Vanguard and Fidelity See Stocks Returning About 5.8% a Year, Far Below the 10% Many Retirees Plan On
A retiree with $2 million could have about $1.4 million less after 10 years if stocks earn the roughly 5.8% a year Vanguard and Fidelity now forecast rather than 10%, a 24/7 Wall St. analysis found.
Vanguard’s latest Capital Markets Model forecast, based on a Sept. 30 run, projects U.S. stocks will return 4.8% to 6.8% a year on average over the next decade.
Fidelity’s 20-year capital market assumptions put U.S. stock returns at 5.8% a year, or about 3.2% after inflation, Yahoo Finance reported. Both are well below the S&P 500’s historical average of about 10% a year since it launched in 1957.
Fidelity said its expectation for U.S. stocks is “below the long-term average due to lower growth potential and higher starting valuations.”
The firm still expects stocks to outperform bonds, “but by a smaller margin relative to history,” with emerging markets generating the highest returns.
The forecasts land after a decade of outsized gains. An S&P 500 fund returned 15.2% a year with dividends reinvested over the past 10 years, 24/7 Wall St. reported, meaning both firms are calling for less than half that pace.
What the Gap Means in Dollars
The outlet ran the numbers for a 66-year-old couple with $2 million in savings who draw $62,000 a year from their portfolio, with withdrawals rising 2.5% a year.
At 5.8%, the account would hold about $2,566,012 at age 76. At 10%, it would reach $3,992,932, a gap of $1,426,920. At the top of Vanguard’s range, 6.8%, the balance would be about $2,859,508.
The money would still last for decades under the common 4% withdrawal rule, the analysis found, but the cushion would be far thinner than many savers expect.
Vanguard also projects U.S. bonds will return 5.1% to 6.1% a year, close to its stock forecast. That narrows the reward investors get for taking on stock-market risk.
The forecasts are not guarantees. Vanguard’s stock range moved up 0.6 percentage point in a single quarter, from 4.2% to 6.2% as of June 30, and neither firm predicts the order in which good and bad years will arrive.
“While the stock market’s trajectory is relatively unpredictable, it is possible that if its returns fall below historical averages, savers could be surprised by the pace of their retirement cushion’s growth,” said Brianna Rodgers, director of investor education at Madison Trust Company, in comments to Yahoo Finance.
“Those who are approaching retirement may consider postponing their retirement altogether if returns are markedly lower than anticipated,” Rodgers said.
Higher starting valuations, lower growth potential and frothy market conditions are among the reasons for the modest outlooks, a separate Yahoo Finance report said.
Yahoo Finance’s guidance urges savers to review their contribution rates and retirement timelines, and not to overlook income such as Social Security, rather than building a plan around best-case returns.
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