Why These Experts Think Your Retirement Plan is Broken

Why These Experts Think Your Retirement Plan is Broken

Why These Experts Think Your Retirement Plan is Broken

Big firms on Wall Street are predicting below-average investment returns over the next 10 years. Learn what that could mean for your retirement plans.

Why These Experts Think Your Retirement Plan is Broken

    Intelligent Wall Street firms are predicting below-average investment returns over the next 10 years.

    How could this impact your retirement plans?

    Who is Talking?

    Which “Wall Street Firms,” exactly?

    As Howard Marks of Oaktree Capital wrote in his October 13, 2020 newsletter, low-interest rates decrease the entire yield curve—negatively affecting bond returns, stock returns, and all other investment returns.

    The Yield Curve, courtesy Oaktree Capital.

    Why does Marks say this? It’s because investment returns are measured against the so-called “risk-free rate” of the 30-day U.S. Treasury Bill. These “T-Bills” represent the rate of return that investors can expect while taking zero risk. If investors take more risk, they expect greater rewards.

    The risk-free rate is tied to the U.S. Federal Reserve’s interest rate. When the Fed’s interest rate increases, the risk-free rate increases. And thus, all other assets are expected to increase their return. The other side of the coin is that when the Fed’s interest rate is low, then all other assets have lower expected returns.

    Right now, we’re in a low interest rate environment. The expected return of bonds and stocks is lower than just about any time in history.

    Marks isn’t the only one following this logic. Many big Wall Street institutions agree with him.

    JP Morgan, Kiplinger/Northern Trust Asset Management, and Charles Schwab have all recently published forecasts predicting lower-than-typical asset returns in the coming years. Their predictions are listed below. Note: CAGR = Compound Annual Growth Rate: the way year-over-year investment returns are averaged into an annual rate.

    Source Large-Cap Stocks CAGR Bonds CAGR Timeframe
    Historic Data 9.79% 5.17% 1928 - today
    JP Morgan 4.1 (nominal) 1.8% nominal Next 10 years
    Charles Schwab 4.5% (real) -0.4% (real) Next 10 years
    Kiplinger/Northern Trust Asset Management Blake Lively2.7% (real) 0.3% (real) Next 5 years

    But Who Can Predict the Future of the Market?

    Can we trust these prognosticators? Market predictions are a dime a dozen, and they frequently differ drastically from one another. Why should we listen to these guys?

    There are two interesting reasons:

    1. On one hand, we shouldn’t trust these predictions. We won’t know the future until we actually arrive in the future. Countless market predictions have been painfully false over time.
    2. However, these predictions are based on the logical conclusions of logical assumptions. The arguments of Marks and the banks all make sense.

    How Could These Predictions Affect Retirement Plans?

    If these predictions come true, how could they affect you? Let’s start by answering for our younger readers.

    “I’m Not Retiring Until 2032—or later…”

    If you’re not retiring until the 2030s or later, then a poor market over the next decade is good!


    You know that old saying about making a profit: “Buy low, sell high?” If the market crashes, you’ll be purchasing your investments at lower-than-expected prices.

    If the predictions we present today are correct, then you’ll be buying low in the near future. And that’s good for you.

    But what if you’re older, or retiring sooner?

    Uh oh. I’m Retiring in 2022.

    Perhaps the worst-case scenario based on today’s predictions is that someone is looking to retire in the near future. They are retiring right before a (predicted) market correction.

    Take all market predictions with a grain of salt. But also ask yourself, “What if this prediction did come true? Would I be prepared?”

    Historic annual stock market and bond market returns (1928 to today) are 9.79% and 5.17%, respectively (nominal, not adjusted for inflation). Many retirees—especially those in the FIRE movement—base their retirement withdrawal plans on such returns. They cite the “Trinity Study,” which backtested various portfolio allocations and withdrawal strategies against historic market conditions.

    These historical backtests create the famous “4% Rule.” The “4% Rule” says that for the following retirement plan:

    • 30-year retirement period
    • Portfolio contains 50% stocks, 50% bonds

    …that a retiree could withdraw 4% of their funds in Year 1, adjust that withdrawal for inflation in all subsequent years, and they would not run out of money in their retirement.

    Thus, retirees pick a “FI number” that’s equal to 25 times their yearly spending (since 100% divided by 4% equals 25).

    But if Marks, JP Morgan, Schwab, etc are correct…then couldn’t that mess up the result from the Trinity Study? Could the 4% Rule be broken?

    Before we answer that question - how do we apply these experts’ predictions to recreate the Trinity Study?

    Does It Make Sense to Make Past Data Worse?

    One of the “worst-case” analyses we can run is to apply today’s market predictions to past actual market returns.

    Example: we’ll take a look at the retirement period from 1953 to 1983. We’ll shift the market returns of the first 10 years of that period based on today’s predictions. Since JP Morgan predicts stocks and bonds will underperform historic benchmarks by 5.8% and 3.4%, respectively, that’s how much we’d shift the historic returns in those first 10 years. Then the remaining 20 years of the period would remain unchanged.

