Retirement’s New Reality (Pt. 1) — 4 Common Obstacles Facing Retirement

&l;p&g;Retirement has changed for many people, and the growth in the stock market we&a;rsquo;ve experienced since 1980 may be gone for good. Understanding why the stock market increased so much from 1980 to 1999&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;1&l;/sup&g;&l;/a&g; &a;mdash; why it averaged much less with more volatility since then and why the government not only can&a;rsquo;t help you but also may be forced to make retirement planning harder than it already is &a;mdash; can help explain the new reality for your retirement.

&l;img class=&q;size-large wp-image-603&q; src=&q;×800.jpg?width=960&q; alt=&q;&q; data-height=&q;800&q; data-width=&q;1200&q;&g; Understanding why the stock market increased so much from 1980 to 1999 can help explain the new reality for your retirement.

&l;strong&g;Four Common Obstacles Facing Retirement:&l;/strong&g;&l;strong&g;&a;nbsp;&l;/strong&g;

&l;strong&g;1.&a;nbsp;&l;/strong&g;&l;strong&g;The changing landscape&l;/strong&g;&l;strong&g;&a;nbsp;&l;/strong&g;

For our parents, the main retirement vehicles were pensions, subsidized with Social Security, but, as we all know, most pension plans are a thing of the past.

As a result, the ERISA act of 1974 was established, with section 401(k) being added to the tax code in 1978.&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;2&l;/sup&g;&l;/a&g; Employees (baby boomers) were now contributing to their own retirement with some of their employers matching portions of the contributions, causing the DJIA to rise over 1,000% from 1980 to 1999.&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;3&l;/sup&g;&l;/a&g;

It&a;rsquo;s no big mystery &a;mdash; simply supply and demand. Since more people were putting in than taking out, the supply was limited, and prices increased. This rise in the stock market more than doubled the previous 90 years. When people talk about the stock market&a;rsquo;s historical average of around 8%,&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;4&l;/sup&g;&l;/a&g; the majority of this return is based on the growth during this 20-year span; this is really the outlier for growth compared to any other 20-year period in history.

From 2000 to 2017, the stock market grew less than 100% more than the previous 20 years.&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;5&l;/sup&g;&l;/a&g; So, why the limited growth but increased market volatility we&a;rsquo;ve been experiencing as compared to the previous 20 years? The answer is simple &a;mdash; baby boomers are retiring.

But how does this affect the market? The answer brings us to our second obstacle:

&l;strong&g;2. The total value of 401(k) plans reaching over $5.1 trillion in 2015&l;/strong&g;

In comparison to the total U.S. stock market capitalization of $26.1 trillion, almost $1 in $5 invested was in retirement funds.&l;sup&g;&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;7&l;/a&g;&l;/sup&g; As mentioned previously, this is due in part because pension funds are chiefly a thing of the past. In 2011, for the first time in history, the largest segment of the American population, baby boomers, started retiring at a rate of 10,000 per day and will continue to do so for the next 20 years.&l;sup&g;&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;8&l;/a&g;&l;/sup&g;

The alarming part of this fact is the first set of boomers started reaching age 70 &a;frac12; in 2016, triggering RMDs (required minimum distributions). Whether they want to or not, Uncle Sam demands them to sell their holdings and withdraw the funds on their qualified assets every year on a withdrawal schedule until their retirement funds are depleted, or they pass away.

The inheritance of these funds is a topic for another article, but this signifies the largest forced distribution or transfer of wealth in history. Once they pay their taxes, they can spend, save, or reinvest their wealth, but at a lower value than the withdrawal amount because of taxes paid.

The boomer population is not only taking the forced withdrawals, but they are also no longer contributing to the market, and the effects of this double whammy are apparent with the recent market volatility.

&l;strong&g;3. Falling interest rates&l;/strong&g;&l;strong&g;&a;nbsp;&l;/strong&g;

I remember being in high school in the early &a;lsquo;80s and my dad getting a CD for almost 13%. Ten years later, when it came due to roll it over, he was upset to discover the bank wouldn&a;rsquo;t give him more than 7.5%.

What we all wouldn&a;rsquo;t give to get a 7.5% rate of return backed by the U.S. government today. But, it is unlikely to happen and here&a;rsquo;s why.

In the &a;lsquo;80s, if you needed $20,000 per year to live on, and you had retirement savings in the amount of $200,000, it was very realistic to earn a 10% rate of return with no market risk and backed by the FDIC. The trade-off was high inflation.

With the 10-year Treasury rate hovering around 3% today, you would need retirement savings in excess of three times the savings to generate the same income.&l;sup&g;&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;9&l;/a&g;&l;/sup&g; As a result, these low interest rates have been propping up the market, since pre-retirees and retirees have no place to put their money to generate enough income for retirement. The trade-off is more risk of their retirement savings.

How long will interest rates remain at this level? Remember, Japan has operated in a 0% interest rate environment for over 20 years now.&l;sup&g;&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;10&l;/a&g;&l;/sup&g; So, we could have interest rates at a very low level for years. The only reason to raise interest rates is to fight inflation. But the main reason Uncle Sam has no incentive to raise rates is obstacle four.

&l;strong&g;4. The national debt&l;/strong&g;

We aren&a;rsquo;t just talking about consumer, mortgage, and student loan debt, in which most rates are adjustable, but the nearly $21 trillion in national debt.&l;sup&g;&l;a href=&q;; target=&q;_blank&q; rel=&q;nofollow&q; &g;11&l;/a&g;&l;/sup&g; If the government is only paying 1% to service the national debt, that&a;rsquo;s $210 billion.

Imagine if CDs were paying 10% again, meaning the government would pay 10% to service the debt, or over $2.1 trillion a year. That&a;rsquo;s over two-thirds of our annual tax revenue/budget, which is not sustainable. Does the government have more of a vested interest in raising rates or keeping them low?

Using a hypothetical example, let&a;rsquo;s correlate this to the average person&a;rsquo;s biggest expense in retirement: their taxes. If you have a 10% return and owe 25% in taxes, your next return on investment is 7.5%. In trying to figure out how to repay the national debt, do you predict taxes will go up or down? Many retirees have not thought about this expense or strategies for reducing the tax on their retirement income. Instead, they are increasing their investment risk in an attempt to chase higher returns at the peril of losing their principal to cover this cost.

There are a few simple steps to take to help assist you in these volatile times. To discover these solutions, check back for part two!

&l;em&g;This content was brought to you by Impact PartnersVoice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual&a;rsquo;s situation. EGSI Investment Management does not offer legal or tax advice. Please consult with your attorney, accountant, and/or tax advisor for advice concerning your particular circumstances. Investment advisory services offered through EGSI Investment Management, a Registered Investment Advisor. &l;/em&g;&l;em&g;Insurance and annuities offered through EGSI Financial Services Inc., OH License #1020619. DT&l;/em&g;&l;em&g;487392-0519&l;/em&g;&l;/p&g;