One of the big goals most investors have for their portfolios is to fund their retirement. Sad to say, building a nest egg that's large enough to keep us secure in our old age is a much heavier lift for today's workers than it was for our parents or grandparents.
In this clip from Motley Fool Answers, Alison Southwick and Robert Brokamp discuss one of five major ways that retirement planning has changed, and what you can do to adjust to the new realities. First up, the bad news about average investment returns we can expect for the future, and what this means for you.
A transcript follows the video.
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This podcast was recorded on June 21, 2016.
Robert Brokamp: Well, yes. So for a while, now, we've had a certain model of retirement. You enter the workforce at 22, retire at 62, and die at 82. But life expectancy is important.
Alison Southwick: That was very blunt. That's a short bio of Robert Brokamp, CFP. I think my description of you is longer than the bio you just did, but OK.
Robert: Well, as we'll discuss later, life expectancy is important, because that's potentially the end of your retirement, and you have to make an estimate of how long your retirement's going to last. But there are five ways why the future of retirement will look different than the golden years of yore, and one of them is investment returns will likely be lower.
Alison: Aw! That's bummer news.
Robert: That is bummer news, and that's why we're all investing for our retirement and, of course, while in retirement you still will be investing. If there are going to be lower returns, that's obviously something that's important to factor into things.
Why the lower returns? Well, we talked before about how the best, although not perfect, indicator of future returns for the stock market is valuations. Right now the stock market is at least fairly valued if not overvalued.
As for bonds, the best indication of future returns is current interest rate, so you look at the long-term history of things. You always hear about how the stock market has returned 10% a year since 1926. Part of that is a 4% dividend yield. Right now we're only at 2%. That knocks out a couple of percentage points, right there, so I think it's more reasonable to expect, like, 6.5%-7%. Looking at bonds, historical returns for long-term governments were like 5.6%. Right now they're only yielding 2.3%. So you have to assume a lower return on your portfolio.
Alison: But for how long? Like if the stock market tanks tomorrow, then are you going to be like, "Well, actually, now things are looking up, but that's because we've sunk so far."
Robert: That's exactly right. Whenever financial planners or anyone look at this, they're looking at a period of like seven to 10 years, generally speaking, so even valuation, when you stretch it out to, like, 30 years, is not very useful. You're looking at the next decade, roughly speaking. That's No. 1. Investment returns are going to be lower.
Alison: So manage your expectations there.
Robert: Right. And you have to factor in you're probably going to have to save more. The stock and bond markets are not going to bail you out.