It is not only that stretched valuations in domestic asset markets imply somewhat lower overall returns in coming years. Or that the “new normal” of slower economic growth will translate into slower earnings growth. It’s also that to maintain the same standard of living in retirement as during your working years, those returns can’t be too subpar.
For much of the 20th century, generations of Americans pinned their retirement hopes on the three-legged stool of social security, personal savings and a defined benefit corporate pension. In recent years, however, intense global competition has compelled most U.S. employers to replace the much-beloved DB pension with employee-funded (and managed) options like 401(b) plans. Along with potential changes to social security benefits, saving more and investing more wisely has taken on critical importance.
Not surprisingly, then, a Gallup Poll found that not having enough money for retirement was the biggest financial worry for a majority of Americans, even surpassing having to pay for a serious illness or medical emergency.
The Federal Reserve’s latest snapshot of household finances paints a different, bur similarly unnerving, picture. Over one-third of nonretirees “have given little or no thought to financial planning for retirement and 31% have no retirement savings or pension.” The Fed survey also found that “over one-half of nonretirees with self-directed retirement accounts are either ‘not confident’ or only ‘slightly confident’ in their ability to make the right investment decisions when investing the money in these accounts.”
And with good reason. An eye-popping survey of household financial acumen by professors Olivia Mitchell of the Wharton School and Annamaria Lusardi of the George Washington School of Business found that most respondents struggled with such seemingly simple questions as whether earning 2% annual interest on an initial $100 would leave you with more or less than $102 after five years.
Yet even as financial literacy may have declined, the retirement bar has been raised. The Wharton School’s Richard Marston believes that the traditional rule of thumb that retirees need to save eight times their current income to maintain the same lifestyle is outdated. That number, Marston notes in an interesting podcast and in his book Investing for a Lifetime: Managing Wealth for the “New Normal,” should be more like 16 times.
On the subject of investing, Marston remains optimistic. He notes that investors who panicked and pulled out of the equity market during the 2008 financial crisis missed a powerful rally that took stock prices to record highs. His advice: “Don’t play games” with your portfolio by trying to “time” the market. Stay the course.
For all of its modern challenges, the heightened struggle to make the post-workaday world a comfortable place could make its attainment more satisfying.
The writings of poet Joseph von Eichendorff seem appropriate to describe the arduous journey from laborer to retiree: “We have through sorrow and joy gone hand in hand. From our wanderings, let’s now rest in this quiet land.”
‘Tis a consummation devoutly to be wish’d.