Experts Predict 6% Stock Returns for Next Decade

Historically stocks have returned 10%…but experts are predicting gains of only 6% in the coming decade. What can you do as a Millennial investor saving for retirement?

I recently came across a few articles that pulled in different U.S. stock market forecasts for the next decade, and the “forecasts” is not warm and sunny, more like cloudy and cool. Over the past 90 years or so the historical long-term averages of stocks have been 10%, while bonds have safely hovered around 5%. However, that is not what the “experts” are predicting.

Now before I give you the experts forecasts I want to explicitly say no one (or one company or firm) can successfully predict future returns in the stock market. It’s impossible. Vanguard founder John Bogle famously said that in his 60+ years in the investment business not once has he met someone who can predict the stock market, nor has he met someone who has met someone who can. That is saying a lot, and is very well put by one of the truly great individuals in the investment business.

While we’re on Vanguard, there 2017 outlook forecasts an annualized stock market return of only 6.6% over the next ten years. They are even less optimistic on bonds, based off historical averages, and only project bonds to annualize at 2.1% over the next ten years. Large asset manager BlackRock is a bit more bearish on the next decade of stocks, forecasting an annualized return of only 5.9%. BlackRock is however a bit more bullish on bonds, forecasting 3.1% returns over the next decade.




What does this mean for a Millennials retirement?

With returns forecasted to be 4% lower than the historical average, this means you’re going to have to tighten up your budget and save more. You don’t necessarily have to invest more aggressively, but you should save more aggressively. For example, as a Millennial if you are saving $500 per month towards retirement and receiving the historical average annualized return of 10%, you would expect to end up with approximately $95,600 after ten years.

However, based off the forecasts from Vanguard and BlackRock noted above, over the next decade you should probably plan on receiving returns of roughly 6% instead. What does this mean for you? If you invested $500 per month but returned annualized gains of only 6% versus 10%, you would end up with approximately $79,000 after ten years. That’s a difference of more than $16,000! If you increased your monthly contributions from $500 to $600, with a 6% return, you would end up with right about $95,000. That $100 monthly increase is fairly large in comparison to what you were saving towards retirement each month, but we Millennials should look at how we can come up with this extra savings each month to keep our retirement on track.


How Much Do I Need for Retirement?

This is the ultimate question for all of America; how much money do I need to save to retire? This number is a bit easier for those nearing retirement, like Baby Boomers and Generation X. But for us Millennials its hard to predict how much money we’ll need to retire comfortably in 30-40 years. Naturally our income is going to change during time frame. I found an equation that works well for all generations, including us Millennials.

Retirement Savings Calculator

The below equation is an inflation-adjusted calculation of what you would need in today’s dollars to retire. As I stated above, its hard to predict what your income will be in 10, 20, 30, or even 40 years. This retirement savings calculator allows you to project how much you’ll need at retirement, based off what you could retire and live off today.

C x (1 + I)T = R x 25

Key:
C = Retirement spending needs in today’s dollars
I = Projected annual rate of inflation (we’ll use 3%)
T = Number of years until you wish to retire
R = Retirement spending needs
25 = Multiply future dollars by 25 to account for future nest egg number (note: a number of academic studies support the “multiply by 25” theory, which is based of historical market returns and a 4% retirement withdraw rate).

Example Retirement Savings Calculation

Let’s use a hypothetical couple who is looking to retire in 25 years. Their gross annual income is $125,000, however, we can subtract their retirement savings and mortgage to account for what they would need (considering they should have a paid for home by retirement age and obviously no longer need to save for retirement).

$90,000 x (1.03)25 = $188,440 x 25 = $4,711,000

Based off the above calculation for our fictitious couple, their $90,000 livable income in today’s dollars would be equal to $188,440 in 25 years (when they plan to retire). That number is then multiplied by 25 to create a retirement target nest egg figure of $4.7 million. With a retirement nest egg of $4.7 million dollars you would safely be able to withdraw 4% annually from your account to live on, which would equate to $188,440/year.

