Retirement Planning: Time to Lower Your Return Expectations

By Jeff Voudrie
Wall Street System (WSS) advisors and financial planners for years have told those saving for retirement or saving in retirement that they can count on equity market returns in the 10% per year range on average. These advisors base that number on looking at equity returns over the past 20-30 years.

It is my contention that a 10% return is not only unrealistic, but that it has done great harm to retired investors by causing them to feel secure living a lifestyle that may be unsustainable at more realistic rates of return.

The impact of using a higher assumed rate of return in financial planning does the following:

  • It creates a false sense of security.
  • It reduces what people save and increases what they spend.
  • It results in many retiring years earlier than they should.
  • It encourages them to live a more lavish lifestyle than can be sustained.

The WSS and financial planners have placed undo bias on the most recent bull market while minimizing the likelihood of bear markets similar to those early last century. This is unfortunate for the following reasons:

  • The equity returns from 1980 to 2000 were unprecedented.
  • They resulted from conditions that are unlikely to repeat in the next 30-40 years.
  • They minimize the real impact that traditional Bear markets have on retirement savings.

It is for these reasons that I firmly believe that retired investors and their Wealth Managers need to recognize that these assumptions will greatly affect the sustainability of their wealth. And reality requires mental adjustment such as:

  • Retiree may need to adjust their standard of living.
  • They should probably assume an interest rate of 3%.
  • They should use online calculators to assist in estimating how long their money will last.

It’s okay to be optimistic, as long as you’re realistic.

Jeff Voudrie and Common Sense Advisors do not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.


Twitter:  @JeffVoudrie   @seeitmarket     Facebook:  See It Market

Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of his employer or any other person or entity.

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