The Next 10 Years Will Be Ugly for Your 401(k)

We’re about to pay the price for all the good times

It doesn’t seem like much to ask for—a 5 percent return. But the odds of making even that on traditional investments in the next 10 years are slim, according to a new report from investment advisory firm Research Affiliates.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. Their average annualized long-term expected return? 6.2 percent. After 1.6 percent was shaved off to allow for a decade of inflation1, the number dropped to 4.6 percent, which was rounded up. Voilà.

So on average we all expect a 5 percent; the report tells us we should start getting used to disappointment. To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model, the report looks at the typical balanced portfolio of 60 percent stocks and 40 percent bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance of 6.6 percent, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is that the high returns of the past came with a price: lower returns in the future.

“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”

Research Affiliates’ forecasts for the stock market rely on the cyclically adjusted price-earnings ratio, known as the CAPE or Shiller P/E. It looks at P/Es over 10 years, rather than one, to account for volatility and short-term considerations, among other things.

The firm’s website lets people enter their portfolio’s asset allocation into an interactive calculator and see what their own odds are, as well as how their portfolio might fare if invested in less-mainstream assets (which the company tends to specialize in). The point isn’t to steer people to higher risk, according to West. To get higher returns, you have to take on what the firm calls “maverick” risk, and that means holding a portfolio that can look very different from those of peers. “It’s hard to stick with being wrong and alone in the short term,” West said.

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At least as hard though is seeing the level of return the calculator spits out for traditional asset classes. Splitting a portfolio evenly among U.S. large-cap equities, U.S. small-cap equities, emerging-market equities, short-term U.S. Treasuries, and a global core bond portfolio produced an expected return of 2.3 percent. Taking 20 percent out of short-term U.S. Treasuries and putting 10 percent of that into emerging-market currencies, and 10 percent into U.S. Treasury Inflation Protected Securities, lifted the return to 2.7 percent. Shifting the 20 percent U.S. large-cap chunk into 10 percent commodities and 10 percent high-yield pushed the expected return up to 2.9 percent. Not a pretty picture.

Moral of the story: Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.

 

Credits: Stephen Kelley

About the Author

stephen-kelley
How can you know what you should do if you don’t know what you can do? Author, radio personality, educator and financial planning pioneer Stephen Kelley shares his secrets to More Now, More Later™ retirement income planning. Most planners regard income planning as a “zero‐sum game,” a “Rob Peter to pay Paul” exercise. In these self‐serving, Wall Street‐dictated scenarios, people must limit the amount of income they receive to ensure they don’t run out of money in retirement. But there is an alternative to this “less now, more later,” or “more now, less later” mentality. Using state‐of‐the‐art income planning techniques, and his own trademarked “Last Things First™” planning process, Stephen Kelley blows the lid off the traditional Wall Street‐serving methods and brings retirement planning home to the individual retiree. In his books you will learn how to: - Unleash as much as 3 times the lifetime income using half the money with Kelley’s trademarked planning process, Last Things First™ - Ensure your Social Security benefits enhance, rather than impede, your plan. - Reduce, or even remove, taxes and fees from your retirement plan. - Maximize market returns while minimizing market risk. - Regain control of your pension so you not only get all the income you can, but so you can also leave it to your heirs. - Take control of the planning process so you can spend freely without worry. - Much, much more.

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