This number may be a bit daunting to hit but it is reality. Millennials must save now and pay themselves first if they want to retire with a nest egg they can live off of. Time is on our side and so is the power of compounding interest. We Millennials must leverage this and save as much as possible as early on in our career as possible.

Average Retirement Savings

I was recently reading a study I found on Vanguard where the average amount saved for retirement by age was noted. Granted this study was from 2014, but I still thought it was relatively shocking just how low the numbers were for my Millennial generation, which are individuals born between 1982-2004 and also referred to a “Gen Y” or “Generation Y”. In fact, I sadly think the numbers are very low for all age ranges and generations. This report goes to show that people are simply not saving much for retirement.

I want to bring this back to my Millennial generation and our lack of saving for retirement. I’ve read in other publications that my Millennial generation is known to be savers, much more so than Generation X or Baby Boomers. But this study from Vanguard disputes that on the surface and is based on empirical research, as this study is based on employer retirement plans (and their participants) managed by Vanguard, and amounts reflect the average balance per account. I say on the “surface” because my Millennial generation hasn’t had much time for compound interest to work in our favor like generations 10, 20, 30 years older than us. But these numbers are still very low for Millennials.

Let’s examine the below numbers more closely from a Millennials standpoint. As stated earlier, a Millennial is one who is born between 1982-2004, meaning in the year 2014 when this study by Vanguard was conducted, a Millennial ranged in age from 32-10. Based on this study we’re only examining a small portion of Millennials, those between the ages of 25-32 in 2014. Either way you slice it, the numbers stated below for those age 34 and below are rather low.

Average Retirement Savings by Age

Average retirement savings by age
Source: Vanguard, How America Saves 2014. This study examined employer retirement plans (and their participants) managed by Vanguard. Amounts reflect the average balance per account.

This chart shows average retirement plan account balances by age as of 2014.

  • For people under age 25, the average account balance was $3,865.
  • For people age 25 to age 34, the average account balance was $21,524.
  • For people age 35 to age 44, the average account balance was $54,054.
  • For people age 45 to age 54, the average account balance was $103,269.
  • For people age 55 to age 64, the average account balance was $154,421.
  • For people age 65 and over, the average account balance was $176,696.

Average Retirement Balance for a Millennial?

Millennials, how does your current retirement balance compare to the aforementioned “average” retirement balances Vanguard is reporting on?


Retirement Portfolio Diversification Explained

I came across a recent article on proper retirement asset allocation strategies. The article quoted Morningstar’s personal finance expert Christine Benz. She recommended splitting your portfolio into three separate buckets, and not your typical asset classes you normally read about when researching retirement diversification strategies.

Instead this was about how to proportionately divide up your retirement account money to ensure a proper retirement landing. I’ve done extensive reading up on retirement allocation and overall retirement strategies and this was the first time I’ve read this advice.

1) Cash: 1-2 years’ worth of living expenses
2) Bonds: 5 years’ worth of living expenses
3) Stocks: remaining assets

Let’s pretend the Jones’ are 65 and retired. They saved really well and have $1 million saved for retirement. They can live on $80,000/annually, e.g. $80,000 would be one year of living expenses for them. In this scenario they would allocate $80,000 to cash (if not $160,000). They would then earmark $400,000 towards bonds (5 years of living expenses X $80,000). The remaining $520,000 of their retirement assets would then be allocated all towards equities/stocks to ensure the portfolio continues to grow and last for 25+ years to ensure the Jones’ have a long, happy retirement.

I’ve read this countless amounts of times that most certified financial planners recommend entering retirement with a 50/50 asset allocation (50% stocks and 50% bonds). The above scenario lays out that 50/50 breakdown a bit more clearly and explains why you would want that asset allocation. I like this recommendation, despite the fact that I believe my future “retired” asset allocation would be 60/40 (60% stocks and 40% bonds). So I would lean slightly more aggressive than this scenario, but still fairly close. With that said, if my portfolio is in a really good place and I’m looking more to preserve wealth versus “growth”, then I would probably be 50/50 or even 40/60 (40% stocks and 60% bonds).

