One thing I have learned in life is that people become very angry when you gently suggest to them that the way they have been getting rich will most likely not work in the future. Unfortunately, when you work in the financial services industry, this can make it difficult to avoid awkward conversations.
Of course, a lot of people don’t bother sitting down in front of a real live person anymore in order to analyze their financial situation. Instead, they choose to use an internet retirement calculator. This has the advantage of allowing you to scream obscenities at it, safe in the knowledge that you can’t hurt the AI’s feelings.
Every financial company worth its salt has a retirement calculator on its website, including Vanguard, Fidelity, Charles Schwab, Edward Jones and many others. They ask you to input a tangle of personal information like your age, current savings, salary, etc. Then they spit a nice definitive answer back out at you.
Most of the time, the “bottom line” returned by a retirement calculator makes us feel anxious or inadequate. Occasionally it makes us feel satisfied or superior.
But almost every retirement calculator asks for a single number that is more important than all the others. It is a number that is hardly ever talked about, but is vitally important for investors. This golden number is the return expectation, sometimes known as the discount rate.
Return expectations are crucial because a high rate of return will quickly grow even a small pile of money into a huge stash in very little time. In contrast, a low rate of return means that a modest amount of savings will remain modest for an excessively long time.
We are all interested in achieving a high rate of return on our investments. And the companies that design retirement calculators understand this. They want us to feel good about our investment and retirement prospects. Otherwise, we would all be too depressed to save anything – a situation which isn’t conducive to driving profits for large financial firms.
There is only one little problem for these financial firms and the retirement calculators they’ve created. The default return expectations baked into most retirement calculators are, in a word, insane. I’ve seen numbers that range from 5% on the low end to around 12% on the high end.
But these numbers are so unrealistic as to be laughable. Even the 5% expected rate of return, while certainly better than double digit return assumptions, is unrealistically sanguine. This is because the U.S. stock market (along with many other global equity markets) is trading at historically high valuations (warning: paywall). A more realistic estimate for long-term stock returns would be in the 1% to 2% range, a possibility that effectively no one is planning for right now.
Relying on a balanced portfolio of stocks and bonds in order to pad the returns in your retirement calculator isn’t going to work either. A variety of broad U.S. bond indices currently have yields between 3% and 4%. These low bond returns will drag down the equity return portion of any balanced investment portfolio, assuming those future equity returns somehow manage to climb higher than 4%.
In other words, your investment plan, as validated by your favorite retirement calculator, is an impossible dream. It is painting a fantasy of tropical white sand beaches and gently-lapping blue waves, when the ugly reality is likely to be trailer parks, dog food and squalor.
I get it. You’re angry. You don’t like me implying that the nice man who wears a crisp suit at your local brokerage office is lying to you.
And, to be honest, your investment advisor might not even be trying to intentionally mislead you. He may simply be ignorant of reliable long-term valuation measures and what they portend for future asset returns.
Look, I’m not telling you this to make you upset. I’m telling you because someone needs to tell you before it’s too late. The financial media is full of cheerleaders, charlatans and hacks. They will say whatever their boss tells them they should say in order to get next week’s paycheck.
They don’t have to live with the consequences of their bad financial advice. You do.
So I implore you to get diversified – really diversified. Don’t expect that adding another index fund to your 401-k is going to be enough. It almost certainly won’t be.
Instead you’ll need to do some intellectual heavy lifting. You’ll have to research investments that you never knew existed. You’ll have to consider investments that might have seemed ludicrous just a few years ago.
Learn about investing in tangible assets, like fine art, precious metals, antiques and gemstones. They aren’t a panacea by any stretch of the imagination, but they can’t be printed by the world’s deranged central bankers either. And always be sure to take physical delivery of anything you buy. In the future, if you can’t hold an asset in your hand, the chances are very good that you won’t own it in any meaningful sense of the word.
I don’t think you can automatically expect to garner double digit returns in any asset class. But you will have a much better chance of meeting your financial goals if you have a healthy allocation to tangible assets. Your retirement calculator may whisper sweet little lies into your ear, but don’t be fooled. The investing future belongs to those who refuse to be deceived.
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