Washington - The projections are in and Wall Street analysts
have pretty low expectations for how the stock market will perform this year.
A roundup of the figures
shows that strategists project the Standard & Poor's 500-stock index will
gain 4 percent on average in 2017 - the lowest expected annual gain for the
stock market since 2005, according to an analysis by Bespoke Investment Group.
While it's impossible to
predict exactly what the stock market will do, investing pros over the past
several months have been reducing their expectations for what they think the
stock market will return, not only in the next year, but potentially over the
next couple of decades.
If those gloomier outlooks
hold true, workers saving for retirement today may not get as much from their
portfolios in the long term as previous generations did. Advisers say that
millennials, who are decades away from retirement, will need to save more - in
some cases twice as much as they were saving before - to make up the
difference.
"Realistically, most
people who are reading this article probably should expect to work a little bit
longer than their parents did," said Tim Koller, a partner with the
consulting firm McKinsey.
Even a small drop in market
performance can make a huge difference.
If average annual stock
market returns fall by two percentage points over the next couple of decades, a
25-year-old saving for retirement would need to more than double how much she
is saving to make up the shortfall, according to an analysis by the Employee
Benefit Research Institute.
The pessimistic predictions
come at a time when younger workers are already struggling to save for
retirement while they pay off student loans, face high child-care costs or deal
with rising rent. But firms such as McKinsey predict that US stock markets may
not deliver as much as they have in years past, putting more pressure on
millennials to save as much as they can. US stock markets gained 7.9 percent
a year on average between 1985 and 2014, a track record that Koller and other
economists say is unlikely to be repeated.
Read also: Millennials aren't cheap, they're thrifty
The reason for the dismal
view is that stock market gains were so robust over the past 30 years that it
will be pretty tough for the stock market to match those returns going forward,
some economists say. Stocks have grown pricier as the market has climbed
higher, giving them less room to grow.
If the economy grows more
slowly, that could also drag down stock market returns, Koller said. The US population
is not growing as quickly as it did, which could lead to fewer workers and
reduce the amount of services and goods that companies can produce. At the same
time, more people are retiring than are entering the workforce, which means
that the number of people selling stocks to pay for living expenses is
increasing faster than the number of people who are buying stocks in their
retirement accounts.
GMO, a financial firm that
accurately predicted the previous two market downturns, announced in September
that it expects US stocks to fall by an average 3.6 percent a year for the next
seven years. John Bogle, who founded the investment firm Vanguard, said market
returns will "inevitably" be lower over the next decade.
Up for debate
Exactly how much millennials
should be saving for retirement in light of these lower projections is up for
debate. Many financial advisers recommend that workers aim to save between 10
and 15 percent of their pay. But other experts say millennials should save much
more, up to nearly a quarter of their income, to avoid running out of money in
old age if stock market returns fall.
For instance, the personal
finance website NerdWallet recently estimated that millennials need to save 22
percent of their paychecks to have enough cash in retirement if stock market
gains are weaker going forward. The study assumed that workers would not receive
any income from Social Security, in response to a survey from the Pew Research
Center finding that 51
percent of millennials assume the entitlement program won't be there for them
when they retire.
But if young workers can't
sock away that much, the bottom line is to start saving, and investing, as soon
as possible, financial advisers say.
Workers who aren't saving as
much as they want to can aim to get there over time by having their
contribution rate increase automatically by one or two percentage points each
year, financial advisers say. And taking advantage of matching contributions
from an employer can help. For instance, a worker can get to a target 15
percent savings rate if he contributes 12 percent of pay and receives a 3
percent match from his employer.
"The first step is
usually just to do something," said Brian Nelson Ford, a financial well
being executive for SunTrust Bank who recommends that young people aim to save
at least 15 percent of their pay. "Taking action and taking control of what
they can control is vital."
WASHINGTON POST