Granted, the aforementioned is catered towards those nearing retirement. It doesn’t totally pertain to Millennial’s, which is who I am posting retirement and personal finance advice for. However, this advice struck me and was really interesting. I think it’s worth noting for anyone, regardless of age and stage of retirement. I believe it is good food for thought for Millennials.


Habitual Savings for Retirement

Earlier this week I posted my review of Charles Duhigg’s wonderful self-help book on ‘The Power of Habit’. Duhigg explores how we form habits and what it takes to break those bad habits and form new, good habits.

“As people strengthened their willpower muscles in one part of their lives—in the gym, or a money management program—that strength spilled over into what they ate or how hard they worked. Once willpower became stronger, it touched everything.”

Like virtually all books I read these days, I instantly go to how this came help me financially and help me with my personal finances. Over the last couple of years I have gotten into the “habit” of saving aggressively for retirement and budgeting so I ensure I live within my means. In 2015 I increased my 401k savings and upped my emergency fund. In 2016 my wife and I both maxed out our Roth IRA’s and I again increased my work-sponsored 401k plan.

It became a game for us to challenge ourselves to save more and more. It became a habit and we kept pushing ourselves to save more. We knew the more we could save at an early age, the better our chances are at retiring early. We kept learning how to live on less money each month so that we could continue to allocate more towards savings and retirement.

In 2017 I again increased my 401k savings to 12% of my income. We both plan on maxing out our Roth IRA’s. We’ve even discussed the potential of maxing out my work 401k plan, which would be $18,000. I don’t think we’ll get there this year or even next year, but still, if I can max out my 401k before the age of 35 we’d be in a great spot at eventually retiring early (age 55). We’re expecting our first child very soon and plan on starting to save for college ASAP via a 529 plan. So the new, added expense of a child makes maxing out my 401k a bit challenging for now. We’re going to see how our budget changes with a child to now care for and raise, then go from there. Diapers and college, here we come!



Traits of Self-Made Retirement Millionaires

Several years ago my wife and I decided to dramatically change our lifestyle and stop living paycheck-to-paycheck. It’s taken us just under three years but we now 100% have our financial life in order. Our retirement accounts are hefty for our age and we have an emergency fund with 5+ months of expenses. We are now living well within our means, which provides us with a lot left over to throw at retirement and our home mortgage.

The purpose of my personal finance blog for Millennials was to show others that you don’t need a finance degree to get out of debt and become financially independent. I read money, finance, investing, and personal development articles and books like crazy. I listen to podcasts and audio books on money as well to continue to grow my knowledge on investing and personal finances.

I recall reading an article about the traits found in self-made millionaires. I read the article and felt great at every turn because I thought to myself, “that’s what I do!” It’s a great feeling. I wanted to share those traits with my fellow Millennial readers to inspire them to think differently about money, investing, and retirement so you and I both can one day (very soon, hopefully) be Millennial Millionaires!

But first, to put the idea of becoming a “Millionaire” into perspective, that examine how much money, or lack thereof, that really is. If you retired with one million dollars today and used the 4% withdraw rule that would leave you with $40,000 annually to live on. Not so great, huh? Us Millennials have time and compound interest on our side so we need to think bigger. I want to be a Millennial Millionaire with $3 million to retire on. That would leave my wife and I with $120,000 annually to live on. That sure sounds like financial independence to me! So what is it going to take to become a Millennial Millionaire?

Traits of Self-Made Retirement Millionaires

Millionaires are often well-educated

Graduating college is not required, obviously, to become a millionaire, but getting that degree does better your chances of accomplishing this feat. In the book The Education of Millionaires: Everything You Won’t Learn in College About How to Be Successful, author Michael Ellsberg cites the fact that 80% of all millionaires have graduated from college.

I am a college graduate and my wife is not. I feel like we’re in a great spot and on the right trajectory. So goes to show that any education level makes it possible, but a college degree may help more. However, I would argue that work ethic trumps the degree.

Millionaires understand the power of compounding interest

From the day I graduated college and started my first full-time job I began saving for retirement. I was only 22 at the time. I had lots of debt (student loans and credit card) and wasn’t making a ton. But I knew I needed to save for retirement and save as much as I could. Any little bit at that early age would help. I did the same for my wife (who was only my girlfriend at the time) and forced her to open an account with a brokerage firm since she was independent. Compounding interest is amazing and can virtually double your investment every 7 years.

