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Retirement Planning's Hard Reality: Savings Trump Returns

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Reality is defined as the world or the state of things as they actually exist. 

With that being said, it somewhat amazes if not saddens me that the average investor has little to no clue about the reality of investment returns, risk or retirement needs. As a prime example, I happened upon the Natixis Asset Management Investor Survey conducted by CoreData Research in February 2015, developed by surveying 7,000 U.S. investors.

One of the most shocking statistics in the report related to retirement goals is that U.S. investors say they will need average investment returns of 10.1% above inflation to achieve their retirement goals!

Based on that alarming stat, I want to explain two major points which, if not learned very early on as an investor, will make the truth a very hard reality to swallow later in life.

  1. Average returns of plus 10%

    This perception, while it may exist for very short periods of time (during major bull markets), does not exist long term on a highly consistent basis (meaning year after year). For example: Since the year 2000, the S&P 500 has averaged roughly a 5% annual return through 12/31/2015. That represents a 15-year time span, where an investor’s needed returns of 10.1% (assuming 100% allocation to large U.S. stocks) would have been in the red, at a rate of -5% per year. That doesn’t even mention the need for managing risk, diversification, volatility or even an investor’s emotions/feelings, which will reduce the possible returns even more, on average, long term.

    Additionally, we haven’t even considered the factual part that the published 10% statistic assumes the needs are above inflation. Really? So what most U.S. investors need to actually meet their goals is more like 13% in returns per year, assuming inflation is a steady 3%. Sorry, but pipe dreams and unicorns don’t actually exist, although the lottery is an option. It’s not really a returns problem, but more or less a “returns expectation” problem, where the truth becomes a hard reality if an investor doesn’t learn this lesson until later in life. You’re probably never going to make 10% annualized return year after year, much less 13%, especially with any sense of risk management.

  2. Worry about how much you’re actually saving 

    Our culture has become very impatient and “short-term” focused, with this desire to live right on the edge, by doing only enough to get by. The unrealistic 10%/13% return statistic above does not include any indication that the problem lies within our slow economic growth, GDP or low interest-rate environment (even though those are important factors), as most investors assume. It’s actually trying to teach investors this hard reality: Saving a lot consistently is by far more important than the actual average returns an investor will achieve over time.

    Any return rate is significantly compounded the more money is actually saved.

Most investors in the U.S. save very little to almost nothing for retirement! Yet somehow they rationalize they’ll either have more time later with higher income, or they somehow think – based on their current saving rates – they’ll only need 25% of their current income once they retire, or they expect to die within five years after retirement.

Both assumptions represent ignorance, a lack of prudence and a decision that trades future needs for today’s immediate desires and wants. 

For example: Let’s assume the average investor family earns (for simple calculations) $100,000 per year. The family saves 6% in the workers’ 401(k)s with a company match of 4%. So the family holds back roughly 10% for retirement each year. Their needs in retirement will be 80% of their current gross income, dropping to about 60% – assuming Social Security still exists at retirement. I’ve not even included taxes, inflation/cost of living adjustment needs over time, etc., just to keep this simple.

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Based on various sources of historical research from J.P. Morgan, Goldman Sachs, Morningstar, etc., prudent withdrawal rates in retirement (without running out of money before death), cannot exceed more than 3% to 4% per year. Yet the analysis above shows that even with a base 30-year savings plan at a range of 6% to 8% annualized growth, the average investor still won’t have enough money saved for retirement to warrant that maximum 3% to 4% withdrawal rate from their future portfolio.

Therefore, the hard reality is not that most investors need more returns, but that they need to be saving more money toward retirement! As noted in our example above, an investor at least 30 years away from retirement must, at a minimum, be saving 20% of his or her annual gross earned income to have a chance of not running short of money later in life. 

Perception is defined as a mental impression, thought, belief, judgement or estimation. While that definition surely makes sense, and many of our daily perceptions are also our daily realities, the future comparison isn’t that open to variance. The hard reality doesn’t lie, nor does it allow any time for adjustment when it finally hits.

As I say all the time, “Save like you’re expecting to be dirt poor in the future, and you’ll likely be the opposite; because if you spend like you’re already wealthy today, you’ll more than likely be very poor in the future.”


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