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If Vanguard Is Right, You’ll Need to Save More For Retirement

Courtesy of Pam Martens

Broken Piggy BankVanguard is one of the largest mutual fund companies in the world with 20 million investors and approximately $4.5 trillion in global assets under management as of September 30, 2017, according to its website. When it expounds on the outlook for the stock market, people tend to listen closely.

Yesterday, Vanguard issued its economic and stock market outlook for the medium term, writing: “For 2018 and beyond, our investment outlook is modest, at best. Elevated valuations, low volatility, and secularly low interest rates are unlikely to be allies for robust financial market returns over the next five years.”

Exactly how “modest” does it expect stock market returns to be over the medium term? The report goes on to define “modest” as follows:

“Based on our ‘fair-value’ stock valuation metrics, the medium-run outlook for global equities has deteriorated a bit and is now centered in the 4% – 6% range. Expected returns for the U.S. stock market are lower than those for non-U.S. markets, underscoring the benefits of global equity strategies in the face of lower expected returns.”

If your retirement savings strategy has factored in an annualized stock market return of 7 percent or higher and Vanguard is right about the potential for a return of 4 to 6 percent, those planning to retire in less than 10 years will need to either save more for retirement or extend out the date of retirement.

This reality may already be setting in among millions of pre-retirees as they watch friends and family members who have already retired tighten their belts as a result of an unprecedented, prolonged low rate of return for fixed income investors. Retirees who were earning 4 and 5 percent on U.S. Treasury securities or Certificates of Deposit prior to the financial crash in 2008 have seen their interest income cut by half or more since the crisis.

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