While the recent stimulus has bolstered the S&P 500, investors should be wary. A rough rule of thumb for future stock returns is to add 4% to what bonds yield currently. With the t10-year U.S. Treasury note hovering around 6/10 of a percent, you can do the math. Granted, it’s a simple exercise but perhaps indicative of the outlook going forward.


Even before the pandemic, Morningstar’s David Blanchett was warning retirees to expect a rough spot. For example, over the last 100 years, the United States has been the world’s preeminent capital market. With that tailwind, retirees with U.S. stocks and U.S. Treasuries in their portfolio could withdraw 4% annually, adjusted for inflation, for 30 years and not run out of money, ergo the 4% safe withdrawal rate rule. But the 4% rule only worked in the U.S. Italian and Japanese retirees, for example, could expect a safe withdrawal rate under 1%.


Regardless of country, the safe withdrawal rate excludes management fees, investment costs, and taxes. An asset management fee (1% or higher) lowers the safe withdrawal rate. Deferred annuities have even more onerous costs, often topping 2.5.%.


For the last century stocks have rewarded investors with double-digit gains but Blanchett’s research predicts significantly lower returns for the next 10 years. He sees negative returns for large-cap U.S. stocks with small U.S. stocks and international stocks notching slight gains, 1.45%, and 3.7%, respectively. Going out 20 years, returns bounce back, albeit slightly. Morningstar cautions 20-year returns for large US stocks to be less than 2.5% with small U.S. stocks and internationals returning less than 5%. Cheer up millennials, 20-plus years should see 5% to 7% returns among the three asset classes. Expecting history to repeat for your retirement is a fool’s errand. As such, retirement guru, Dr. Wade Pfau, argues for a lower initial withdrawal rate, 3%.


All it is not lost.


Most Americans believe we have a retirement crisis, but Morningstar surveys show 90 percent of current retirees are satisfied with their finances. Except for big-ticket rewards, like a fancy rig or an extended vacation, retirees generally spend less than when they worked. Blanchett also found necessary living expenses decline over time. A retirement withdrawal plan includes inflation-adjusted spending goals but that strategy could overstate spending. Also, humans are an adaptable species, and when investment returns are low, we can spend less or at least try. Blanchett and Pfau contend retirees could start with a higher initial withdrawal rate then scale back over time if necessary.


Retirees should prepare for longevity. For the average 65-year couple, there’s a 50% chance at least one will live to age 93. Consider lifetime income products like annuities, and delaying Social Security, when possible, is the best annuity available. The second best is a single premium immediate annuity. Avoid variable or indexed annuities, unless you like giving your money away.


You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by, masked, 2050 West County Highway 30A, M1 Suite 230.