The Error-Proof Portfolio: Get Realistic About Future Market Returns
It's better to enjoy an upside surprise than risk a shortfall come retirement.
Even if your retirement looms far off into the future, it's worthwhile to think about the nitty-gritty of actually getting there, such as how much you have now, how much you'll need, and how to bridge the gap between the two. If it turns out you're way off and need to save more or recalibrate your retirement date, it's better to know that sooner rather than later.
Essential to that exercise, whether you're relying on a financial advisor, a sophisticated online calculator, or the good old-fashioned "rule of 72," is making sure that you have reasonable return expectations for the asset classes that you hold.
Unfortunately, many retirement plans and pensions are using overly rosy projections for asset-class returns, as Research Affiliates' Rob Arnott noted in a recent commentary. And a lot of individual investors are apt to be making a similar mistake. They may be anchoring on the oft-repeated conventional wisdom that stocks return about 10% per year, or they may be relying on a tool that's using outdated assumptions.