Started Saving ‘Too Late’? The Horizon Is Probably Farther Than You Think

Like many Americans, Joe Parrillo got a late start saving and investing for retirement.

Now the 44-year-old youth pastor, a graduate student at Fuller Theological Seminary in Pasadena, is left with a big question: How best to invest his nest egg? And an even bigger fear: Did he start too late?

That fear, often unwarranted, is one that tens of thousands of retirement investors, including many of the nation’s 401(k) plan participants, share.

“A lot of people look upon retirement as a big end point that they’re saving money for,” said Mike McCarthy, a consultant with Hewitt Associates, the nation’s second-largest 401(k) account record keeper. “But really, it’s just the start of a long period of time.”

Take Parrillo. At 44, he still has 15 years to go before he can even touch the money in his individual retirement account. He has more than 20 years before he turns 65, the traditional age for retirement. And once there, he can expect to live at least 20 to 25 years more. Which means Parrillo’s investing “time horizon” may be closer to 40 years.

Dee Lee, co-author of “The Complete Idiot’s Guide to 401(k) Plans,” notes that retirement investors often fail to recognize this fact. And this leads some to overreact, in one of two ways:

* Some investors, fearing they’re running out of time, take on more risk than they need to. Parrillo may fall into this category. Notes Parrillo: “I am 44 years old and don’t have the luxury of time that many young investors have, so I look for funds that are considered aggressive.”

That’s why he recently put about a quarter of his IRA assets in Wasatch Micro-Cap, an “aggressive” stock fund that invests in the smallest of small-capitalization stocks. (Micro-cap stocks are inherently riskier than blue chips, and in recent years small stocks haven’t produced anywhere near the gains of large-capitalization stocks.)

The remaining three-quarters of Parrillo’s retirement account is held in two stocks: Cendant Corp., whose shares have been volatile over the last year, and Fletcher Challenge Forests, a small-capitalization company that runs forest plantations in New Zealand and South America.

Why not just invest in diversified mutual funds, like most 401(k) and IRA investors do? “I guess I wanted to venture into deeper, riskier waters seeking higher returns,” Parrillo said.

Lee notes that in Parrillo’s case, it’s probably not necessary to take on such a dicey strategy. Nor is it desirable. (Another big reason Parrillo says he invests in shares of individual companies, though, is that he likes picking his own stocks.)

Given Parrillo’s time horizon, Lee thinks he could reduce tremendous amounts of risk, while also achieving his goals, with a much more “balanced stock portfolio, with a big stake in large-cap stock funds, some small-cap representation and maybe an international fund, provided it’s geared toward Europe.”

Indeed, because 401(k) and IRA assets generally represent “long-term” money, you shouldn’t feel compelled to put it all into the hottest stocks of the moment.

You can show some patience. You can even invest in stocks that may be out of favor today but may come into favor in the next few years.

For instance, while “value” stocks (those that are overlooked or beaten down by the market) have trailed “growth” stocks (shares of companies with rapidly growing earnings) in recent years, patient value-stock owners have actually done quite well.

A recent study by the Hammond, Ind., newsletter Dow Theory Forecasts found that stocks in the blue-chip Standard & Poor’s 500 index with price-to-earnings ratios of less than 10 on Dec. 1, 1994, generated average returns of 250% as of Jan. 20, 1999. At the same time, high-priced growth stocks with P/E ratios above 40 returned, on average, only one-fifth as much during that time.

Of course, unless you took a “buy-and-hold” approach to those value stocks, you wouldn’t have seen those gains. A tax-deferred retirement account is a perfect place to show that kind of patience.

* Others, fearing they’re running out of time, shy away from risk altogether. “Some people who don’t get started investing till late decide they’re not going to start, period,” says Hewitt’s McCarthy.

The thinking goes: I’m close to retirement, I know I’ll need this money, and I don’t want to lose even a small chunk in the stock market. So I’ll sock it all away in bonds or cash.

To be sure, some of you may actually need this money in two or three years. If that’s the case, putting all your 401(k) or IRA money into bonds and cash might not be a bad idea.

But for the rest of you, it could be dangerous. Notes McCarthy: “The biggest threat to retirement isn’t market risk; it’s the risk of losing out to inflation.” And history has shown that stocks are the only asset class to outrun inflation over long periods.

Now, you may not fear inflation because it’s currently running below 2%. But West Los Angeles financial planner Joel Framson notes that over the last 15 years, inflation has averaged around 4.5% a year. At that rate, in 30 years--when many of the nation’s 30 million 401(k) plan participants will be retiring or tapping their retirement money--investors would need $37,453 to pay for what costs $10,000 today.

OK, but some of us are afraid to put our retirement nest egg into the market.

“It’s like if you’re on a boat and you keep watching the waves lap against the sides of the boat. Of course it’s going to make you queasy,” says Framson. “But you can’t let that stop you from going where you need to go. If you look not at the water but at the horizon, which is where you need to be, you’ll feel much better.”

Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at paul.lim@latimes.com.