Here’s How Much Later You’d Retire if Market Returns Drop

Retirement investors can expect their investments will generate smaller returns over the next 20 years compared with what they had received in the past three decades, according to a study by the McKinsey Global Institute. The decline in future returns could be attributed to sluggish economy, inflation, corporate profit pressures, and potentially rising interest rates, the study says.

What’s the impact to future retirement plans in such a scenario? The study projects that the decreased returns mean individuals would have to work longer or double their savings in order to grow their portfolio to that of an equivalent earning a 7% return (generally used as a long-term historic average for a portfolio 50% invested in stocks and 50% invested in bonds).

Here’s the complete write-up from the Wall Street Journal:

Chances are good that investment returns will be lower over the next two decades than during the past 30 years, and that will have a tangible impact on future generations of retirees, according to new research by the McKinsey Global Institute.
Slow economic growth, rising inflation, corporate profit pressures, and potentially rising interest rates all challenge the notion that U.S. stocks and bonds will keep earning the same rate of return as they have in recent decades.
“We’ve been in a super-bull market,” said Richard Dobbs, a director at the advisory firm and lead author of the report. “Investors need to reset their expectations for returns that will be two to four [percentage points] lower in real terms.”
How much will that pressure investors?
According to McKinsey’s calculations, a 30-year-old who expects to receive annual real returns of 4.5% on a mixed portfolio of stocks and bonds will have to work seven years longer to earn the same amount for retirement as a portfolio with expected returns of 6.5%. Or double their savings.
That’s based on estimates that U.S. real equity returns will average 4% to 5% and fixed-income real returns will be between 0% and 1%. Even if growth picks up faster than McKinsey expects, the researchers forecast returns will lag the average of the past 30 years.
It’s not just individuals investors that will get hit. U.S. endowments as a whole can expect to earn $13 to $19 billion less in yearly returns, according to Mr. Dobbs. Local and state employee pension funds, 90% of which are underfunded, could see deficits grow from $1 trillion currently to between $2 and $3 trillion.
All of these are just projections, but they underscore that the possibility of lower returns will have a significant impact on investors. That adds to the chorus of warnings from firms like BlackRock and Fidelity Investments, who are increasingly saying Americans aren’t saving enough for retirement.