By: Dan Weil
April 8, 2014
Wall Street Journal columnist Brett Arends finds some troubling data in a new retirement investment report prepared by money-management firm GMO.
First there’s this. Based on standard industry assumptions about returns and volatility, you can expect that $100,000 invested in a typical retirement account when you are 25 will grow to about $1.2 million, adjusted for inflation, by the time you’re 65.
But that’s an average. The result will be less than $750,000 more than half the time and less than $350,000 a lot of the time, according to GMO, Arends writes.
That makes the $1.2 million figure useless for planning purposes, he says.
Many financial planners look at historical returns to determine future returns, but that’s problematic, Arends writes.
Since 1928, the S&P 500 has averaged an annual return of 9.6 percent and the 10-year Treasury note 5 percent, according to New York University’s business school.
But that 5 percent is now a pipe dream with the 10-year yield at 2.73 percent, Ben Inker, GMO’s co-head of asset allocation, tells Arends.
And given the lofty levels of price-earnings ratios using 10 years of earnings, stocks may struggle, Arends says.
“This is a dangerous time to be close to retirement,” Inker says.
As for stocks, the S&P 500 has gone without a 10 percent correction since October 2011. That’s far beyond the 18-month average period between such corrections since 1946, as calculated by S&P Capital IQ.
But an adjustment will come, experts say. “If there’s one guarantee on Wall Street, it’s that while a correction may be delayed, they will never be repealed,” Sam Stovall, chief equity strategist at S&P Capital IQ, told Newsmax’s Private Opportunities newsletter.
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