Throughout market history, there have been certain segments of the investor population that have unintentionally benefited from or been hurt by pure circumstance. And the financial markets have done it again, notably delivering a significant blow to those relying on their nest egg to produce income throughout retirement. These retirees, by no collective fault of their own, have become victims of two market conditions during the past seven or eight years: Lower than normal economic growth and therein stock market underperformance, and lower than normal interest rates.
Challenging Conditions For Retirees
Since the downturn of 2008, global economic growth has been below average at best. Though a decent segment of economies have reported increasing gross domestic product (GDP), the rate of expansion is dull and incapable of stimulating investment returns typical of equity markets. Outside of the United States, conditions are less favorable than within the world’s largest economy. Emerging countries have suffered from a strong dollar, graft, and weak global demand. Europe has been plagued by the continuous plight of the Eurozone and constant austerity battles. And in the United States, global volatility mixed with nonstop political squabbling and gridlock have caused substantial strain. The result is a world still struggling to attain stability, and we are a far cry away from performance resembling anything near what retirees planned on.
In parallel, central banks throughout the world have kept interest rates at or near record lows in an effort to combat the lackluster growth outlined above. From Israel to Japan to the United States, interest rates have spent the last seven years close to zero. And in countries such as Switzerland and Japan, central banks have taken the unprecedented step of pushing interest rates into negative territory. The consequence is a fixed income market yielding such low interest payments that retirees have had to adjust expenses downward and moreover question their entire approach to investing and retirement.
Escaping The Retirement Pinch
Being stuck in the pinch between slow growth and low interest rates has left retirees confounded and financially frustrated. This economic environment has now persisted for a protracted period—retirees needing income and moderate risk from their investments have had to endure nearly eight years of worry and grief.
Yet there is an answer to this conundrum. First, retirees caught in the pinch must recognize the risk in cutting expenses. Less spending only adds to the problem of slow economic growth, and consequently, will contribute to the persistence of low interest rates. Second, retirees must recognize the error in taking additional portfolio risk. Any shift of asset allocation outside the desired risk tolerance of a retiree is a mistake in any environment and will ultimately cause issues.
Fortunately for retirees, escaping the pinch just takes a little perspective. Retirement is a long-term journey, lasting more than even the current eight-year-and-counting market cycle. When conceiving of their finances, retirees should necessarily assume there will be periods of pinch, as well as periods of prosperity. And during both, they must resist the impulse to react.
The Bottom Line
As humans, we always wish for things to be neat and tidy, to sail smoothly through life. We want to drive without traffic, love without interruption, and retire with eternal financial security. But life, like the markets, is messy. The world is filled with external factors that impact our internal situations, and we hate this. Our brains naturally look for ground to stand on anytime we feel groundless; being out of control hits us on a deep primal level and we innately struggle to find something more solid. However, running into traffic does not mean we are bad drivers. Questioning our relationships does not mean our love is less heartfelt. And feeling the retirement pinch does not imply our approach is faulty. These bumpy stretches are part of the journey, and it would be irrational to expect an ideal ride at every moment.
Uncertainty and lack of control are actually good signs — they are normal and therefore signify progress. As humans and investors, we should want things to be messy. Messy is actually the desired outcome. Neat and tidy only occurs during a great boom or bust — both of which are not healthy for ourselves or our markets. So to the retiree feeling the pinch: understand that while the current economic circumstances are far from perfect, perfection was never the goal. Embrace the messiness of the pinch. Stay long-term, stick to your process, be more patient than you ever thought possible, and know that markets are healthiest when disorderly and disjointed.