401(k) Losses Linger for Young People

Younger workers may earn lower annual returns than their elders


The baby boomer's stock market losses have certainly impaired their ability to retire comfortably. New research suggests that younger people may be even more adversely affected by the stock market drop because they didn’t benefit from earlier bull markets in the 1980s and 90s as fully at the oldest baby boomers did.

[See U.S. News's list of the Best Mutual Funds for 2010, and use our Mutual Fund Score to find the best investments for you.]

“As jarring as the financial collapse may have been for the early boomers, the market has actually treated them well over their lifetime,” write researchers Alicia Munnell and Jean-Pierre Aubry in a new Center for Retirement Research at Boston College paper. “Unlike their older counterparts, younger participants never enjoyed the full run-up in the stock market from 1982 to 2000 and have endured two market collapses.”

The Boston College researchers calculated that a hypothetical early baby boomer age 50 in 1999 with a 401(k) account invested half in equities and half in bonds had earned an 11.2 percent annual return over his lifetime up to the October 2007 stock market peak. In contrast, a late baby boomer age 40 in 1999 had earned a 9.4 percent annual return up until that point and a Generation Xer age 30 in 1999 had earned just 7.8 percent annually.

[See Fewer Workers Enrolled in 401(k)s.]

When you factor in the stock market decline through March 2009, the early baby boomer’s lifetime annual returns dipped down to a still reasonable 8.7 percent. However, the late baby boomer’s returns dropped to a slightly more disconcerting 5.5 percent and the generation Xers portfolio veered into negative territory with a negative 0.6 percent annual return. If you include the partial recovery up until February 2010, the early baby boomer’s lifetime returns are back up to 9.3 percent annually, while the later baby boomer’s portfolio in now at 6.6 percent and the generation Xer has earned only 2.4 percent annually. All three of these hypothetical employees were assumed to start their career receiving the median annually salary in the U.S., contribute 6 percent of pay to a 401(k), earn a 3 percent employer match, and receive 3 percent annual pay raises.

[See Launching a Second Career Instead of Retiring.]

To enjoy a retirement income comparable to that of the early baby boomers, late baby boomers will need to achieve an average annual return of 13.2 percent and generation Xers, who have more time before retirement, will need to earn 11 percent annually, according to Boston College calculations. “The returns required for both the late boomers and gen Xers may not be impossible, but they are certainly on the high side of average,” write Munnell and Aubry. “The late boomers are the most vulnerable, as they would need substantial returns in the future to end up with the same ratio of assets to income at age 60 currently enjoyed by early boomers.”