The current investment environment makes retirement nest eggs less effective than many retirees had hoped. Understanding potential retirement income shortfalls is a critical first step. The hard part–developing a plan to avoid that shortfall–comes next.
$1.5 million. To most investors, that sounds like a big number. In fact, more than 75% of American workers see that as more than enough money to live comfortably in retirement.1 The critical question: are the vast majority of American workers right?
The answer relies on the relatively simple math of figuring out how much income will be generated by each investor’s nest egg. Unfortunately, the reality of the current investment environment is that generating income is an increasingly difficult challenge.
Why is this the case? Let’s start with the following chart:
Source: FactSet, Standard & Poor’s
As interest rates have fallen, bond yields have fallen along with them. The yield on the 10-year Treasury, for example, has fallen nearly 80% over the last 25 years.
Investors looking to find income beyond bonds will find that search difficult. Consider, for example, that the dividend yield for the S&P 500 hasn’t exceeded 4% since the mid-1980s.
The implications may not be fully and explicitly understood by investors. Let’s revisit the income generated over time by the $1.5 million nest egg viewed as adequate by most Americans, using the 10-year Treasury at specific points in time as a barometer:
The difficult truth is that the income potential of many nest eggs has been dramatically reduced.
While investors will certainly continue to seek ways to generate more income or adjust spending expectations for their golden years, for many the path to addressing this issue will simply require saving more.
It is likely that many investors sense this already. Though 75% of Americans view $1.5 million as enough savings, only 21% feel very confident that they will have the assets needed to live comfortably in retirement.5
Understanding the potential retirement income shortfall is a critical first step. The hard part–developing a plan to avoid that shortfall–comes next.
1 Employee Benefit Research Institute, 2016 Retirement Confidence Survey.
2 Nominal dollar amounts, not indexed for inflation.
3 Based on monthly 10-year Treasury yield data from August 1991-August 2016.
4 Based on 10-year Treasury yield of 2.40% on March 31, 2017.
5 Employee Benefit Research Institute, 2016 Retirement Confidence Survey.
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