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.

How long to become a millionaire?

I believe everyone has wondered to themselves, “How long would it take me to become a millionaire?” I mean, that seems to be everyone’s financial dream. Everyone always says, “If I only had a million dollars…” Well, I’m here to tell you just how to go about doing that.

Accumulating one million dollars isn’t quite as hard and daunting as most people think. Does it take a lot of time and discipline? It absolutely does, but it’s feasible if you simply save money and invest diligently. Warning, you may need to forgo some weekly coffees, nights out on the town and luxury cars. But trust me in the long run your future self will be very happy.

See for yourself what the power of compounding interest can do for you in your quest to become a millionaire.

$300/month

It will take you 38 years to become a millionaire if you invest $300/month and earn 9% interest annually ($1,017,493).

Less than $500/month

If you increase your monthly savings to $458, it would take you 34 years to become a millionaire ($1,035,432). I know what you’re thinking…$458 is an odd number. Yes, on the surface it is. I used $458/month because that equates to maxing out a Roth IRA, which I encourage all Millennials to do. The maximum you may contribute to a Roth IRA is $5,500. In order to hit that via dollar cost averaging, you would need to contribute $458/month.

$458/month may sound like a lot of money to some people but it’s really not. If you earn $55,000/year and save 10% of your income for retirement, that would equate to $5,500/year (the max for a Roth IRA), or $458/month. At a minimum, all Millennials should be saving 10% of their earned income towards retirement. And I mean, at a minimum. Most financial experts advise you save between 15-20% of your income in order to retirement comfortably. And by “comfortably” most financial experts mean your retired by age 65. I’m shooting for 60, if not sooner. How about you?

Millionaire in 30 years or less

What if you lived well below your means, drove a car payment-free, and lived a bit more frugal of a lifestyle versus buying more extravagant, name brand items? If you could save $700/month it would take you 29 years to become a millionaire ($1,042,749).

Looking to become a millionaire in 25 years or less? You would need to invest $1,000/month with a 9% annual return ($1,016,419). $1,635/month would get you one million dollars in 20 years ($1,000,697).

How to be a millionaire in 10-15 years?

Okay, let’s pretend you’re really, really impatient and want to save one million dollars ASAP. If you have the resources you would need to save $2,850/month to have one million dollars in 15 years ($1,004,146). If you invested $5,500/month you could end up with one million dollars in 10 years ($1,002,735).

Challenge yourself to save as much as possible. Start off small and save $200/month. Then slowly increase that amount as often as you can. When you get a raise, apply it directly to your monthly savings. No Millennial starts off saving $800/month initially. You have to ease your way into it. It’s not going to be easy, but it’s doable. Just learn to live below your means.


Is everyone rich or living paycheck to paycheck?

Haven’t we all been there before, wondering where people get their money from? And how it’s possible some people afford the things they do? This thought crosses my mind virtually every single week, if not daily. I wonder aloud, or to my friends and colleagues, “how do they afford that?”

Well it’s taken me a little time now, but I’m convinced nearly everyone simply lives paycheck-to-paycheck, and just loves giving off the presence of being rich. People who buy designer clothes and seem to always have a new wardrobe. Go out for dinner, drinks and entertainment with friends throughout the week. Drive nice cars that are always relatively new. Take vacations are a regular basis. You name it, they’re doing it. Just living the high-life and appear to have endless amounts of money.

We all know these people. Heck a lot of us Millennials might be these people. Millennials are the “me” generation who love posting all their experiences on Facebook…almost in a boastful way of look how exciting my life is and how successful I am. I’m not judging, as I’m guilty of this too.

And this type of behavior is certainly not exclusive to Millennials. Everyone demographic is guilty of this, and probably none more than another. I live in what would be classified as a relatively upper-middle class neighborhood/sub-division with Millennials, Gen X’ers and Baby Boomers and everyone does this. My neighbors seem to buy cars like they are going out of style. In the last year I can easily name a number of luxury, very expensive cars that were bought; two Land Rovers, a Yukon Denali, a fully loaded Chevy Tahoe, Infiniti Q50S hybrid, Dodge Viper, another Dodge sports car I know is expensive, and a Camaro. This is all on my street in the very recent past. It’s unbelievable.

Everyone has heard of the old saying “keeping up with the Joneses” because it’s true. There are a TON of people who live like this. They want to keep up with everyone else’s lifestyle. Everyone is constantly trying to keep pace with or one-up those in their social circle or in their neighborhood. It may be fun in the moment, but it is very shallow and hollow. It does nothing for you financially to secure you and your family a great future and financial independence.

I don’t even let it bother me anymore and haven’t for quite some time now. I just think to myself, well if I wasn’t putting nearly 20% of my income into savings for retirement, I guess I could afford that $70K SUV payment or regular beach vacations as well. But I’m good. I like seeing my Vanguard statement grow and grow because of compounding interest and knowing my financial future is very, very bright.

Millennials, I’m speaking to you specifically because I am one as well. Don’t try and keep up with the Joneses because the Joneses are leveraged through their eyeballs financially. They really don’t have that much money – it just looks like they do. Enjoy some experiences and have fun once in a while for sure. Take your spouse or family out for a fun get-together, but don’t buy trivial items just to look rich and successful. Invest that money instead because we as Millennials have so much time on our side to achieve real wealth. Your future self will be much happier.



