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04.19.2024 by Donovan Ingle

The Marriage Between US Capital Markets & Retirement Savings

Last month, BlackRock co-founder and CEO Larry Fink released his annual letter to investors. BlackRock In his letter, he focuses on how US capital markets (publicly traded stocks, bonds, and other securities) have played an ever-important role in retirement savings and vice versa. Like any marriage, it is not perfect, but in the United States, both parties have mutually benefitted.

In the US, our retirement system has three pillars – government benefits (Social Security), employer benefits (pensions), and individuals investing personally (401ks, IRAs, etc.). Over the past 50+ years, this system has changed drastically. Most individuals can no longer rely heavily on the first two pillars, making their retirement success mostly up to themselves.

With 401(k)s and other retirement plans gaining popularity throughout the 1980s and 1990s, individuals were incentivized and given access to invest their money in financial markets like never before. Today, US retirement savings make up around half of the total assets in capital markets. ASPPA Meaning, the pool of our collective retirement savings controls and benefits from half of all public stocks and bonds in the US. The additional capital flowing through stock and bond markets has lessened the reliance on banks to lend out money, allowing companies to access capital quicker and easier, thus leading to an economy that is more flexible and resilient.

Even when setbacks occur, such as the financial crisis in 2008, the US economy can survive and rebound quicker than other countries because of our capital markets. When banks began failing, other banks stopped lending. In many countries, where most of the consumer assets were kept in banks, the economies took much longer to recover due to all the capital being tied up in frozen banks. Although things did get pretty scary for the US, once we weathered the storm, corporations were able to get capital from public markets and recover much more quickly.

Other countries have caught on and are trying to emulate our system. Governments in countries such as India and Japan are considering significant policy changes to get their citizens more involved in their capital markets. Indian citizens have traditionally favored gold, an asset class that doesn’t spur up much economic activity, and Japanese citizens have traditionally favored keeping money in bank savings accounts. While the 401(k) plan has been around in the US for over half a century, Japan’s version only came out in 2001, and they are increasing incentives this year in hopes of increasing participation. As more countries catch on, hopefully, the result will be more economic security around the globe.

Retirement security in the US still must improve, but we are better positioned for an aging population than many countries and our economy is a benefactor. Every two weeks when that money goes into your 401(k), you are not only saving for your future but providing a better and more secure future for the whole economy.

Financial Planning/Investment Strategy Corner:     

Education Expense Planning: With student loans in the news again with President Biden’s latest plan to forgive loans for millions of Americans Washington Post and graduations being right around the corner, here are a few quick tips and resources to help alleviate some of the stress around helping kids paying for college:

Determine how much you want or can contribute to education expenses: Every parent has a different answer for this. Some want to make sure all expenses are covered, while some prefer to have their kid have some skin in the game. There is no correct answer, but determining what best fits your goal for your kid and what works for your financial plan is a great first step to determining how much you need to plan and save for.

Utilize 529 plans: 529 college savings are a great way to save for future education costs. They have great tax benefits when funds are used for qualified education costs and the list of eligible of these qualified costs has expanded to include most post-secondary education programs (trade schools, certificate programs, etc.).

Student loans can provide flexibility: While taking on debt isn’t always the best financial strategy, sometimes it is necessary and provides flexibility to both parents and students dealing with the hefty price tag that college expenses bring.

We also have a couple of great resources on our website covering 529 plans and a guide for parents and students navigating the college search process:

Quick Hits:

Women’s Athletics – Still Room to Grow

Over the past 12-24 months, Caitlin Clark has taken the world by storm. Bursting onto the scene in the 2023 Women’s NCAA Tournament, she continued (& increased) her dominance through the 2024 tournament. She helped bring more viewers to the women’s championship game than the men’s for the first time ever.

Clark now gets to live out nearly every kid’s dream of becoming a professional athlete and receive that life-changing contract that will pay her a salary of… $76,535. USA Today Pretty underwhelming right? For comparison, Clark majored in Marketing at the University of Iowa. According to Indeed, the average salary for a Marketing Manager is $75,000.

Luckily, Clark’s name has become a household one, and with college players now able to capitalize on their name, image, and likeness, she reportedly makes $1-3 million in endorsements and sponsorships. Unfortunately, this isn’t the case for all (most) women athletes. Despite the higher TV ratings in the NCAA tournament, the women’s tournament received 99% less TV money. WSJ Stars like Caitlin Clark, Angel Reese, and many more are bright spots in the future for women’s sports, but the paychecks show there is still a long way to go.

Quote: “So all you have to do is dream.” – Caitlin Clark

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