Low Investment Returns Require More Savings

The odds of making a 5% return on traditional investments in the next 10 years appears slim, according to a new report from investment advisory firm Research Affiliates.  For most people in or approaching retirement this means one of two things:  save more or live on less.

The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors.  The average annualized long-term return people seem to expect is 6.2%.  Just over one and half percent would shaved off for inflation.  So the after-inflation return drops to roughly 4.6%.  That’s before taxes.

Over the next decade, according to the report, the ubiquitous 60/40 U.S. portfolio (60% stocks/40% bonds) has a 0% probability of achieving a 5% or greater annualized real return.

One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is to expect lower returns in the future.

“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”  One reason for this is most people are not equipped to alter their investment mix.  They are either afraid to reallocate funds into different, potentially higher yielding, assets, or they are uninformed as to such options, or both.

Moral of the story:  Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.

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