Will the Kids' Retirement Be All Right?
Boomer parents already stressing plenty about their own retirement prospects now have yet another retirement-related worry: are their kids so scarred by the financial crisis and bear market that they are becoming too risk averse?
Merrill Lynch's latest quarterly survey of affluent investors found that young adults were about as conservative as retirees. Here's an age-breakdown of survey respondents who said they have a low risk tolerance:
Not only did more than half of respondents between the ages of 18-34 say they have a low risk tolerance, the younger generations have also become more conservative over the past year.
Can't Really Blame Them
In a speech at the recent Morningstar conference, Vanguard Chairman and CEO Bill McNabb acknowledged that younger investors have every reason to be skeptical:
- If you're in your 20s and are just starting to save for retirement, you've seen the stock market drop 55%, climb 88%, and drop again in a short span. Will an entire generation turn away from investing?
- If you're in your 30s and have been saving for the past decade, you've seen the stock market return essentially 0%.
But is that necessarily bad?
If conservative means fewer younger investors are firing up day-trading accounts and are instead heeding the call to have an emergency fund that strikes me as a positive development.
If conservative means they are well aware stocks are risky and thus are taking a more measured approach to asset allocation, then maybe they are ahead of the game. In its 2010 report on the investing profile of more than three million 401(k) participants Vanguard found that the 24-and-younger set has a 78 percent allocation to stocks and the 25-34 year old age slice had 77 percent invested in stocks. That sure looks like a smart approach to asset allocation. And it's encouraging given the fact that in their short investing experience they have, as McNabb points out, had an absolutely horrid experience. (Auto-enrollment and the adoption of target date funds as the default investment are obviously big drivers of how younger adults are invested in 401(k)s.)
Perhaps the bigger issue for the younger generation is that in a period of lower new-normal market returns it will take more of their own personal savings to build sufficient retirement funds. But as for taking a more conservative approach to how they invest that money, well that might be a virtue, not a vice.
Related MoneyWatch Articles:
Gen Y Has It Over Boomers
Gen Y's Retirement Price Tag
chart source: Bank of America/Merrill Lynch
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