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Saver’s Digest 1st Quarter 2017

Eighteen years ago, on March 29, 1999, the Dow Jones Industrial Average (the Dow) finished the trading day above 10,000 points for the first time since the index was first published in 1896.

However it was not until late 2010, over 11 years after initially cracking the five-digit threshold, that the Dow was able to sustain itself above 10,000. In late 2016 and early 2017, the stock market hovered around the next big milestone: 20,000. But how monumental of an achievement is “Dow 20k” for the stock market?

The significance (or not) of milestones

The Dow surpassing 20,000 has drawn much attention from the media, especially given the Dow’s rapid rise after initially surpassing the 19,000 mark in November 2016. However, not all 1,000-point gains in the Dow are created equal. From 1896 to 1972, the Dow grew from 40.94 to 1,000, representing an increase of 2,343 percent. The Dow’s 1972 first-time close in quadruple digits was indicative of its massive growth in the preceding 76 years. Comparatively, the Dow’s 1,000 point move from 19,000 to 20,000 is an increase of only about five percent. Though the timeframe to increase from 19k to 20k was quite short, the percentage growth itself is fairly unremarkable in context with the Dow’s history.

Enjoying peaks and enduring valleys

Retirement plan investors must have a long-term investment strategy. Though difficult, it is crucial to keep long-term goals in mind both during a bear market and a bull market. For example, in September 1929, the Dow closed around 380, a record high at the time. Shortly thereafter, the stock market plummeted nearly 90 percent over the next few years during the largest economic panic in American history. The Dow wouldn’t return to pre-Depression levels for 25 years. Beyond showing the market’s volatility, this reinforces the understanding that money invested in the market must have a long-range investment horizon to “ride out” the inevitable valleys.

The impact of “Dow 20k”

It is unclear whether the market will be able to sustain the 20,000-point milestone on a long-term basis. Some investors may view Dow 20k as an indicator the market is growing too quickly and a slowdown is imminent. Such a sentiment could lead bearish investors to sell and exit the market in hopes of trying to time the market’s next valley. Others may see Dow 20k as a sign of a strengthening economy with more growth in store, leading to more equity investments that drive the Dow higher. And other investors may consider the milestone arbitrary and don’t see a reason to change their current course.

Above all the excitement, it’s worth noting that only 30 company stocks comprise the Dow index. Within the Dow itself, certain stocks are weighted more than others. For example, Goldman Sachs’ stock is weighted about eight times higher than some of the lower-weighted stocks in the index. If a highly-weighted Dow stock, like Goldman Sachs, declines in price, it will reduce the index more than a decline in a lesser-weighted Dow stock. Because the Dow can be influenced by a few major companies, it might not accurately portray how the economy is performing overall.

The reason that Dow milestones draw publicity is likely rooted in psychology as much as anything. Round numbers inherently mark progress and appeal to investors as perceived significant benchmarks. Stock market indexes do serve as enduring measures by which investors gauge confidence and economic performance. And arguably the Dow is the bellwether stock index in the United States. So, to the extent investors view the Dow favorably, they may be inclined to invest more capital (via an employer’s 401(k) or 403(b) retirement plan) in the market. Only time will tell how investors react to the Dow’s move through 20,000. Regardless, retirement plan investors are committed to the long term and Dow 20k is merely a marker on the way to building their retirement funds.

According to a TransAmerica Center survey, the typical American expects to retire at age 67, but actually ends up retiring five years earlier than anticipated.

A shorter-than-planned working career means less time to make contributions, less time for earnings to accumulate, but more time spent withdrawing from retirement accounts. These three detrimental forces to retirement savings further emphasize how saving for retirement early and in meaningful amounts is more crucial than some Americans might assume.

To gain a little insight into America’s progress in saving for retirement, the data is a recent snapshot of retirement savings patterns by various groupings as of 2013. The information is taken from “The State of American Retirement” report by the Economic Policy Institute (EPI). It reflects EPI’s analysis of the Survey of Consumer Finance data, 2013. “Retirement savings” include balances in 401(k)s, 403(b)s, IRAs, and Keogh plans.

Perhaps your New Year’s resolutions included one of the goals below and you’ve let it lapse. Now is a great time to revisit your resolutions because doing so could not only improve your health, but your finances as well.

Losing Weight

Losing weight and increasing overall health nearly always tops the list of “most common” resolutions. But a healthier lifestyle has more in store than just physical and mental benefits. On average, obese adults spend 42 percent more on health care costs than adults with a healthy weight. Good health can provide you with more than just a higher quality of life, it can yield a sizable financial benefit over the course of your life. Additionally, if health-focused commuting options (like walking or biking to work) are an option, you’ll reap additional health and budget benefits.

Eating Less Fast Food

According to the Bureau of Labor Statistics, the average household spent $7,023 on food in 2015. And money spent on food away from home accounted for over $3,000 of this total. Additionally, a 2014 Public Health Nutrition study indicated restaurant meals averaged about 200 more calories than those eaten at home. Though grabbing a bite to eat is a fun, relaxing and communal experience, it can leave a big dent in the checkbook and possibly add an inch or two to your waistline.

Giving Up Smoking

In addition to the well-known harmful physical effects of smoking, it is a financial “lose-lose.” First it’s an expensive habit upfront and second it often leads to expensive health problems later in life. Buying one pack a day at $6.28 will cost you $2,300 each year— and up to $80,000 in 20 years with inflation. Down the road a smoker may face thousands of dollars of out-of-pocket medical costs. In sum, money spent on cigarettes and added health expenses could add substantially to retirement savings instead of vanishing in a puff of smoke. The good news: when a person quits smoking, the physical— and financial — benefits start to become noticeable within a month and only increase from there.

Making a few small lifestyle changes could lead to big savings; extra money that you can use to pay down your debt or contribute to your retirement savings.


The information in this publication is not tax or financial advice. You are encouraged to review the provisions of your plan and to consult a financial or tax advisor on these and other tax and financial planning matters.
© 2013 Xerox HR Solutions,LLC