Retirement Planning: The Lost Decade

On our last post, we focused on the social/emotional/psychological dimensions of retirement planning.  There is, of course, a “numbers” side to retirement planning.  It’s that part of the process that tells us (hopefully) what we might reasonably expect in terms of available assets and income throughout our golden years.  It’s a process that heavily relies on certain assumptions…including assumptions about investment returns. 
 
What if those assumptions, long regarded by some as unassailable truths, are no longer valid?  Over the last eighty-three years, U. S. large company stocks, as represented by the S&P 500 Index, have provided investors with an average annual return of approximately 9.8%.  U. S. Government bonds have provided an average annual return of just over five percent for the same period. 
 
Retirement planners make projections based on various combinations of stocks and bonds in clients’ portfolios.  Although they factor in the possibility of below average market performance, those averages still represent the foundation for those projections. 
 
Let’s look at the last decade:  January 1, 2000 through December 31, 2009.  Now less-than-fondly known as The Lost Decade, it is the first and only time that the stock market has actually declined for an entire calendar decade.  Said differently, the S&P 500 lost ground during that ten year period, a fact that stands in stark contrast to the notion of generating an average annual return of ten percent.
 
Volatility made matters worse!  Four of the ten years involved declines of 9%, 12%, 22%, and 37%; moreover, two additional years saw marginal gains of approximately five percent.
 
Will it happen again?  Will it happen in the current decade?  Although no one can predict the future, we hope and believe that a repeat performance isn’t likely.  Still…we have to entertain that possibility as we prepare for retirement. 
 
So the lesson is this…don’t plan to have “enough.”  Instead, make sure your plan indicates that you’ll have “more than enough” and that it takes into consideration that long-term averages may not hold.  Optimism is a beautiful thing, but it won’t pay the rent!

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