How to easily end up with 10 times your salary


If you save 10% of your pay annually with an 8% annual return in the market for 30 years, you could end up with more than 10 times your pay in retirement savings.

Let me walk you through this scenario so you can see just how easy it is. Let’s say you’re 25 years old, making $50,000 a year. If you save 10% of your pay, or $5,000 annually, and earn a return on your investment of 8% in the stock market, you will end up with approximately $596,500.

Save 10% and Earn 10%

Historically the S&P 500 has averaged 10% annually since 1928. So achieving an annual return of 8% is very feasible. If you were able to achieve an annual 10% return, you would end up with $886,500 after 30 years instead of $596,500.

Pretty nice chuck of money to end up with after 30 years, and all by only saving $417/month for 30 years. Now this number doesn’t account for any salary or savings increases. Both are sure to increase, at least marginally.

Looking for One Million Dollars?

If you increased your savings monthly from $417 to $517, you would end up with just over $1,000,000 (assuming a 10% annual return). If you want to make a safer, more conservative estimate with an 8% return, you would need to save $750 a month to reach one million dollars after 30 years.

All this goes to show that you don’t have to save a fortune to end with one. The power of compounding interest can work wonders if you just save, and invest into the market.



Retirement Plan Fees and Expenses

Keeping your retirement plan fees low is paramount in a successful retirement plan. Once you know your target retirement asset allocation, the next step is selecting your funds and making sure those mutual funds and/or ETFs are very low cost with minimal expenses. A funds expense ratio is the cost of owning the fund.

Most financial advisors say the standard benchmark of a good retirement expense is 0.50%. Some financial advisors say you should actually strive to be even lower with a 0.25%. I agree with the latter, because, obviously, the lower the better. I am proud to say that my expenses currently sit at 0.08%.

I have an extremely low expense ratio and this is across my entire retirement portfolio, including my employer sponsored 401(k), my personal Roth IRA, and my wife’s Roth IRA. While a 0.08% expense ratio sounds hard to accomplish when the benchmark is 0.25%, its really quite easy to do with low-cost index funds.

I invest solely in Vanguard funds across all of my accounts. The bulk of my holdings are in the Vanguard 500 Index Fund Admiral Class (VFIAX), which has a microscopic 0.05% expense ratio. In fact, I believe that is the lowest possible fund fee on a mutual fund or ETF. You won’t find anything lower than that. My most expensive fund is the Vanguard Target Retirement 2040 Fund (VFORX) at 0.16%, which is still very low and well below the 0.25% benchmark.

According to The Motley Fool, the current average expense ratio of an actively managed mutual fund is 1.50%. This is really high. Its obviously a lot higher than the above benchmark of 0.50% and way more than my personal expense ratio of 0.08%. To help you understand what this actively managed fund fee of 1.50% means, say one year your fund is up 10% on the year, well after expenses its actually only up 8.5% after fees. If your fund is flat one year, you actually lost -1.50% in the market because of your management expenses.

To make the math even easier, I am going to compare the actively managed expense ratio of 1.50% to the 0.50% benchmark most financial advisors aim for. So a full 1% lower. What does that mean for your investments over the long term? Probably a much bigger hit to your potential future wealth than you think.

Future Value with a 1.50% Expense Ratio ($831,000)

Let’s assume you open an account with $1,000, invest $500 monthly for 30 years, and earn 9% annual returns after expenses. Compounded over 30 years, your final investment final would be worth $831,112.91. That’s actually a great return and a hefty final balance. But could you do better simply by investing in index funds versus actively managed funds that are much more expensive?

Future Value with a 0.50% Expense Ratio ($1,000,000)

Now let’s assume you did the exact same as the above, only you earned 10% annual returns versus 9% due to your lower expense ratio. Compounded over 30 years, your final investment final would be worth $1,004,413.54. That 1% expense ratio equates to nearly a $170K difference. The difference in being a millionaire and just shy.

You can’t control the stock market, but you can help aid your investment returns simply by choosing lower cost funds, particularly index funds.



The Richest Man in Babylon Summary

The Richest Man in Babylon is a series of folktales on finances and managing money. The book, written by George Samuel Clason in 1926, is set in ancient Babylon and follows a number of characters who learn basic personal finance principles that ultimately lead to wealth and prosperity. It’s a very short book and quick read, comprising of merely 144 pages.

The single greatest takeaway from The Richest Man in Babylon is understanding that a portion of everything you earn is yours to keep, as one of the main characters Arkad explains. Sounds simple yet confusing, right? Obviously what you earned is yours to keep. You earned it. But it’s deeper than that. It’s about saving. It’s about setting a percentage of what you actually earn aside, at least 10%, and having it earn interest and work for you.

…a part of all I earned was mine to keep.

 

The Richest Man in Babylon was written nearly a hundred years ago, but is depicted in ancient Babylon 4,000 years ago. Saving one tenth of your earnings and having it earn interest is easier said than done for virtually everyone. Regular spending gets in the way all too often on items such as shelter, transportation, clothes, food, entertainment, etc.  Adjusting your savings, spending wisely and living below your means is the surest path to wealth and financial freedom.

