Has anything changed in the last year for investors saving for retirement?
Well, the stock market is still in the basement compared with its highs of three years ago.
And the bond market looks a lot more hazardous than it did this time last year. Bond yields are terribly low, so there’s little income to be had. Also, if you buy bonds now, you risk a big loss of principal if yields rise later and you have to sell a bond before it matures, since no one will pay full price for your old, low-yield bonds if newer ones are yielding more.
Cash, such as bank savings and money-market funds, offers protection of principal, which is valuable. But earning 1 percent or so means a 2 percent per-year loss of value to inflation, which is running around 3 percent.
The only good news, assuming you already own a home, is that home values have continued to rise, as low interest rates make it easier for buyers to bid up prices.
Of course, most attentive investors know all this.
So I think the biggest unheralded change of the last year is the spreading sense of resignation.
A year or two ago many of us had recognized that stock returns would be much lower in the next decade than they were in the “90s. But lots of us assumed there’d be a big recovery, and then annual yields would be, say, 6 percent or 7 percent, a third of what we got used to in the good old days.
By this spring, though, many investors realized there may be no big recovery. Instead, stocks may plod along with low returns, starting at this level. The weak economy is the most immediate problem. But even if it improves, it could take many years for traumatized investors to regain the enthusiasm required to really drive prices higher.
Hence, the key factor driving stock prices is sure to be gains in corporate earnings, and it’s just unrealistic, given historical patterns, to expect earnings to grow at more than 6 percent or 7 percent a year over long periods.
If stocks return 6 percent a year, it will take more than five years, starting now, for the Dow Jones industrial average to rise to the record of 11,723 it set in January 2000. Last week, the Dow was slightly above 8,500.
Worse, all the calculations we made in our retirement planning are wrong: There will be a lot less money in the nest egg 10, 20 or 30 years from now than we’d expected a few years ago.
For many, retirement at 55 or 60 is now out. In fact, polls show many people now expect to delay retirement beyond the standard 62 or 65 to some higher age. Sixty-eight? Seventy? Never?
Maybe things will turn out better, but it would be foolish to count on that.
So what should retirement investors do?
First, accept the obvious. There are only two ways to get a nest egg of a given size: earn a sufficient investment return, or save more.
If you started with nothing today and wanted to have $1,000 in 20 years, you’d have to save $13.88 a year, assuming a 12 percent annual return. Cut the return to 6 percent and you’ll have to save $27.18 a year.
Need $500,000? $1 million? Well, just multiply those annual savings by 500 or 1,000.
How much will you need to retire comfortably? Better figure it out now. Hire a financial pro or use the retirement-planning function in a financial software program such as Quicken.
The second obvious fact: Boosting savings can only be accomplished by getting a larger income, cutting spending, or both.
Start with the most painless expense cuts by shopping for better deals on phone, cable service, insurance policies and so on. Then work up to the big-ticket items. Do you have more house than you need? Too many vehicles?
Saving more is part of the solution to closing the retirement gap, but there’s no escaping the fact that many people will have to trim their plans for spending in retirement. Take a close look at your current cost of living, adjust for expenses that will go down, such as commuting. Also assess the costs that might go up, such as medical expenses or home maintenance as you become frail.
It would be wonderful if the stock market went back into another long bull run, making all these unpleasant trade-offs unnecessary.
But there’s every chance that the people who will have the best retirements in 5, 10 or 20 years will be the ones who adjusted to the new facts of life today.
Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brownphillynews.com.
Send questions/comments to the editors.
