we know that people don’t always take the long-term view, it’s time for people to get more educated about the options available to them [and] find out how they can best prepare for retirement, just in case there is a cut in benefits or, in an absolute worst- case scenario, there are no benefits from Social Security.
Parrish: But I think that’s the problem. There are individuals who depend on Social Security as their only means of retirement income. A lot of people aren’t taking advantage of the Roth IRAs and 401(k)s. You have so many people at or below the poverty line who depend on Social Security that the plan might not go through because of that.
Jones: Another problem is that the promise is no benefit changes will occur to those who are at or near retirement. One way to approach this is to focus on the long-term return implied in what you actually collect on Social Security—about 2.5%. The chance to accumulate a much greater retirement nest egg, through your own means, will be the primary argument to persuade young people to participate.
BE: What strategies are you giving your clients concerning Social Security?
Parrish: We cater mostly to individuals, and for younger people we’ve discounted Social Security being there for them. That is until now. We are stressing the importance of growth. We invest most of their money in large-cap stocks then put some in mid-cap, small-cap, and international. We are taking an aggressive stance. For middle-aged people, if you have over a 10-year horizon, we’re putting a lot of their money into growth as well. The rule at my firm is that any money you need in the next 10 years needs to be invested in high-quality, fixed-income securities. Any money you need beyond that time frame should be invested in growth.
Jones: Our advice has a long-term focus, is fully diversified, and aggressive. One of the major mistakes investors make is g
oing with conservative investments over a long-term horizon. People should be shown charts of the difference in accumulation: small-cap and mid-cap returns have been in the high teens over the last several years, large-cap companies earned single-digit returns, and we’ve had a couple of good years in fixed income.
BE: What are some of the positive and negative trends you anticipate from the market in 2005?
Jones: We’ve come through a year of pretty strong economic growth, not the job growth many people thought should be occurring, but we did have close to 2 million additional jobs. Hopefully, that means there is a turnaround well on the way in terms of job creation. We’re fortunate to have a cheaper dollar. That should help our exports and industries like paper and heavy machinery compete with foreign companies.
On the negative side, the economy is slowing down. Our economic experts are toning down their expectations for 2005 to 3% or 3.5% growth. We enjoyed very strong profits in the corporate sector last year, 16% to 20% in various quarters. That will probably