generation X has lived through two severe bear markets in which many watched their parents’ life savings – and retirement dreams – wash away. What’s more, Gen Xers often haven’t been in the market long enough to recognize the market’s historically cyclical nature in which downturns are followed by upswings.*** Add to that the ongoing economic uncertainty and the depressed job market, and many young investors favor keeping more cash on hand (and out of the markets) in case of emergency.

The Need for Risk

Taking too little risk with their portfolios could lead to a smaller than necessary nest egg and a disappointing retirement lifestyle for Generation X. For young investors struggling to balance asset accumulation and principal protection, consider this:

You have time on your side. If you invest for the long term, such as a retirement that is 20 or more years in the future, the market’s long-term gains have historically offset short-term losses. In fact, over the 20-year period from 1990 to 2010, the average return of the S&P 500® was about 10%, despite a -22% annual return in 2002 and a -37% annual return in 2008.***

You may not be able to keep up with inflation. A too-conservative portfolio may also provide insufficient protection from the erosive effects of inflation and taxes. Over the past 25 years, inflation has risen about 3% annually.† If you plan to live on $50,000 a year in retirement, your purchasing power will only be about $18,000 after 35 years of 3% annual inflation. Throw taxes into the mix, and your nest egg needs substantial growth potential to keep up.

You stand to enjoy a lengthy – and expensive – retirement. These days the average American lives about 78 years,†† but many live much longer. That could mean decades of living without a paycheck. And thanks to the rising costs of health care and long-term care, those could be some of the priciest years of your life.

To learn more about how much you could potentially save to supplement your CalSTRS or CalPERS benefit, use the How Much Can I Save in My 403(b) or 457 Plan calculator.

* Source: MFS Investment Management, “MFS Investing Sentiment Survey Results,” March 21, 2011.

** Source: Merrill Lynch Affluent Insights Quarterly Survey, Jan. 31, 2011.

*** Past performance is no guarantee of future results. Individuals cannot invest directly in an index.

† Source: Bureau of Labor Statistics.

†† Source: National Center for Health Statistics.