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Retirement Investors Should Not Ignore Global Investments

As Baby Boomers age well into their 60s, the first significant wave of people to fund retirement using 401(k) plans is beginning to retire. Between 2009 and 2010 alone, the number of 401(k) participants who are retired, or separated from employment, increased by 24%, while the number of active participants decreased by 3%.1

This shift toward more of us needing to use the money we’ve saved via defined contribution (DC) plans, where participants are responsible for all investment decisions, is taking place in an uncertain economic climate. The past few years of volatile equity and fixed income performance have made successfully accumulating assets more challenging than ever. And generating sufficient retirement income on investments has become more difficult, as yields on treasuries fail to keep up with inflation—a situation likely to remain for the near future, with the Federal Reserve’s pledge to keep rates low through 2013.

You May Need to Earn More in Retirement than You Do Right Now
Further complicating the scenario, retirement is more expensive than it has ever been. As average lifespans increase, Americans will spend more years in retirement than at any point in history— and they will spend more on healthcare expenses.

A typical retired couple would need to set aside $271,000 just for healthcare expenses in order to have a 90% chance of affording projected medical expenses as they age.2

Meanwhile, the prospect of rising inflation and diminished Social Security and Medicare benefits makes the entire how-much-to-save equation even more uncertain. As a result, some studies suggest that DC participants seeking to maintain their lifestyles in retirement will need to replace as much as 126% of their final pay at retirement. This is well beyond the traditional income replacement target of 70% to 90%.3

Global Funds vs. International Funds

Global funds invest in the U.S. and around the world.

 

International funds invest exclusively outside the U.S.

How in the World Can You Fund Your Retirement?
We believe one of today’s biggest engines of potential investment growth consists of global equity and global fixed income funds. Exposure to global equities could potentially mean the difference between accumulating enough assets for retirement or falling short. Likewise, we believe that investments in global fixed income could help make the difference between generating sufficient income during retirement or not.

The problem is not that these investment options aren’t available in plan lineups—98% of DC plans include at least one global or international investment option. Yet these investment options are being largely ignored by retirement plan participants.

There’s No Denying It: The Global Tide Has Changed
This is unfortunate. There’s never been a more important time for a global perspective when it comes to investment decisions. Consider the new 0interconnectedness of economies and marketplaces. The world has become one giant global marketplace instead of hundreds of separate ones.

Within this giant global market, the relative importance of the U.S. and other developed countries is decreasing. In fact, foreign countries account for almost two-thirds of the world’s economic output,4 and two-thirds of the world’s actively traded largest companies are headquartered outside the U.S.5

Emerging Markets Are Key Drivers
As the role of developed nations on the world economic stage gets smaller, many view emerging economies as playing a larger part. We believe emerging economies are the engines of future growth, poised to grow four times faster than developed economies over the next 20 years.

Within a generation, it is expected China will be the largest global economy, and five of the top 10 economies will be in the emerging world.6

Domestic Bias Could Equal Missed Opportunities
U.S. investors who eschew a global approach due to perceived political risk and other fears, may in fact expose themselves to other, greater risks—and may actually miss safer investments. As foreign countries embrace globalization as the engine of growth, many have introduced business-friendly changes that have enabled corporations to expand, which may drive higher profits and, ultimately, benefit investors, including retirement plan participants.

Indeed, a recent ranking of the world’s best value-creating companies places seven of the top 10 organizations outside the U.S.7 Five of those seven are in the technology, media and consumer products industries, which tend to grow from tangible and durable demographic trends. Some observers believe that because these industries tend to be driven more by consumer growth and wealth creation, they may be less sensitive than others to geopolitical risk, regulatory advantages and disadvantages, and cyclical upswings.

Educate Yourself
Speak with your Human Resources department or a financial advisor and tell them you’d like to know more about global investing, and how you can build a retirement portfolio that may help you work toward your goals. Indeed, your employer may not even realize that messages about the importance of investing globally are missing from your plan’s educational materials. Your employer or advisor may also be able to recommend websites, apps, online tools, videos and other resources designed to educate plan participants about global investing.

Gone are the days when retired investors could simply reallocate their portfolios to “safe” fixed income investments, such as U.S. corporate bonds and treasuries. That allocation likely won’t sustain a 401(k) balance intended to stretch through a 30- or 35-year retirement, cyclical volatility, flat returns and steeply rising healthcare costs, all with no new contributions.

Depending on your situation, you may need to consider a retirement allocation featuring global fixed income and even global equities. Shattering old paradigms about investing for and through retirement is difficult, but it’s essential if investors are to keep up with the outright smashing of investment and business paradigms in general.

To learn more about going global, visit globalizeyourthinking.com.

1. Source of data: Cerulli Associates, “Retirement Markets 2011,” 2011.

2. Source of data: Employee Benefits Research Institute, Funding Savings Needed for Health Expenses for Persons Eligible for Medicare, December 2010.

3. Source of data: Aon Hewitt, “Total Retirement Income at Large Companies: The Real Deal,” 2008.

4. Source of data: International Monetary Fund, November 2010.

5. Source of data: Bloomberg, OppenheimerFunds Research, as of May 2010.

6. Source of data: Organisation for Economic Co-operation and Development, “The Emerging Middle Class in Developing Countries,” January 2010.

7. Source of data: The 2011 Value Creators Report—Risky Business: Value Creation in a Volatile Economy, Boston Consulting Group, September 2011.

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Special Risks: Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be especially volatile. Small and mid-sized company stock is typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations and tend to have lower trading volumes than large-cap securities, creating the potential for more erratic price movements. It may take a substantial period of time to realize a gain on an investment in a small or mid-sized company, if any gain is realized at all. A fund may invest a significant portion of assets in a particular region, which may increase volatility and exposure to risks associated with a particular region. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall.

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