Self-made millionaires live within their means

One of the biggest traits of self-made millionaires is that they tend to live within their means and operate within the parameters of a budget. This certainly wasn’t me until a few years ago. I didn’t get on a written budget until my late 20’s, but I can’t stress enough just how much money that saved me. It really shines a light on where your money is going and where you can cutback to save, and ultimately increase your take-home pay without actually getting a raise.

We swear by our budget now and monitor it very closely. We also live within our means and save habitually. We actually challenge ourselves each year to save more and more. I keep increasing the percentage of pay towards my Roth 401(k). Every bit of extra money we come across now we save. That was not what we did in our early 20’s though…but we do now and will continue to do so until we are financially independent.

Millionaire’s typically have multiple income streams

A great deal of millionaire’s are well diversified with their income streams. No shock there. This is probably my biggest weakness right now as I don’t have any other source of income other than my job. Same goes for my wife. I have obviously created this personal finance blog for Millennial’s to track and note my journey. I plan on buying a rental property at some point down the road when I have enough money, but right now I live in a really, really hot real estate market where it just doesn’t even make sense right now. Hopefully at some point in a few years that changes a bit and I can dip my toe in the rental market.

Self-made millionaires usually have a mentor

Another common trait a number of self-made millionaires share is that they’ve found a career or wealth mentor along the way who has helped shape their path to prosperity. I would have to say my “wealth mentor” right now is Dave Ramsey. I follow his podcast regularly to keep me straight on my budgeting and personal finances. He regularly refers to himself as a “finance coach” too. I look at his that way without ever have meeting him. I have a couple bosses at work I really look up to professionally speaking. I follow their lead when it comes to advancing my career and increasing my income. But financially I do follow Dave Ramsey, The Motley Fool podcasts (see my post on the best podcast for Millennials), as well as a number of other great personal finance and retirement authors and bloggers out there. I try and keep my money knowledge as diversified as possible so I know all of my options.

Millionaires have defined plans and measurable goals

Finally, not only do self-made millionaires have goals they want to reach and the drive to reach them, but they ensure their progress is measurable. To become a millionaire you obviously have to make money, save well, invest diligently, and live below your means. However, without goals we have absolutely nothing to aim for. I once read if you aim at nothing you’ll hit it every single time. You have to set challenging, yet realistic goals for yourself and track your progress.

If you read through my Millennial Millionaire page you’ll see I’ve set a number of goals for myself.

  • My goal for 2017 is to increase my net worth by $60,000 up to $440,000, which would be a 15% increase
  • By 2018 I will have a net worth of half of one million dollars
  • I should be a Millennial Millionaire and have a net worth of $1,000,000 before the age of 40 (my estimate is sometime between 2024 or 2025)
  • I hope to retire with a portfolio worth $3 million dollars
  • I plan to retire by age 55


Retirement IQ

I was testing out Chris Hogan’s popular ‘Retire Inspired Quotient’ (R:IQ), which is essentially a retirement IQ calculator. You plug in what you consider your dream retirement (family, travel, hobbies, relaxation, etc.), your current gross annual income, how much you need right now monthly to retire, and then your current savings.

R:IQ

The retire inspired quotient tool runs a calculation based off all of your parameters to generate your “R:IQ” number, e.g. the amount of money you need in order to comfortably retire based off everything you just laid out previously. It also tells you how much you should be investing monthly in order to hit your desired retirement age and “R:IQ” nest egg number.

12% Market Returns…Really?

This is a pretty cool retirement calculator, however, it skews on the very high returns side. I think Chris Hogan, famed Dave Ramsey “retirement” personality”, leverages this retirement IQ tool to be more inspiring than factual. The only reason I say that, which is the same reason I am very critical of Dave Ramsey’s investment advice, is because they assume a 12% return, ALWAYS. They automatically assume you can and will get those returns. They essentially say you can beat the market every single year year, considering the stock market has historically returned approximately 10% for the last 80+ years.



