Financial Engines Issues New Analysis: What Will it Take for Near-Retirees to Recover from 2008?
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Analysis Shows that With Right Plan Near-Retirees Can Recover

PALO ALTO, Calif., June 22, 2009 – Financial Engines, a leading provider of retirement help, today announced new analysis that looks at the impact of the market decline in 2008 on investors nearing retirement.  The analysis found that even for investors within 5 years of retirement, modest increases in savings combined with slightly delayed retirement can recover their pre-2008 retirement outlooks if they stay in a diversified, age-appropriate portfolio.  Those who moved to an all cash portfolio, on the other hand, have more work to do to get back on track.  The analysis found that these investors are likely to have to delay retirement as much as 4 years above and beyond the steps needed to recover from the 2008 declines had they stayed in diversified, age-appropriate portfolios.¹

The analysis conducted by the Financial Engines Investment Analysis & Research team assessed the effect of the 2008 market decline on hypothetical investors age 50 and older, reflecting the typical attributes of investors whose accounts are professionally managed by Financial Engines.  The study evaluated recovery strategies based on combinations of increased savings and/or delayed retirement. The impact of inappropriately moving to an all cash portfolio was also examined.  With U.S. equity markets declining 40% during 2008, few investors were unscathed by the market downturn.  Even retirement investors with diversified and age-appropriate portfolios experienced significant declines.  Financial Engines conducted its analysis to better understand:

  • How much the market declines impact retirement outlooks
  • How participants, especially those near retirement, can get back on track

The Impact of the 2008 Market Decline:

Many 401(k) participants assume that the large portfolio losses experienced in 2008 mean needing to work 5 or 10 years longer than planned. Financial Engines' analysis shows that large portfolio losses do not translate into equally large percentage decreases in projected retirement income.  The reason for this is retirement income that will be generated from future savings or Social Security benefits is not affected by the 2008 decline. For near-retirees who began 2008 on track to meet their retirement goals, typical portfolio declines of 23% to 30% resulted in a decrease of only 10% to 19% in their projected median retirement incomes.²  With these facts in mind, it turns out that even for investors within 5 years of retirement, modest increases in savings combined with slightly delayed retirement can recover their pre-2008 retirement outlooks.  Furthermore, these recovery strategies do not rely on investors investing in higher-risk portfolios than would be appropriate for their age.

"While participants are not going to be able to overcome the losses suffered in 2008 purely through different asset allocation, our analysis shows that participants are not completely at the mercy of future market performance," says Dr. Wei-Yin Hu, Director of Investment Analysis and Research, Financial Engines.  "With the right plan, near-retirees can take concrete steps to recover their pre-2008 retirement outlooks, even if markets do not recover to their previous levels. However, the steps to get back on track differ from individual to individual, and no simple rule of thumb applies for everyone."

What Can 401(k) Investors Do to Get Back on Track?

Financial Engines' analysis shows that delaying retirement and increasing savings are two powerful levers for getting participants back on track to meet their retirement goals.  Financial Engines found that for many near-retirees, delaying retirement by 2 to 3 years can get them back on track without any increase in annual savings. Delaying retirement is more effective than commonly realized, because it compounds several factors: allowing more years of savings, giving savings more time to grow, decreasing the number of years of retirement spending that need to be funded, and increasing Social Security benefits.

Through the use of its forecasting technology, Financial Engines is able to give a realistic view of how investment decisions impact retirement outcomes.  Financial Engines Investment Analysis & Research team ran scenarios to test both the impact of savings and delayed retirement on projected retirement income.  The tests were run assuming investors who were between the ages of 50 and 60, with salaries between $50,000 and $100,000, saving 6 percent of salary and earning a 50 percent matching contribution, for a total 9 percent savings rate. Starting portfolio balances as of January 1, 2008, were set to an amount that, together with estimated Social Security and future contributions, would lead to a median projected retirement income equal to a presumed retirement goal of 70 percent of salary.  The result of one of the tests shows what different combinations of saving rates plus delayed retirement can mean for a 60-year old earning $75,000.  The goal was to get this investor to a fifty percent chance of reaching their retirement income goal.  

Recovery Strategies for a 60-Year Old Earning $75,000 per Year

Retirement Age

Estimated Savings Increase*

New Total Savings Rate (including employer match)


36% per year

45% per year


14% per year

23% per year


No Additional Savings Required; More Saving or Later Retirement May Increase Chance of Reaching Retirement Goal



* Assumes original savings rate of 9% per year (6% of salary with 50% matching contribution on up to 6% of salary). Additional savings above 6% of salary does not increase employer matching contribution.

The Cost of Panic:

Many 401(k) participants reacted to declining equity markets by moving all of their balances into money market funds or other fixed income investments. According to Hewitt Associates, retirement investors pulled $6.3 billion out of stock and stock funds in the retirement accounts tracked in Hewitt's 401(k) IndexTM. Much of that money ($5.3 billion) was reinvested into conservative investments. Both are record-setting since Hewitt began conducting the 401(k) Index in 1997.

Financial Engines analyzed the impact of moving to such a conservative approach on investors' recovery strategies. The low expected growth of these conservative portfolios, which may protect from short-term losses, can do more harm to near-retirees' retirement outlooks than was done by the large 2008 losses. The "cost of panic" can result in up to 4 years of delayed retirement to get back on track, above and beyond the steps needed to recover from the 2008 declines had those investors stayed in diversified, age-appropriate portfolios.

Impact of All Cash Portfolio on Delayed Retirement


Age (as of Jan. 2008)

Adjusted Projected Retirement Age with Diversified Portfolio (A)

Adjusted Projected Retirement Age with All Cash Portfolio (B)

Impact of All Cash Portfolio

(B - A)



66.5 yrs

68.2 yrs

1.7 yrs



































All examples in this table assume original planned retirement at 65 and maintain total savings rate of 9% per year (6% of salary with 50% matching contribution), and project the retirement age needed to achieve a median retirement income forecast equal to a pre-2008 forecast.

About Financial Engines:

Financial Engines is a leading independent investment advisor committed to providing everyone the trusted retirement help they deserve. The company helps investors with their total retirement picture by offering personalized retirement plans for saving, investment, and retirement income.  Financial Engines offers both online advice and professional management to meet the needs of different investors. Cofounded in 1996 by Nobel Prize-winning economist Bill Sharpe, Financial Engines works with America's leading employers and retirement plan providers to make retirement help available to millions of American workers. For more information, please visit


Financial Engines® and Retirement Help for LifeSM are trademarks or service marks of Financial Engines, Inc. Advisory and sub-advisory services are provided by Financial Engines Advisors LLC, a federally registered investment adviser.

1.  Projections based on application of Financial Engines' methodology from January 2008 through January 2009. Assumptions: Estimated Social Security benefits vary with current age, salary, and planned retirement age. Deduction of management fees of 60 bps per year (although actual fees may be lower). Portfolio reallocations to reduce risk as investor reaches retirement. Salary growth equal to the average projected rate of inflation of 3.5%, and quarterly contributions equal to the annual rate specified in each example. Hypothetical portfolio allocations and estimated 2008 portfolio performance are based on application of Financial Engines' methodology given a typical 401(k) plan lineup with broad representation across asset classes.

2.  Declines in retirement income vary depending on age and salary.