Opinion: The Retirement Conveyor Belt – MarketWatch
Do you feel like you’re on a retirement treadmill, working harder and harder and falling further and further behind?
You’re not alone. Financial markets have played an incredibly cruel joke over the past two decades on retirees and near retirees.
That’s because what made stocks go up is also what kept your portfolios from going that far in retirement. The markets give and take back at the same time.
That “thing” that both played a big part in the recent extraordinary performance of the stock market and kept your retirement portfolio that way is falling interest rates. To illustrate, we have to go through the thought experiment of imagining where retirees would be today if interest rates had not fallen in recent years.
Let’s focus on the stock market first. Recall that earnings multiples increase as interest rates fall, because these lower rates increase the present value of future corporate earnings. In 2008, for example, investment grade corporate bonds returned 6.4% (according to Moody’s AAA corporate bond yield index). Today, they report 2.8%, less than half.
Indeed, during that 13-year period, the Cyclically Adjusted Price / Earnings Ratio (CAPE) more than doubled from 16.4 to 38.0. While the CAPE ratio had remained constant during this period, the S&P 500 SPX,
today would trade below 1,900 from its current level of almost 4,400.
Granted, falling interest rates aren’t the only cause of the CAPE ratio’s more than doubling since 2008. But you get the point: you owe a lot of debt to falling interest rates for appreciation. your equity holdings. over the past 13 years.
Annuity payment rate
As for the other half of the equation, let’s focus on annuity payout rates. They aren’t the only way to illustrate how far your portfolio will go in retirement, but they are one of the standard ways researchers use to make historical comparisons.
As the accompanying chart shows, annuity payouts have been falling steadily over the past 13 years, almost at the same rate as yields on quality bonds. In 2008, for example, a 65-year-old single man with $ 100,000 could have purchased an annuity with a guaranteed monthly payment of about $ 675. Today, with $ 100,000, he could only buy an annuity of $ 460 per month.
To buy an annuity today with as good a payout as it was in 2008, a 65-year-old single man would need almost $ 150,000.
Obviously, annuity payout rates, bond yields and the stock market are in rough equilibrium. This suggests that retirees and near retirees should be careful what they want. They may say that they want the Federal Reserve to continue to support the stock market with ever easier monetary policy, but it is not clear that they will end up doing better even if the Fed adapts and the stock market reacts accordingly.
There is a silver lining to this rough balance, however: Higher interest rates are not as bad as they might otherwise appear, even if they push the stock market down. This is because the reduced value of your stock portfolio would go further in retirement.
Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment bulletins that pay a fixed fee to be audited. He can be contacted at [email protected].