Why Your Savings Probably Won’t Grow Much in the Next 10 Years

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Investors need to lower expectations for their retirement savings in the coming decade, according to a group of experts at one of the nation’s most respected investment companies.

Economists at Vanguard Group are projecting that over the next 10 years, the return rate for stocks will be “a far cry from returns investors may have become accustomed to over the last several years,” according to Vanguard senior economist Andrew Patterson.

Historically, equities have returned around 9 to 11 percent on an annualized basis, Patterson says. But he estimates that return rate will be around 3 to 4 percent over the next decade.

Patterson estimates the inflation rate will be close to the Federal Reserve’s target of 2 percent — and likely a little bit lower than 2 percent — over the next decade. That’s the glimmer of hope, as such a rate remains low by historical standards.

Now, back to the bad news: After accounting for inflation, equities will return an estimated 1 to 3 percent over the next 10 years, Patterson projects.

It’s the economy

This bleak outlook for equities over the next 10 years has roots in the state of the economy a decade ago, during the Great Recession.

To help the economy bounce back from the recession, the Federal Reserve — the nation’s central bank — adopted new monetary policies. But a near decade of economic stimulus may come at a price — and that price could be a decade of historically low returns on equities, according to Peter Westaway, chief economist, Europe, for Vanguard. He explains:

“… what’s happening is policymakers have been deliberately stimulating markets … to try and encourage firms and households to spend money. But that period is now over, and in a way, we’re now moving into a period where we have to give that back. And so I think the depressed returns looking forward are very much a consequence of the unwinding of those stimulative policies.”

What it means for you

Don’t let this news freak you out. In fact, before you react to it in any way, it would be wise to remind yourself of these lessons from investing 101:

  • Expect market declines. They are an inherent part of cyclical markets.
  • Keep emotions out of investing. Reacting rashly to financial news can do lasting damage to your portfolio.
  • Projections are just estimates. Patterson likened his own projections to “back-of-the-envelope math.”

Once you’re ready to react with a level head, consider your time horizon, asset allocation and stomach for risk.

For example, if your retirement is 20 or 30 years off, a decade of depressed returns may be nothing to sweat. However, if you will need to start withdrawing savings for retirement income within next 10 years, you might want to rebalance your portfolio such that you reduce your exposure to equities.

Or, if you know you have low risk tolerance, you may wish to rebalance regardless of how far off retirement is.

After all, Vanguard shared its projections to get investors to think about the right mix of investments in their portfolios — their asset allocation. Patterson explains:

“… we think it’s important to be very forthcoming about those projections so that investors can make the appropriate asset allocation decisions.”

Of course, the appropriate decision for you is relative to your situation — particularly your timeline for retirement and stomach for risk. That’s why it’s critical to consider these factors before making most any investment decision.

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