With that said, the retire inspired quotient (R:IQ) tool is still very functional. I simply modify my number by accounting for a more modest return…not 12%. You too can play with that percentage return and use something more like 7%, 8% or ever 10%. But 12% is extremely optimistic.

Retire Inspired Quotient

Without further ado, below are my personal retire inspired quotient (R:IQ) results. Based off Chris Hogan’s tool my wife and I are in a pretty good spot. The R:IQ says I need $3.36 million dollars to retire by the age of 55. In order to hit that mark I must save $1,626/month for the next 18 years. All of that is great to hear…and this is based off a 10% return, not 12%.

Retire Inspired Quotient or Retirement IQ
Retire Inspired Quotient (Retirement IQ)

What is even more encouraging about all of this is the fact that my wife and I collectively save significantly more than $1,600 per month. We sock away a lot of money each month for retirement. We both max out Roth IRA’s and I have a 401k with company match and profit sharing. So even if we get returns more in the 7-8% return, our monthly savings should help make up that gap.

Millennials, what is your retire inspired quotient?



Guarantee Retirement in 30 Years

I was listening to one of my favorite podcast on money by Paul Merriman and he focused on a topic I think a lot of us Millennials think about…early retirement. We Millennials are a ways away from retirement, which means, lucky for us, we have tons of time to save and let compound interest work in our favor. I have always targeted age 60 as my goal retirement age. And even that seems “early” in comparison to when most people retire these days. The average retirement age is 63.

I am in my early 30’s now and have been saving for retirement now for 10 years. I track my retirement progress religiously and I am always trying to push myself to save more for retirement. Paul has inspired me to rethink my goal retirement age. Instead of retiring by age 60, I am now moving my ideal target retirement date to 55. I am still 20+ years away from this age so I have more than enough time to achieve this goal, if I save diligently.

Retirement Projections

A couple years ago I put together a retirement projection spreadsheet, based off my current savings, savings rate, and projected annual rate of return. The below projections are for both my wife and I and what I anticipate we may like have in retirement savings by age.



Retire by 50?

– 7% return = $1 million
– 8% = $1.25 million
– 10% = $1.68 million

Retire by 55?

– 7% return = $1.63 million
– 8% = $1.96 million
– 10% = $2.85 million

Retire by 60?

– 7% return = $2.4 million
– 8% = $3 million
– 10% = $4.79 million

Retire by 65?

– 7% return = $3.5 million
– 8% = $4.58 million
– 10% = $7.95 million

So what jumps out most about these numbers? To me its two fold. The first is that obviously the longer you work the greater your savings compound to. Case in point, with a modest 7% return I should have just barely $1 million dollars by age 50. But if I keep working and allow my savings to continue to grow, by age 65 I may have a $3.5 million nest egg. That’s 3.5x more! The second biggest take away from these numbers is the difference 1-2% points can make on your retirement portfolio. At age 55, a 2% difference in return means nearly $1 million dollars. By age 60 that jumps to a $1.8 million difference. Worse yet, at age 65 a 2% difference is more than $3 million dollars.

I want to retire by at least 55

So the obvious answer is save longer and shoot for higher returns, but that is easier said than done on the returns side of things. And I’m writing this article because I’m broadcasting my goal of retiring at least by the age of 55.

How to retire in 30 years, guaranteed

Paul Merriman’s premise is that you can retire in 30 years if you manage to save $12,500 per year for 30 years and receive an annual return of 12%. Saving that much each month for 30 years actually isn’t all that challenging, as it equates to you and your spouse each saving $520/month towards retirement. The 12% return is what is tricky. However, if you miss 12% and hit 10%, you’re still looking at a $2 million dollar nest egg. Pretty good consolation prize. The other option is to work slightly longer or simply save more than $12,500/year. For a couple earning $100,000 annually, that is only 12.5%. I will strive to save 15-20% to guarantee (more or less) my success. If you upped your savings to 15% you would end up with $3.6 million (with a 12% return) or $2.4 million (with a 10% return). Even an 8% return would still net your $1.7 million.