Depending on stock returns to fund your retirement? Think again

How worried should I be?

That’s a question financial people get a lot when the market is as unstable as it has been over the past several weeks. Actually, it’s a question we ask ourselves in those environments.

Having both asked and answered that question several times recently, let me share some of the answers I’ve come up with.

Down 500 points? No big deal.

The stock market has hit some major downdrafts lately, including days when the Dow Jones Industrial Average lost over 500 points.

Inevitably when this happens, the media post pictures of Wall Street traders tearing their hair out. That’s okay. Baldness is an occupational hazard, and they are compensated well enough to afford Rogaine.

An important thing to remember about those traders is that they have large amounts of money at stake on very short-term market positions. Outside of the financial sector, though, most investors are trying to save for the long term, for retirement. This means accumulating wealth over 20, 30, or 40 years. Have you ever seen what a 3 percent loss (roughly the equivalent of a 500-point drop at today’s level of the Dow) looks like on a 40-year chart of stock market returns? It is barely a ripple, something you wouldn’t even describe as a speed bump.

Bigger problems than market downturns

For long-term investors, then, most day-to-day or even month-to-month fluctuations can be shrugged off. What is more disturbing is that, for all its ups and downs, the stock market has made very little progress over a long period of time.

Since the beginning of this century, the S&P 500 has gained just over 34 percent, or a compound average of 1.90 percent a year. Throw in a couple percent a year for dividends and you would roughly double that on a total return basis. But returns in the neighborhood of 4 percent a year are far below the growth assumptions people make when they are doing retirement planning. This has been going on for more than 15 years now, which is a significant chunk of anyone’s retirement time horizon.

Add to that the low yields on bonds over the past several years and the even lower rates on savings accounts and other bank deposits, and you are looking at long periods of sub-standard returns for most U.S. investors. This is a bigger problem than any short-term market downturn.

Economic reality vs. perception

Markets are one thing; the economy is another. While the U.S. market was going through all the angst of late August, one very positive piece of economic news went almost unnoticed. The official estimate of U.S. gross domestic product was revised upward to 3.7 percent, a substantial improvement over the original estimate of 2.3 percent, and significantly better than the first quarter’s rate of 0.6 percent.

The contrast between the stock market and the underlying economy is even greater in China. For all the attention the dramatic plunge in Chinese stocks has gotten, what is less reported is that their economy is continuing to grow, albeit at a slower rate than in recent years. Squeezing some of the speculation out of the Chinese stock market should be good for investment there in the long run.

Protecting your number one asset

When the investment environment gets worrisome, your attention should turn to your number one asset. This probably is not your portfolio or even your house. It is your job.

Keeping that stream of income coming — and growing it through career advancement if possible — can help pick up the slack when investments are doing little to build your wealth. Keep your skills sharp, and look to add value at your job to a degree that would make it difficult for your employer to do without you.

Control what you can control

Besides attending to your career, the other thing you can control when investment results disappoint is your spending. Lower returns may mean you have to lower your spending expectations, both now and in retirement. Doing this on your own terms is much less painful than having austerity forced on you when you can’t pay your debts. Just ask the Greeks.

One way to think of all this is that you should be concerned rather than worried. Concern means that the situation is serious enough to merit some attention, particularly with regard to safeguarding your career, tightening up your spending habits, and being alert for investment opportunities. Acting out of concern is distinct from merely worrying, which usually involves unproductive activities like checking the market every five minutes or lying awake at night worrying about decisions that are already behind you.

This notion of acting constructively toward things you can control is perhaps the best cure for a worrisome environment. Once you’ve done all you can do, it is easier to stop worrying and turn your attention to other aspects of your life while the stock market’s drama plays itself out.

12 Responses to “Depending on stock returns to fund your retirement? Think again”

  1. Protecting an income stream, whether through a job or a business (or both) is something so many people overlook as they focus on the market. I always want to chuckle when I read the 8% return projections, except they really aren’t funny anymore, are they?

  2. Anonymous

    I think you should protect all the things that are important to you. Personally I go the extra mile every day to be a success in my job. I have a portfolio in place and its grown nicely, I only invests in Dividend Kings and Dividend Aristocrats and I’m building a passive income portfolio, the market is at a all time high at the moment so I buy fast moving PUTS to hedge my portfolio. I think protection is very important.

  3. Anonymous

    I must admit that I was always suspicious of the trust we all have on stock-investing for the short and long-run. One should always question and explore all investing options, especially when it comes to retirement funds. No one would wish to be in a harsh financial state during their retirement period. Open your eyes and your ears and look for stable alternatives!

  4. Anonymous

    I’ve been thinking this same thing for awhile. With investments in the market I actively manage my money and still only plan on a 7% ROR over the long term. However, I include gold in that number. The next thing is focusing on other sources of income. While career advancement is a good thing to prioritize, it still places you at the mercy of your boss, company, industry etc. for your sole source of income. By spending time and energy developing another source you diversify your monthly income. Something I think is very important during these uncertain times.

  5. Anonymous

    If you have an established plan to rebalance periodically, you can take advantage of the fluctuations in the market. I did so during the 2000’s and made a positive return during that “lost” decade.

    Stay invested. Set your allocation properly. Rebalance periodically. Keep costs super-low (think low cost index funds). Minimize taxes where you can. It’s worked every time it’s tried!


  6. Anonymous

    My father has been investing in the stock market for decades and it helped him retire in his 40’s. He is not a dabbler though. I think people need to clearly understand the market before depending on it for their retirement and unfortunately – this is not the case for many. Great read. Thanks 🙂

  7. Anonymous

    A downturn is actually a good thing because it turns into a buying opportunity. Take the ups and downs in stride because it is out of your control, and just stay invested long term is the only way to succeed.

  8. Anonymous

    This is something I wish I had realized earlier in my career, it would have saved me a lot of money. I think everyone needs to have self awareness, don’t invest if you aren’t an expert. Much better to go with high yield bonds.

  9. Anonymous

    So in a nutshell, one shouldn’t bother investing in the stock market to finance their retirement? What other options to people have in that case? Sure, saving money and trimming your lifestyle can go a long way, but that’s a huge change in the standard of living, which some people may not want.

  10. Anonymous

    When you throw around those seemingly low numbers you should be clear they are in real, not nominal terms. 4-5% above inflation is good.

    Misleading article.

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