    Would the 4% Rule work in this pessimistic past? Or do we have to pick a “lower” rule?

    How “low” (3.5%? 3.0%?) would we need to go in order to have a successful retirement.

    Then, let’s repeat that same example for all of the experts’ predictions (JP Morgan, Schwab, Kiplinger) and for all 30-year periods of real market data used in the Trinity Study.

    Then we ask: How often does the 4% Rule fail?

    Source of Prediction 4% Rule Fail Rate Earliest Year in 30-Year Retirements When 4% Rule Fails Lower "X% Rule" that results in 100% Retirement Success
    Historic Data 2 of 63 periods (3%) Year 28 3.8%
    JP Morgan 35 of 63 periods (56%) Year 15 2.3%
    Charles Schwab 32 of 63 periods (51%) Year 16 2.6%
    Kiplinger/Northern Trust Asset Management 21 of 63 periods (33%) Year 19 3.0%

    Applying JP Morgan Predictions to First 10 Years


    X-axis - years into retirement period

    Y-axis - dollars remaining in original $1 million portfolio

    Note how many of the retirement periods run out of money before 30 years!

    Actual Historical Data

    X-axis - years into retirement period

    Y-axis - dollars remaining in original $1 million portfolio

    Note that only two of these 30-year periods run out of money.

    How bad are the predictions? In all three cases, over a third of all historic 30-year periods would fail to support the 4% Rule. All three cases would have at least a period that failed before Year 20! And the best case is that you could feel secure if you reduced spending down to a 3% Rule.

    So - why are these results so bad?

    Why So Bad?

    How are these results so much worse than traditional 4% rule data? How can 10 years of “bad” returns (but heck, they’re still positive returns!) take our failure rate from near-zero all the way to over 50%?!

    It’s due to the so-called sequence of returns risk! Bad markets hurt more during the beginning of your retirement than they do at the end of your retirement. All of today’s simulations assume someone was just beginning their retirement now, and that they begin with 10 straight years of bad returns.

    What’s an alternative? If our test subject retired ten years ago, we’d likely see that their nest egg is WAY bigger today than it was in 2011 - even after 10 years of annual withdrawals! That’s how much the market has increased over the past decade! And since their nest egg is so large today, the next 10 years of (predicted) bad returns are not going to affect them as drastically.

    In other words, someone who retired in 2011 has felt the opposite of the sequence of returns risk. Their returns were sequenced dramatically in their favor, seeing large market increases when it helped them most—during the nascent years of their retirement.

    Be Honest – How Realistic Is This Analysis?

    This analysis is fun and useful, but not without its flaws.

    First, we’re forgetting the amusing lessons taught in every time-travel movie ever.

    You try to go back in time to change one thing, but you accidentally alter the very fabric of the future. You can’t just change one thing! If we’re changing the first 10 years of a given time period, then the following 20 years would surely be affected by our change. There’s no way to account for that secondary change—unless you have a time machine! And that makes “changing the past” a dubious practice.

    Second, we know that markets go through natural cycles. Periods of growth, periods of decline. The bull and the bear. Assuming that the experts are correct about our bleak next decade…so what?! It’s nothing more than the natural cycle. It’s expected! The market crash is coming…eventually. We’re coming off a historic 12-year period of stock market growth. A compound average growth rate for the next decade of only 2% would “balance out” the amazing returns we’ve recently seen.

    And third, there’s some context confusion at play. Why does it make sense to take 2022-2032 market predictions and apply them to past time periods? Trick question! It doesn’t make sense. It’s a useful heuristic, but not necessarily logical. Those past periods had their own contexts that determined their market returns. Leave 2022 predictions in 2022.

    So…Is This Analysis Worthwhile?

    Those are three big flaws. So - is this analysis worthwhile?!

    Definitely! This analysis has plenty of utility.

    Analysts frequently attempt to “bound a problem.” Before making a decision, someone wants to know the best-case (upper bound) and the worst-case (lower bound) that could result from that decision.

    Today’s analysis presents a reasonable lower bound for the next 10 years of retirement decisions. It’s pessimistic, sure. But within reason.

    Should This Idea Change Your Plans?!

    The real money question is - what should you do about this data?

    Our best recommendations are:

    • Discuss it with a trusted advisor or your financial planning
    • Compare this idea to other “predictions” that you’ve heard, and weigh them appropriately.
    • Take your time with investing decisions. One article shouldn’t change a decades’ long plan.

    Some experts are predicting below-average investment returns over the next 10 years. Other experts aren’t. Our job as future retirees is to weigh the data, determine an intelligent plan, and execute in our best interests.

    The opinions expressed in this article are for general information purposes only and are not intended to provide specific advice or recommendations about any investment product or security. This information is provided strictly as a means of education regarding the financial industry.

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    Jesse Cramer

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    Jesse is the founder of The Best Interest, a financial literacy company based in Rochester, NY, where he lives with his fiancée and their foster dogs.