Q: Globally, what trends have emerged over the past few years that might lead people to alter their retirement savings strategy?
A: Globalization has altered the labor market, and people need to understand that it will be unlikely that they’ll work at one job--or one firm--for their whole working careers. There’s less security in this brave new world, so people need to remember they may need to retool mid-life and this may cost money for more education or simply lost wages while they’re in between jobs. The more you save, the bigger cushion you’ll have to deal with such periods.
But there’s a flip-side to globalization: it offers many investment opportunities that didn’t exist a generation ago, and higher returns from investing abroad may help your retirement accounts grow faster.
Q: Given recent global economic tumult, many people consider turning to savings previously benchmarked for retirement to address more immediate financial crises? What are the implications of this both for individuals and at a macro level?
A: Yes, this has been a disturbing trend. Understandably, for many, short-term financial needs take precedence over longer-term financial priorities. Our recent survey found that 27% of Americans would look to their retirement savings to get through serious financial hardship, and withdrawals against IRAs in 2010 hit a record high. But investors should resist this if possible; depleting savings today will only create retirement headaches in the future. This is because with life expectancy increasing, most people have already underestimated and underfunded their future retirement needs. 53% of our survey respondents believe they haven’t saved adequately.
Q: One-fifth of the American working population saves nothing for retirement, and of that group, the majority says all of their earnings go toward day-to-day expenses. Given such constraints, how could this group of people begin to save?
A: There’s no getting around it: saving requires some personal discipline. You need to give up a little spending today for more spending tomorrow. The fact that we have some tax incentives with retirement schemes helps investors harness compound returns over time. And the best advice is to start saving as early as possible, and make saving a habit. Many employers have some form of automatic investment programs for retirement through payroll deductions--that’s a great place to begin saving.
Q: By the same token, there is a years-long gap between the age at which individuals begin to save for retirement and when they begin to plan for retirement. Is it problematic for so many to blindly stow money away without guidance on how to grow those savings?
A: Most people forget there are quantity and quality issues about investing--risk and reward issues--and they are very intertwined. That is, if you invest wisely, you will need to contribute less each year to achieve an investment goal. For example, to have approximately $1,000,000 in 40 years, if you earn 5% per annum from your investments, you’ll need to save around $8,300 per annum. Earning 8%, that number drops to less than $3,900 because of compounded growth. Investors need to sit with financial advisors and really figure out the optimal amount of savings you’ll need and can afford relative to their own risk/reward tolerances.
Q: You have underscored the importance of saving for ongoing educational costs. How much should adults reasonably plan to tuck away to ensure they—in addition to their children—can afford lifelong education and career changes?
A: It’s tough to generalize, given that everyone has different earnings potential and living expenses. But at current trends, all-in private college costs (including tuition and living expenses) may hit $100,000 per annum by 2030. Advanced degrees may be even more. We estimate that parents may have to save and invest between $15,000 to 24,000 per annum per child to comfortably afford a private 4-year bachelor’s and 1-year master’s degree with investment returns in the 3 to 5% range. Higher investment returns help lower that contribution amount, but you’ll still need a fair amount--we’re talking about real money!
Q: How are other countries increasing their number of highly educated citizens, and what is the best way for Americans to compete with such increases?
A: Yes, Americans need to remember that there is rising competition from many countries in the 21st century. A generation ago, we were on top. But we haven’t improved our college completion rates very much since 1980; they’re only around 35 to 40% of our population. Around the world, more and more people are completing college. The country with the highest college completion rates is now South Korea at 58%, according to the OECD. And then there are just China, for example, had less than 50,000 people studying in college in the late 1970’s. By 2010, Chinese universities were enrolling more than 25 million people. We have about 18 to 20 million in the US. So, a college degree is the minimum entry point today. In fact, American households that have earned a college degree earn more than 3 times those that didn’t earn a high diploma, and over 50% more than those with just a high school diploma. Those with master’s and higher professional degrees do even better. So, remember: more learning equals more earning.
Q: What effect will the increase in available international human capital have on the cost and value of continuing education?
A: We may witness what some call “credential inflation,” meaning that people will need more degrees and skills to compete with labor from abroad. And because the world is changing so fast, going to school is not something we will only do until our early 20s; many of us may have to go back to school for retooling in our 30s, 40s and 50s--maybe even our 60s! If we live to 95 or 100--a distinct possibility--we may not even retire until we’re 75 or 80 in the future.
Q: There is a significant gap in the amount of money that individuals save for retirement and the amount of money they will actually require to maintain standard of living. What steps need to be taken to better educate Americans about being honest with their planning?
A: Some researchers suggest starting financial literacy at a much earlier age--maybe grade school when we first learn basic math. The earlier we think about these issues, the earlier we can plan and save accordingly.
Q: How can individuals best prepare for potential economic downswings and mitigate their negative affect on savings?
A: First is to try to live within a comfortable budget and not get too overextended in debt. Second, saving is the cushion for surprises; the more you save, the easier it is to deal with surprises and not be destabilized. These two things, coupled with a good education, is your best insurance against a downswing.
Q: In “Living Longer Amid Globalization,” Peter Marber wrote, “we can now invest in dozens of countries whose financial markets were out of reach 30 years ago.” What is the best way for an investment novice to identify and take advantage of such opportunities?
A: Yes, investors shouldn’t limit themselves to U.S. opportunities: there’s a big world of out there. But deciding where and how to invest in places like Latin America, the Middle East, Africa, Asia, and the former Soviet Union is not for novices; there are many risks that need to be analyzed. The best advice is to sit with an investment professional and devise a good retirement plan--how much to save, and how to best diversify it across the globe.
Q: Will emerging markets continue to provide dynamic value over comparable domestic investments?
A: Some will some years, other years American investment will beat emerging markets. We’re talking about 50+ countries--not all perform the same way each year. That’s what diversification is all about. The idea of investing globally is to capture trends everywhere, catching markets that zig when others zag. Over the long run, this has proven the best way to improve returns and smooth out risk versus staying in just one country.
Q: Everyone knows about China’s boom—but where outside of China should investors be looking for attractive opportunities?
A: China is an exciting economy, but it’s only one country. Diversification is about putting your eggs in many baskets--that means many countries and many economic cycles. And we forget that 85% of the world’s populations lives in more than 100 developing countries. A good emerging markets stock or bond fund exposes investors at least 25 countries. These funds could invest in everything from supermarkets in Brazil, treasury bonds in Poland, mining companies in South Africa, banks in Thailand, to generic drug makers in India. Investing in a global-focused fund provides far more opportunities than single-country funds.
Q: What lessons can individual investors take from the internationally-minded for whom investing is unconstrained by geopolitical borders?
A: As the old saying goes, “fortune favors the bold.” For those brave enough to invest in these countries since the beginning of 2000, emerging markets debt and equity indices have returned 4 to 5% more return per annum, on average, than comparable U.S. funds.
HSBC's The Future of Retirement program is a world-leading independent study into global retirement trends. It provides authoritative insights into the key issues associated with aging populations and increasing life expectancy around the world. The latest Future of Retirement campaign is the seventh in the series and is based on interviews with 15,866 people in 15 countries. Since the Future of Retirement program began in 2005, more than 125,000 people world-wide have been surveyed. Visit: http://www.hsbc.com/1/2/retirement/future-of-retirement.