WE’RE IN A WORLD of low investment returns. Bond yields are tiny—and bond investors can’t reasonably expect to earn anything more than those yields. Money market funds, savings accounts and other cash investments are even worse.
Meanwhile, economic growth is muted and stock valuations are rich, suggesting lackluster stock returns. My best guess: Over the next decade, a globally diversified stock portfolio might return 5% to 6% a year and a mix of high-quality corporate and government bonds could clock 2% to 2½%, while U.S. inflation runs at 1½% to 2%. And remember, those returns are before investment costs and taxes.
My low expectations don’t put me on the lunatic fringe: Many observers now expect modest gains from the financial markets. Vanguard Group founder John Bogle recently told The Wall Street Journal that, over the next decade, stock investors would be lucky to earn 2% a year after costs.
Problem is, a somewhat rosier view is baked into the financial calculators used by many investors. For instance, for its FuturePath and retirement income calculators, T. Rowe Price assumes stocks will return 4.9% a year more than inflation, bonds 2.23% and short-term investments 1.38%. (To T. Rowe Price’s credit, it also adjusts for potential expenses.)
The retirement planner at Dinkytown.net allows you to override its return assumptions. But if you don’t—and I suspect that would be most users—the calculator assumes your investments earn a generous 7% a year before retirement and a more reasonable 4% after retirement, while inflation runs at 2.9%. The obvious danger: Investors rely on those assumptions—and end up spending too much and saving too little.