Tomorrow's retirees have huge disconnect


INVESTORS EXPECT a bull market for stocks in 2005 but are hoarding cash.

They expect to retire as millionaires at age 61 and live comfortably, even as the U.S. personal savings rate stays low.

Despite the disconnect between reality and expectations, more than half of investors also say they favor privatizing Social Security.

To recap: Investors, who make notoriously bad decisions, are clamoring to control even more of their retirement dollars.

So concludes a study of investor behaviors and attitudes released this month by Eaton Vance Corp., the Boston mutual fund company.

"Both wealthy and less wealthy investors seem to take the same behavioral missteps," said Duncan W. Richardson, chief equity investment officer for Eaton Vance.

Unbridled optimism

Chief among the missteps, he said, is our unbridled (and uninformed) optimism. Nearly 7 in 10 said they are as financially secure as they'd hoped to be a decade ago.

"With the low savings rate and year-in, year-out confusion on the tax impact of investments, you would think investors would be a little more concerned," Richardson said of the annual poll of 1,000 investors, titled "Inside the Mind of the 21st Century."

In addition to perhaps-misplaced optimism, investors are also simply making outright mistakes. About 40 percent said they would put tax-managed mutual funds, variable annuities and municipal bond funds into their retirement accounts, which are already tax protected, the fund firm said.

"Investors have an irrational desire to hold low-turnover investments in their retirement accounts. That's like having a belt and suspenders - you don't need both," Richardson said.

Of the investors who reallocated their portfolios in the past year, 37 percent said they cut their stock investments.

Overall, a stunning 94 percent said they would maintain or boost their cash holdings in 2005, despite the fact that 59 percent reported being bullish on stocks for 2005.

Moreover, more than 4 out of 5 investors believe they will live comfortably in retirement.

Investors believe they will need between $1.4 million and $1.9 million to retire, and just 16 percent say they want to work past age 65.

Despite widely held professional forecasts for subdued stock growth in the coming decade, 49 percent of investors believe another huge market run like the one that happened in the late 1990s will occur again within five years.

Hollow laughter

You could chuckle here that investors are taking one big trip to Fantasy Island, but investor psychology experts aren't laughing.

"Potentially, this could be a big problem," said Terrance Odean, a behavioral finance professor for the University of California at Berkeley who has studied investor mistakes extensively. "It's similar to the surveys of workers who say they intend to save more in the future, but they never do.

"This survey just confirms that people aren't getting it right and they're displaying a low level of understanding of financial markets."

Not only are investors prone to lots of human error in managing their own accounts, but they also would be vulnerable to prolonged market downturns that drag everybody down, Odean said.

What to do?

While Odean and others argue for long-term solutions, such as better financial education in schools and more intelligent savings programs (such as those that automatically set savings defaults in workers' retirement plans), there are a few preventive measures individuals can make right now.

Rearrange portfolio

First, if you're among the group who put tax-managed investments into already-protected, or qualified, retirement plans, consider running a new analysis of your asset allocation plan. Work toward putting low-turnover funds with smaller exposure to capital gains taxes in your taxable account and moving the more actively managed funds to the retirement account.

Next, match up your own retirement expectations with reality. Several no-cost Internet sites, including one at, will tell you if what you're saving will get you where you want to go.

Finally, dial down your expectations for returns by a couple of percentage points and dial up your savings rate by the same amount - or more.

A second coming of the 1990s run would be lovely, but investors need to stop counting on it.

E-mail Janet Kidd Stewart at

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