Why You Misjudge How Much to Save for Retirement
We all know that it’s crucial to save for our retirement and that we begin as soon as possible.We “know exactly” how much to save for retirement.
That truth has been hammered into our heads for decades now.
However, the fact remains that too few Americans have any sort of retirement savings, and of those who do, many will find that they have underestimated the amount they need not to live comfortably during retirement, but to simply make ends meet.
Errors in Understanding How Much to Save for Retirement
In fact, Powell went so far as to say, “Right now, things look pretty bleak for the next 10 years.”
What are they talking about?
Simply this – the return on investments is low, and will remain so. In fact, 10-year Treasuries are only paying about 1.75% per year, and for investors in Germany and other areas of Europe, government bonds will really have a negative yield, meaning they’ll actually pay the government for the privilege of investing their money.
While the stock market itself experiences a great deal of turbulence and can be impossible to predict, you should expect similar performance from your investments here. Valuations have been pushed up since 2008.
David Blanchett stated that because of this, investors in the US are in for a very rude surprise. “The US has had a higher return for a balanced portfolio for the last 115 years than almost any other country in the world. We’ve had it really good for a long time.”
Those good times are now coming to an end, and it will bite quite a few investors.
What this really means is that investing in the stock markets now might not be enough to save you if you’ve not put away enough money.If you’ve been waiting to save for retirement, you might have to resign yourself to working well into your golden years just to pay your bills.
Experts in the field point to the looming market devaluation and say that rather than pulling 4% of their retirement savings per year, retirees should plan on 3.5% or even 3% instead.At the best, that’s $10,000 per year less that you’ll have to live on.
It’s Not Just about Baby Boomers
If you think that the worry about investing and how much to save for retirement only applies to Baby Boomers, think again.
Even Millennials are in for a rough time ahead. There are quite a few factors working against the youngest generation, including the fact that income is down across the board, which makes it difficult or even impossible to save money for retirement.
A study conducted by Wells Fargo found that more than half of Millennial women said they didn’t earn enough money during the year to save anything. A full 64% of Millennials (men and women) reported that they had no confidence that they’d ever be able to save a million dollars in their lifetime.
Of course, the aforementioned market volatility also plays a role here. Millennials remember all too well what the Great Recession did to their parents’ 401(k) accounts, and they look on the growing volatility in the stock market with unease.
Really, the boom years that American investors have experienced were an anomaly. A pleasant one, no doubt, but an anomaly all the same.
Inflation and interest rates dropped, while growth was very strong. Business success was relatively high. These factors combined to create something of an investment golden age.
However, all good things must end, and we simply live in that particular time. The golden era is gone. Those forces that bolstered high returns are weakening and investment experts predict that if they do not fade entirely, they will at least be rendered pretty much moot. Others are reversing entirely.
One of those is global GDP growth. An aging global population means GDP will shrink worldwide. Interest rate growth and inflation are hitting their limits. Corporate profitability might not be guaranteed. Emerging companies put pressure on established firms, and all realize a smaller piece of the pie.
It’s not just about businesses, either.
If a two-point drop occurred in individual investor return, it would mean that a 30-year-old today would have to work a full seven years longer in order to live comfortably after retirement.
And make no mistake – low rates are here, and they’re only going to get lower. The immediate upshot of this is that your retirement future could be destroyed.
How Much to Save for Retirement: The Answer to Your Savings Quandary
So, where does the looming rate drop and market plunge leave you?
While you will most likely need to double your earnings in order to live comfortably after you retire (assuming a two-point drop), there are things you can do.
One of those is to ensure that you’re utilizing the right investment tools. While government bonds are not ideal, corporate bonds can still be powerful tools. With that being said, it is crucial that you focus on investment-grade, high-quality corporate bonds, and avoid bond funds and other problematic investment vehicles.
With the right additions to your portfolio, you can create a predictable payout schedule (a bond ladder) that helps you weather any financial storm.
Whether you’re a Baby Boomer, part of Gen X, or a Millennial, it is crucial that you take action now in order to safeguard your financial future and save enough that you can not only make your bills in retirement but are able to live a comfortable life.