Will You have enough to retire in the new normal?
The Investment Landscape has changed – Will You have enough to retire in the new normal?
Blackrock CEO Larry Fink’s latest to shareholders addresses some of the main topics of my current roadshow. Specifically the section titled: Changes to the investment landscape. Will you have enough to retire? What should you do about it!
“Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future.”
Regular viewers will know that I have been suggesting interest rates will need to stay near zero for decades to come for the world economies to grow at a modest pace. Blackrock does some basic pension math and suggests that one may need to save 3.2 times as much in a 2% interest rate environment than in the old 5% interest rate environment. Of course we need to consider inflation in this calculation too and with negative real rates (your purchasing power after inflation), the math could be much worse.
For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.
Safe investment returns are something that we all need to be concerned with. The traditional buy and hold target date funds will likely fail investors for the next generation because of this toxic interest rate environment.
Consider these two retirement scenarios: The boom period from the high inflation era of the 1970s to the low inflation environment of the 2000s held the best investment returns for equities and bonds ever. This investment return boom is not likely to be repeated in our lifetimes. Expected equity returns are well below average and bond yields are the lowest they have ever been. Both scenarios look at a typical $1,000,000 retirement portfolio with simple withdrawal rates based on actual returns of real portfolios. If you are spending more than 7% of your portfolio (assuming $1,000,000) you run out of money in about 20 years. If you were the unlucky once to retire in 1973 and not 1977, you ran out of money taking out more than 5%. Because we are all living healthier and longer, there is a good chance that your money will need to last for closer to 35 years.
You have no control over the investment outcome and you cannot forecast what will happen with the markets with certainty. You can control when you expose your retirement savings to market risk and I will show you some smart techniques for navigating what could be a very difficult few decades of lower than average returns for investors. You can also plan better for this by having a financial plan done at least every few years so that you know you are on track. Come out to my current roadshow where I will give you a few ideas on what to do with your money so that some of these risk factors turn to opportunities rather than something you need to worry about.