Historically, the U.S. Stock Market has returned about 4% to 6% annually in excess of inflation. Is this likely to continue? Real earnings come from dividends, dividend growth, and P/E expansion. Projecting future returns to match the historical level, which included one of the longest bull markets from August of 1982 through March of 2000 is not likely to be duplicated in the near future. Further, dividend yields are below historical levels and P/E expansion is expected to slow. With current S&P 500 growth rates I am currently using 7.0% when running retirement projections. And that percentage is likely high. Six percent (6%) might be a more realistic figure.
This all sums up to retirement projections frequently coming up short of the goal. The solutions are rather grim if the growth rate of the market slows. Here are some solutions for those preparing for retirement around age 65.
- Save more.
- Work longer.
- Plan to live on less.
- Take on a part-time job in retirement.
- Hope for an inheritance.
While we use history as a guide, don’t plan on stock market returns repeating the performance of the last 50 years. It is a mistake to do so. Plan conservatively. This includes future expenditures as well as the amount needed to be saved to meet retirement goals.
Sometime in the near future I will take a portfolio made up of “Feynman ETFs” and run a retirement analysis so readers can see what may be required for a comfortable retirement.