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.