Are you sure you’re on track for retirement?
BlackRock, the world's largest money manager, recently asked a group of Americans in defined-contribution plans, how they're fixed for retirement. Most said they're on track to kick back in comfort.
Are they crazy? If they are, so are some of the equally sanguine professionals running their pension funds.
The US has served up a big fat plate of economic optimism since President Donald Trump's election last November, with promises of tax cuts and infrastructure spending, which has helped the S&P 500 Index to soar.
Such optimism is largely a good thing. Without it, consumers might not make the big purchases that fuel so much of the economy. We might not work as hard at our jobs, assuming we'll make more money and get a promotion, so productivity would take a hit. We might not save as much if we figure everything's going to work out fine.
The dark side of optimism is overconfidence, a well-chronicled killer of wealth, memorably dubbed irrational exuberance by former US Federal Reserve chairman Alan Greenspan in the dot-com bubble of the late 1990s. Some academic studies suggest that the more information we get, the more confident we become in our decisions. Yet, with all the market noise, our decisions aren't always a lot better than those of people without all that information.
The survey commissioned by BlackRock suggests that many of those with money in workplace defined-contribution plans may be overconfident about future returns. The poll, of 1,002 plan participants with at least $5,000 saved in their current employer's plan, looked at how confident workers were about being able to enjoy a nice retirement. More than half of the participants said they were on course to “retire with the lifestyle they want” — 56 per cent, up from the annual survey's reading of 52 per cent last year. Nearly 70 per cent think they can save enough to meet their financial goals for retirement.
The problem is, many of these individual savers expect returns to be far higher in the future than financial firms do, perhaps because we often assume that what's happened in the recent past will continue in the future. Sixty-six per cent of savers in the survey expect returns in the next decade to track past performance. Even-higher returns than in the past are expected by 17 per cent. Almost two-thirds of workers said they didn't know that Wall Street expects “notably lower” market returns in the future.
In fact, stock and bond returns could be half of what Americans have grown used to in recent decades, according to consensus forecasts of 35 companies in the financial industry that were gathered by Horizon Actuarial. Maybe workplace retirement savings plans should come with those reminders that fund companies have on ads touting their products' returns: past performance is no guarantee of future results.
The workers' views mostly reflected those of the 200 plan sponsors surveyed for the report. Seventy per cent of the benefit and finance professionals at plan sponsors said that over the next ten years, the annualised return for US stocks will mirror the past or be higher. Even more (78 per cent) expected bond returns to be around the same or higher than in previous years.
Even taking into account the high margin of error for this smaller group — at +/- 6.9 per cent — that's a lot of optimism for the pros.
In the shorter term, a recent survey by brokerage firm Edward Jones of 1,105 people, done between January 19 and January 22, showed more optimism than pessimism about the Trump administration's impact on their strategy for retirement savings. Forty-two per cent of those with investments think the new administration will improve their portfolio this year; 27 per cent think it will hurt their portfolio.
The BlackRock survey results contrast with the poor retirement prospects of many Americans. Data from US Census Bureau researchers recently showed that only about one-third of employees save in a pension plan at all. Another survey, of 800 people 25 and older, by phone, found enough pessimism to conclude that “Americans are united in their anxiety about their economic security in retirement”. In that poll, commissioned by the National Institute on Retirement Security, more than two-thirds of people fear that economic conditions might hurt their chances for a secure retirement. If you aren't saving enough to fund the retirement you want, perhaps because you're too optimistic about future returns, the time to act is now, if not yesterday. The sooner you realise it, the more time you have to adjust course without making radical lifestyle changes.
The tragedy is when the revelation that your diligent saving was at too low a rate comes late in your career, when you may not have the earning potential or years left in the workforce to make up the shortfall.
Consciously living below your means is one way to fend off that prospect, said financial planner Michael Kitces, author of the Nerd's Eye View blog. The fight here, he said, is against “lifestyle creep”. Even clients who've had great careers struggle to get to retirement, Kitces noted. As their income grows, their lifestyle grows with it, and they never get ahead. Many of us are just too casual about the decision to introduce new expenses into our lives, and it gets harder to shed those nice things later. Kitces practises what he preaches, by the way.
“I don't know of anyone who has bought a new car and then went back and bought a used car after that,” he said.
So be of good cheer. But not too good.