It might be time to recalibrate your retirement expectations

*This content is brought to you by Brenthurst Wealth

By Sonia du Plessis*

Sonia du Plessis

Predicting the future might be a fool’s errand, but that doesn’t mean you shouldn’t be planning your financial future. Especially in the context of the highly anticipated global recession and how this may affect investment returns in the coming years.

It’s useful to look at historical market returns to get an idea of what we can expect. However, that seems less reliable given some of the fundamentals shifts we’ve seen in the past three years. Globalisation, for instance, has gone from a driving force of the world’s economy to a major hiccup as countries look inward to shore up their supply chains.

How this plays out and how the global economy recovers will be crucial for investors who are saving for their retirement. The big question is whether the models and projections we’ve relied on in the past are still relevant. Because if they’re not, then it’s time to relook at your portfolio to check that it can still deliver what your retirement plan demands.

Looking to past to plan for the future

Historical market returns are a simple tool we use to guide our expectations of what we can expect in the future.

Take a look at the S&P 500 and JSE All Share Index over the last 20 years:

 5 Years10 Years20 Years
S&P 500 Total Return USD10.4%12.8%9.8%
FTSE/JSE All Share Total Return ZAR0.8%1.6%10.4%
As of date 31/10/2022   
Source: Morningstar Direct   

The roughly 10% compound annual growth over 20 years has long been a fair assumption to use for your long-term projections when putting your retirement plan together.

And while it’s tempting to look at the higher returns achieved over the most recent five and 10 year periods, don’t be fooled into relying on those numbers for your long-term strategy.

What the experts predict for the next 10 years

If you want to get a more realistic picture of what we can expect in the coming years, look no further than the projections of some of the US’s largest fund managers. The likes of BlackRock, Grantham Mayo Van Otterloo and Morningstar Investment Management were recently asked to predict market returns for the next 10 years.

As you’d expect, the projections vary quite a bit between the various fund managers. The over-riding conclusion. however, is that returns are projected to be much lower over this period than the previous 10-year period.

 10-year expected nominal return from U.S. large-cap equities10-year average expected return from European / developed market large-cap equities10-year average expected return from emerging-markets large-cap equities
BlackRock7.1%8.3%  9.0%
Morningstar Investment Management5.8%8.8%10.1%
Research Affiliates  6.3%11.8%11.7%

* All return assumptions are nominal (non-inflation-adjusted).

What this means for your retirement planning

While it’s important to digest and understand these projections, this is not a signal to up-end your portfolio. Or, rather, the projections alone aren’t reason enough to have to re-evaluate your portfolio composition.

However, factors such as the domestic economy and inflation, and rising life expectancies could give you some cause to reassess and rebalance your retirement plan.

How you choose to do that, and the reasons for doing that, will differ from one person to the next. It’s unreasonable to expect that your circumstances, goals and ambitions are the same as your neighbour’s or a work colleague’s.

These very personal circumstances are at the heart of what your retirement plan is about and how it’s going to allow you to retire comfortably.

Reassessing your plan and your portfolio is something you definitely need to do from time to time. Preferably together with a financial advisor who understands your goals and is able to give you qualified advice on how best to respond to markets and global economic conditions.

Doing these occasional reassessments help give you the confidence that your plan is still on track, while giving you the room to tweak components that need to be recalibrated.

These are conversations that we expect to have with clients in the coming months as the world drags itself through the inevitable recession. In fact, those in the know say we’re already in the recession, which means that we’re also already making our way out of it. That’s unlikely to happen this year, and probably won’t happen next year but there are glimmers of hope that 2024 will see us emerge from this tough period.

By riding out the down cycle, we’re all likely to emerge better off once the up cycle kicks in again. Until then, it’s important not to panic and to keep your eyes on your long-term goals. And only if needed, make adjustments that can help you emerge stronger.

Brenthurst Wealth

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