Can you afford your retirement?
How to navigate the golden years smoothly
Last June, Bob Reiser, CFA gave a presentation to members of Maine’s Boothbay Harbor Yacht Club about how to successfully navigate retirement. He shares a synopsis of his speech below, updated to reflect recent developments.
Today’s average retiree no longer has the advantage of a defined-benefit plan, instead relying on savings (often in an IRA, 401(k), or personal portfolio) and a very modest Social Security benefit. This is hardly enough to enjoy the life to which we all aspire upon retirement. In fact, according to a U.S. jobs report that was released last year, nearly 20% of people aged 65 and older were still working at least part time.
With lower investment returns anticipated in the future, combined with longer life expectancies, it is critical that your retirement portfolio provide the necessary spending for your entire lifetime, not to mention for any kind of inheritance you hope to leave the next generation.
What does the future hold?
Hubris is a particular affliction of the investment industry. We believe that our forecasts are perfect and insights brilliant. I am no different, except that after almost 50 years of investing, a certain degree of humility is creeping in. Having said that, let’s get the future out of the way—I will tell you what returns to expect. There are, however, two caveats: my forecast is for 20 years, and I cannot tell you how rocky the ride will be.
According to Balentine’s 2018 Capital Markets Forecast,
- U.S. bonds will return 2.7%. The academic basis for bond returns is the current yield to maturity (YTM). Can you do better than 2.7%? Only if yields go down or you take more risk.
- U.S. stocks will return between 5-7%. Stock returns are determined by three factors: the current dividend yield, the growth in the dividend, and the change in price.
Portfolio allocation will determine your return. Other considerations are how much volatility you are willing to endure and whether you plan to leave an inheritance. But here is the rub: the path will not be smooth. Over a five- or 10-year period, returns could be well below or above the 20-year average. Additionally, if your spending is too high relative to the size of your portfolio, you will reduce the opportunity to earn the 20-year return.
There are also four potential challenges for markets today:
- Market bubble
- Dysfunction in D.C.
- Federal Reserve policy
- Geopolitical uncertainty
Could they impact your future retirement? Let’s explore.
We do not appear to be in a bubble today. While market valuations are high, they are not at extreme levels. Economic activity is robust, interest rates remain low, and inflation is modest. In fact, after years of doubts swirling around this aging bull market, along with constant media scrutiny, investors are finally starting to feel more comfortable.
In summary, a market bubble does not seem likely today; as such, it is not an immediate concern to retirement.
Dysfunction in D.C.
When I spoke at the Yacht Club last summer, the big issue at the time was the possibility of reforming and/or replacing the Affordable Care Act; we all know how that turned out. However, the Trump administration’s second major policy initiative, tax reform, did pass in December. Although supporters have lauded the tax cuts, benefits for both individuals and businesses remain unclear. Many other uncertainties also exist, ranging from energy policy to trade policies.
Tax reform will remain a key focus in 2018 as we wait to see if it accomplishes the administration’s stated goals of increasing productivity and business investment.
Federal Reserve policy
The Fed has followed a disciplined policy of lowering short-term interest rates and buying government securities in support of economic stimulation since the 2008 financial meltdown. However, in December 2016 the Fed reversed direction by raising short-term interest rates, followed by additional increases throughout 2017. Rising interest rates, alone, may not be a risk to stock prices if they remain gradual and expected.
Last November, Jerome Powell, a Fed board governor since 2012, was selected by President Trump to become the next Federal Reserve chairman. Powell is a supporter of the current monetary policy stance, and, as a lawyer and businessman by trade, he has a keen interest in banking regulation and capital market liquidity. Powell seems to fit the Trump administration’s bill of continuity in the current “dovish” monetary policy stance with a lighter touch when it comes to bank regulation.
The markets mostly “yawned” after Powell was elected Federal Reserve chairman, and it seems that he will stay the course that Yellen laid out; therefore, we do not see Fed policy as a threat to portfolios at this time.
The world has gotten smaller with the increase of technology, and geopolitical issues increasingly have the ability to impact U.S. markets. The International Crisis Group, a news and advocacy organization, has identified the ten most critical conflicts to watch in 2018:
- North Korea
- U.S.-Saudi-Iran Rivalry
- The Rohingya Crisis: Myanmar and Bangladesh
- The Sahel
- Democratic Republic of Congo
Out of this group, only the confrontation with North Korea stands out as a significant risk to U.S. stock markets. Other potential issues are climate change, aging populations, involuntary migrations, and water shortages.
As a general rule, geopolitical events may have a short-term impact on the market, but not a long-term impact on your retirement.
- Expected returns from stocks and bonds will be below long-term averages.
- While there is no evidence to indicate that this bull market will die of old age, the risks of a market bubble, uncertainties surrounding the new political order, a sharp reversal in Fed policy, or a geopolitical flashpoint are worth watching.
- As your retirement gets closer (and, therefore, your timeline gets shorter), risk management should become the primary driver of your investment strategy, not earning more.
- Your spending policy needs to be conservative and should reflect realistic returns as well as how much you want to pass on to family or charity.
- Overall, today’s market outlook is sanguine as far as crisis is concerned. Investors should enjoy the bullish conditions.
If you have questions about planning for your retirement and meeting your long-term goals given today’s environment, please contact a Balentine Relationship Manager.