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What Boomers Have Learned About Retirement Saving

Sep 28, 2016

After a lifetime of hard knocks in the markets, boomers seem to have arrived at a sound retirement saving strategy—one that younger generations would be well advised to emulate.

The last 40 years have brought booms and busts, inflation and bouts of deflation, sharply rising and falling interest rates, and a few speculative bubbles that ended badly. Over that period, the S&P 500 returned an average 12% a year, including dividends as well as price change. That blows the doors off any other common investment.

Boomers haven’t always been patient. They didn’t calmly ride out all those years. But they know now that they should have—and they seem intent on doing so for the remainder of their saving years.

Read next: 5 Smart 401(k) Moves to Make Now

Asked what makes them feel smart as investors, 65% of boomers say sticking with their investment strategy, according to a study from American Funds. Six in 10 also say they do nothing during periods of market volatility, and a piddling 2% of boomers say that picking a hot stock makes them feel smart.

This sense of calm is far less evident among younger generations. For example, only 43% of millennials say sticking to their strategy makes them feel smart, and the percentage of millennials who say picking a hot stock makes them feel smart outpaces boomers six-fold. Gen X tends to align with millennials on these questions.

Experience seems to have taught boomers something else: Good times don’t last forever. While the last five years saw the stock market bounce back sharply following the financial crisis, only 16% of boomers expect gains to keep coming at the same or better rate over the next 10 years. That compares to 31% of millennials.

Millennials have a big edge over boomers in one important respect: They got the message on saving much earlier in life. Nearly 60% of millennials began saving for retirement before age 25, the study found. That compares to 28% of boomers. But millennials’ debt, especially student loans, gives them a more pessimistic view of later life. They are far less likely to believe they will be happy on day 100 of their retirement than boomers.

While boomers have settled into some wise savings habits, they also have some blind spots, the study shows. Boomers remain absolutely committed to low-cost index funds, which generally produce good long-term results. But stock index funds also leave you vulnerable to sharp short-term downward moves in the market, something that 81% of boomers say is a key risk to guard against at this point in their life.

If stock index funds are only part of your portfolio, and you also own bonds and other investments, there is little reason to ditch the index funds. Likewise, if you are concentrated in a single age-appropriate low-cost target date mutual fund, you probably have the downside protection you want. But about half of all generations do not understand the short-term risk of an index fund—a blind spot that could hurt if the market turns sharply lower during your first years in retirement.

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