Contributed by Lewis J. Walker, CFP®
The Dow Jones Industrial Average closed 3rd quarter 2016 at 18,308, the S&P 500 Index at 2,168. Writing in Forbes magazine (10/4/16), investment strategist and columnist William Baldwin offered his forecast for 2036, opining that “stocks will do fairly well.” His targets: Dow at 43,000; S&P 500, 5,000, in 20 years.
Like most musings about the future, the scenario is a mixture of good and bad news. Take growing older. In 20 years today’s 60 year old contemplating retirement could be a healthy, or an impaired, 80 year old; today’s 67 year old retiree, 87. A 70 year old married male who wonders if he will make 90 has to reckon with the statistical odds that somewhere along the way his wife may be a widow, as 80% of men leave the planet before their wives. Will her financial independence be endangered?
For someone 50, in 20 short years you will be 70, potentially in the “go-go” phase of an active retirement. What do you have to plan for in between now and then? Educate children? Finance weddings? Take care of aging parents or a special needs child? Focus on a productive finish to your career? Develop a growth and continuity plan for your business? Build savings? Work out and improve health? Hone your bucket list?
A December 2015 study from the Transamerica Center for Retirement Studies indicated the top 8 things workers 50 or older fear about retirement: Outliving savings and investments; declining health requiring long term care; Social Security benefits reduced or eliminated; lack of access to adequate and affordable health care; cognitive decline, dementia, Alzheimer’s; finding meaningful ways to spend time and stay involved; being laid off/not being able to “retire on my own terms”; feeling isolated and alone.
The last three fears touch on meaning and purpose. All eight hinge on achieving financial freedom. And financial independence depends on defined goals and objectives and the appropriate investment policy. So is Dow 43,000 good news? Perhaps, yes. Perhaps, no.
Writer Baldwin indicates that achieving Dow 43,000 presupposes a return lower than that of the past, price gains plus dividends minus inflation of 6.5% annually for the past century, even more in recent decades. Baldwin blends a 5% total return on stocks, a 2% dividend yield, and 1.4% inflation (which the Coach sees as low, BTW) and you get Dow 43,000 and S&P 5,000 in 20 years. He notes, “Today’s youngsters will have to work harder and longer before they take up golf full-time.” We may see more pre-retirees working past full retirement age under Social Security into their 70s, both for financial purposes so they can retire “on their own terms,” or because they like being involved and playing golf seven days a week gets boring.
Baldwin points out that there are more bullish forecasts for equities from respected sources with nominal returns up to 7.5% before inflation and taxation. Schwab expects inflation at 1.5%, nominal returns on large cap U.S. stocks at 6.9% and 7.5% on small companies.
None of this figures in taxes, at ordinary income rates on distributions from retirement plans (except for Roth plans) and potential capital gains on personal holdings. Some politicians are pushing for higher tax rates to finance “government investments.” When a politician touts “investments,” that’s code for “tax and spend.” Tax strategies matter!
Social Security will be there, if they have to print the money. That means higher inflation, potentially. Social Security planning strategies matter!
Over 20 years on the way to Dow 43,000 you will see pullbacks and bear markets. That means opportunities for workers to add to stocks when they are on sale. Retirees need “bucket strategies” to deal with market volatility so as to preserve their “paycheck fund” long term and minimize the risk of your bank balance going to zero before your heart rate does. Asset allocation strategies matter!
Advisors can apply software to estimate the probability of meeting financial independence goals. But the best software, along with “wisdomware” in the brain of a seasoned advisor, tells you nothing about sequence of returns. Statistical outputs are based on past performance with caveats that past performance cannot be taken as a projection of future returns. Retirement income scenarios are merely snapshots in time and “standard deviation” is a fact of life. The only question is how far will actual results deviate from assumptions, plus or minus?
Nevertheless, looking at probabilities beats flying blind. Planning matters!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. This information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. There is no guarantee that any opinion or suggested possibility will happen.