Retirement in America is gradually becoming more out of reach
for most, at least several studies done in the past five years give
such cues. Though the U.S. economy is slowly gaining its lost
ground, the improvement is still too small to make up for the lost
money of the older cohort during the time of recession.
Despite having enough time to plan their savings for retirement,
the younger generation often has a carefree approach towards
long-term savings, as per
. Also, the U.S. population is replete with
earners who have several part-time jobs but do not get retirement
benefits as these are given only to full-time employees. Only the
high-end population is likely to take part in retirement plans
thanks to their excess income and a higher risk appetite.
reveals that almost 25% of Americans are not saving for their
retired life. Most people are running out of cash, especially the
middle-income mass. As much as 30% of the millennials - ages
between 18 and 29 - are not saving at all while 33% of this group
has managed to hoard something via a 401(k) plan. Also, about
one-third of the population having 401(k)s is unaware of the
investments that their savings are leading to.
Wage growth is sluggish in the U.S. while some fear a housing
bubble. Towering stock markets in most cases are being accessed by
the high-income population. A recent article in
says "The American Middle Class Is No Longer the World's Richest"
while rich Americans kept on earning more than many of their
cousins worldwide. While emerging economies are witnessing
increased purchasing power of the middle-class population, exactly
the opposite is happening in the world's largest economy.
The NY Times study suggested that tax-deducted middle-class income
earners in Canada -- quite lower in 2000 than America -- have now
outpaced the U.S. That's not all; the underprivileged class in most
part of still-struggling Europe makes more money than poor
Americans. This income inequality has reduced the power of saving.
Impact on Retirement Savings Related
Questions arise on the future health of the retirement plans like
401(k), IRAs and the ETFs designed for retirees' benefits. The use
of ETFs in 401 (k) is still at a nascent stage with
launching an ETF-only 401(k) plan this February.
Schwab proclaimed itself as
foremost 401(k) provider to bring an all-ETF option to the market.
This version of 401(k) will keep a check on expenses as opposed to
the regular 401(k) which mainly focuses on mutual funds.
Next comes IRAs. The usage of ETFs in Roth IRAs - a type of
individual retirement account which differs from a traditional IRA
in that you cannot deduct your contributions but can withdraw
tax-free - is pretty large, though many investors are still just
starting to embrace the usage of these products (read:
5 Long Term ETF Buys for Your Roth IRA
Purely ETF Version
The ETF world itself also has many retirement-oriented products
such as Target Retirement Date ETFs. The biggest fund in
terms of AUM in this space is
Target Date 2020 ETF (
Investors will be shocked to know that since its debut in November
2008, this fund has managed to accumulate only $54.4 million of
assets. The fact once again verifies Americans' inability or
reluctance (depends on case by case) to focus on their retirement
3 Low Risk ETFs for a Stormy Market
These are generally multi-asset funds. As for TZG, the iShares fund
holds a basket of iShares ETFs comprising global stocks and U.S.
bonds targeting a retirement date of nearly 2020.
Stocks account for 58% of the fund while bonds take up the rest.
Thanks to its semi-conservative approach, the fund returned about
75% over the last five-year period, 26% in three years, 9.5% in one
year and 3% so far this year.
So, strategy wise we find nothing wrong in such multi-asset funds
while these funds bear a moderate cost structure with average
expense ratio of 42 bps per year. Still, these products fail
to amass enough AUM, probably due to investors' lack of interest or
incapacity over this horizon of investing. Now with cash-strapped
Americans saving nothing for future, these funds might not see any
improvement in AUM numbers (read:
ETF Asset Flow Roundup: Treasury Soars, Equity
Not only the target retirement funds, but also some other actively
traded funds have been the top choices for U.S. 401(k). Last year
- a company assessing 401(k) and 403(b) plans - issued some notable
ETFs that are largely used in U.S. 401(k), as per a Forbes article.
These ETFs include
SPDR S&P 500 (
Vanguard Total Bond Market (
), iShares Russell 2000 Index
Vanguard Total International Stocks
Shares Russell 1000 Value Index
iShares Core Total U.S. Bond Market
iShares Russell 1000 Growth Index
Vanguard S&P Small-cap 600 Index
iShares S&P 500 Index
SPDR Gold Shares
iShares iBoxx $ Investment Grade Corporate
Bond ETF (
Apart from the usage in 401(k) and IRAs, these funds are often used
by those who would retire soon as most of these are extremely
diversified and offer a decent risk-adjusted return. Now, with
savings seeing a decline, these top notch and high-profile ETFs may
also witness less investors' participation.
Is the Scenario That Scary?
There is a hopeful aspect in the studies discussed above. The
studies probably underrate the number of savers through
employer-provided plans (as per some analysts), though widespread
research calls for a diminishing savings ability of the majority of
the populace. With more than 6.0% unemployment level still
prevailing in the U.S., brighter days are yet to come.
However, while the situation can come as a blow to exclusively
retirement products like 401(k) or IRAs - which have much
diversified application, the ETF industry will likely be less hurt.
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ISHARS-TD 2020 (TZG): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-BR AG BD (AGG): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
VIPERS-VALUE (VTV): ETF Research Reports
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