Seven Cures for a Lean Purse

Arkad was ordered by the King of Babylon to teach these seven principles so that all could be prosperous.

  1. Start thy purse to fattening

As mentioned above, a portion of all your earnings is yours to keep. As in save it and don’t spend it. In the book the example used is imagine you make 10 eggs every day in your basket. At the end of each day ONLY take out 9 and always leave one behind, e.g. 10%. Every day your basket grows by one egg. So after 10 days you have exactly one days earnings already sitting in your basket.

  1. Control thy expenditures

As your income grows, so do your expenses. That is what you have to get under control, e.g. live below your means, if not well below your means. The point is to learn to live on nine-tenths of your income and get accustomed to that 10% towards savings. Eventually it will be easier to increase that 10% to 15-20%.

  1. Make thy gold multiply

Now that you have the saving part down and you’re setting aside at least 10%, you have to make that money/savings work for you via compounding interest.



  1. Guard thy treasures from loss

Don’t be fooled by bogus investments and opportunities that sound too good to be true, because they probably are. If you are unsure, consult someone who is wise with money for advice, whether that be someone who has made sound investments or someone who is in the finance industry.

  1. Make of thy dwelling a profitable investment

Own a home so that once it’s paid off, you have something to show for your investment. If you rent all your life, you’ll never have this. Simple as that.

  1. Insure a future income

Buying a life insurance policy will guarantee your family has financial security if you suddenly pass. Even if you’ve saved well, this is a sound investment to safeguard your family’s finances.

  1. Increase thy ability to earn

Knowledge is power, and continuing to learn and develop your skills highly increases your chances of growing your income. Investing in yourself is categorically your best investment.

Key Takeaway from The Richest Man in Babylon

Earning money is a start, but knowing how to earn, save, live below your means, and invest wisely is what truly leads to prosperity.



Most Millennials Say They Won’t Ever Accumulate $1 Million

Below is a list of some of my favorite money/personal finance articles from this past week. I’ve sifted through boat loads of articles on money, retirement, personal fiance, budgeting, paying off debt, and buying a home.

All of the below articles are highly relevant to the Millennial generation (Gen Y) and their money. Knowledge is power, and you are your single greatest investment, so continue to educate yourself on money and personal finances right here on this very blog so you can one day become financially independent.

This week’s best articles on money and personal finances, specifically for Millennials



Majority of Millennials Say They Won’t Ever Accumulate $1 Million

Despite an impressive head start, millennials overwhelmingly say they will not be able to put away as much as $1 million in their lifetime, new research shows. Yet with three or four decades to save, that mark should actually be fairly easy to hit. (Wells Fargo)

The 50/20/30 Rule for Minimalist Budgeting

Budgets are more than just paying your bills on time—a budget is also about determining how much you should be spending, and on what. The 50/20/30 rule, also called the 50/30/20 budget, is a proportional guideline that can help you keep your spending in alignment with your savings goals. (Mint.com)

The index fund: A monster of efficiency

When the first index mutual fund began operations on August 31, 1976, Jack Bogle’s brainchild was a curiosity, a provocation in a largely academic debate about whether professionals could consistently outperform the market. It wasn’t even all that cheap, with a sales load and expenses equal to 0.43% of assets at the end of its first fiscal year. (Vanguard Blog)

3 ways to more than double your retirement savings

The majority of the investments I own I’ve had for over 40 years. When I look back, they have had incredible performance — largely as a consequence of three principles that my financial advisor taught me in a number of early consultations. All three principles were the enemies of compounding’s power. The average long-term investor got only a fraction of the growth I have achieved. (MarketWatch)

20 Signs You’re Destined to Become a Millionaire

Becoming a millionaire may seem like an unobtainable dream. I’ve been there and felt like it was unattainable and something that would never happen to me. Then I started reading, studying and mimicking countless different successful millionaires. Here are 20 signs based on observations from several millionaire friends of mine, that you’re destined to become successful. (Entrepreneur)

The Worst ETFs You Can Own

Bloomberg’s resident ETF expert, Eric Balchunas, shared some interesting stats today on the habits of millennial investors. Their use of ETFs has exploded in recent years, up nearly 60% over the last year. Also, a greater percentage of millennials use ETFs than older generations: Millennials=41%, Gen X=25%, Baby Boomers=17%. (A Wealth of Common Sense)

Tax-Free Savings for College

The two most popular college savings programs are the Qualified Tuition Programs (QTPs, aka 529 plans) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, the less money you will have to put away each year. (Warrior Accounting)

How to Grow Your 401(k) in a Flat Market

The average 401(k) account balance stood at $88,900 at the end of June, according to an analysis of Fidelity accounts. That was up from $87,300 at the end of March but down from $91,100 a year earlier, Fidelity says. IRA accounts showed a similar pattern: The average balance stood at $89,700 on June 30, up from $89,300 at the end of March but down from $96,300 a year earlier. (Money)

Happy reading, my fellow Millennials.