I suppose you're wondering what the title of this article really means. With any luck, it might mean that the average annual return you can expect from the stock market is now 15%, instead of the historic average of 10%. Sadly, that's not the case. (Note that while you can take comfort in the 10% rate, know that over your particular investing time period, you might earn an average significantly higher -- or lower -- than 10%.)
If you're thinking that the stock market may crash to the tune of 15% one of these days, instead of just 10%, think again. No one knows how severe the next correction, or crash, will be. Some over history have been relatively small (and short in duration), while others have wiped out more than 30% of the market's value (though it later rebounded, eventually).
How much should you save?
The 5% increase refers to an article by Jeff Opdyke that I ran across recently in The Wall Street Journal. In it, he explains that many financial planners are questioning "the long-held belief that saving 10% of a paycheck is sufficient" for retirement. I would question it, too, because it's still rather vague. Does it assume that someone saves that much every working year, beginning immediately upon entry into the workforce? Does it assume that the sum saved will be enough to provide for at least 50% of a retiree's income? And besides, we're all in different situations, with different resources to draw on in retirement.
Here are a few scary statistics from the article:
- Nearly 45% of households with working-age adults might have to cut back on their standard of living in retirement.
- A quarter of workers are "very confident" about retirement security, even though 22% of them aren't currently saving, and nearly 40% have less than $50,000 put aside.
Opdyke offers some examples of newfangled thinking on retirement savings. For instance, T. Rowe Price advisors are recommending saving a minimum of 15% of your salary, and investing 60% of it in stocks and 40% in bonds. That should generate roughly 50% of your pre-retirement income (not including Social Security or pensions). Note, though, that if you're midway through your working life, you'll need to crank up your savings. The article states, "If, for instance, you're 20 years from retiring and have saved little, you'll need to sock away 25% of every paycheck to replace just 34% of pre-retirement income before Social Security is included." (Note that the 15% suggested rate includes employer contributions to a 401(k) plan.)
About that allocation mix ...
Here's another concern: I'm wary about the 60-40 stock-bond ratio. Bonds can work well in portfolios, especially for older investors, but there's a good argument to be made against them, in general: According to the research of business professor Jeremy Siegel, stocks have outperformed bonds 74% of the time over all five-year periods between 1871 and 2001. Over all 10-year periods in the same span, that figure rises to 82%. Meanwhile, stocks outperform bonds 95% of the time over all 20-year periods and 99% of the time over all 30-year periods! So if you're 30 and have 37 years before retirement, and even if you're 50 or older, you might do well to keep a vast majority of your long-term money in stocks.
In case you're starting to hyperventilate thinking about how much you need to save and invest and how you'll earn a decent return on your money, consider these words of my colleague Dayana Yochim: "Consider this oft-overlooked footnote about the stock market's historical 10% annual return: 6% comes from capital appreciation and 4% from gains from dividends. Late savers can improve their lot with less risk with investments carrying above-average dividend yields." She notes that companies that increase their dividends regularly can help your payouts beat inflation, too. Some significant dividend payers you might want to look into include Pfizer
Once you've reached retirement, what then? Well, remember that many 65-year-olds still have a good 25 to 30 or more years ahead of them. All investing needn't stop. But one investment many might want to consider for part of their nest egg is the immediate annuity, ideally a low-fee one. With these, you fork over a big chunk of money, and in return, you can receive a set sum each year for the rest of your life. It might not be all that you want, but it will keep you from running out of money.
Before you take any action, though, take some time to learn much more about retirement planning, and to crunch some numbers, to see where you are and where you need to get. We'd love to help you with your retirement planning. I encourage you to take advantage of a free 30-day trial of our Rule Your Retirement newsletter service. It's prepared by Robert Brokamp, who distills what you really need to know into a manageable volume each month. A free trial will give you full access to all past issues, allowing you to gather valuable tips and even read how some folks have retired early and well. Robert regularly offers recommendations of promising stocks and mutual funds, too.
Learn more in these articles, as well:
Longtime Fool contributor Selena Maranjian owns shares of no companies mentioned. She was recently relieved to learn that turkeys are not so dumb that they'll gaze upward at falling rain until they drown. Pfizer is a Motley Fool Inside Value recommendation. Sysco is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.