“If you’re investing for a lifetime – and you should be, saving for retirement and educating your kids along the way – if you’re 20 years old now, you should be thinking 60 or 65 years as your time horizon.” – John Bogle
This week’s edition of scary retirement statistics comes from a Wells Fargo survey of middle-income earners to get their take on retirement and investing issues.
Here are the grim results:
Thirty seven percent of respondents said they planned to work until they die. So they’re not even planning on retiring ever. Thirty four percent say 80 is their new retirement age.
Fifty nine percent of these people said paying day-to-day bills is their top financial concern. Only 30% have a retirement plan in place.
And the craziest statistic is that 75% said they aren’t confident that the stock market is a good place to invest. Even worse, 80% of those in their 20s said they aren’t confident investing in stocks.
I was shocked by these numbers, especially since stocks have had one of their best runs in history over the past five years. A sub par economic recovery has masked this performance for many.
So this is quite the conundrum. People aren’t confident that they can retire, maybe ever. But they’re terrified of investing in stocks, which is the only way they are ever going to be able grow their wealth enough to retire.
So why do people hate stocks so much?
I’m sure it has something to do with our recent experiences with large losses. There are many behavioral biases at work here (the recency effect, loss aversion, the availability heuristic, the gambler’s fallacy, hindsight bias, etc.).
It seems that everyone has a personal story of a friend or family member that has lost money in the stock market.
The problems only get compounded when they give up after large losses and sell at the bottom, vowing to never return to the wicked markets which are rigged, unfair, run like a casino and many other forms of blame that get heaped on everyone but themselves.
As Jason Zweig described in Your Money & Your Brain, financial losses are processed in the same area of the brain that responds to mortal danger. And it is literally true that we can relive our financial losses in our sleep. Losing money hurts.
The combination of past losses, a lack of financial literacy and our behavioral biases means that most experiences with the stock market end in pain for most individual investors.
It’s unfortunate that it has come to this. By saving and investing in a diversified portfolio over a long time horizon these people could drastically improve their odds of achieving financial freedom some day.
So here are the facts that that the people in this survey need to understand:
Stocks are your best route to building wealth over the long term. The long term is defined by multiple decades; not tomorrow, not next week, not next month. They aren’t always a great buy but history shows they are your best bet over multi-decade time frames.
Pick any 20 year period of stock market returns throughout history. Start on any day. You will not find a loss at the end of 20 years. It’s never happened. There were many losses along the way to get there, but stocks go down over shorter periods.
From 1928 to 2012, the average annual return over 40 year periods on the S&P 500 was 10.8%. That kind of return doubles your money roughly every 7 years. The low was 8.5% per year and the high was 12.5% a year. Imagine those kinds of returns compounding over 40 years, even with smaller amounts of money.
This time frame included wars, natural disasters, recessions, market crashes, the Great Depression and much more. Yet businesses continued to earn profits and progress grew exponentially.
Rolling 30 year periods averaged 10.8% a year. Rolling 20 year returns were 11.2% and rolling 10 year returns averaged 10.4%. The shorter your time frame, the greater variation of returns, which is why you must always think and act long-term instead of making short-term decisions based on fear and greed.
Let’s say returns come in much lower than this going forward, call it 7% per year to be conservative. Your money will still double in value every 10 years or so (divide your return by 72 to figure out how long it will take your money to double).
Seventy-five bucks a month at 7% a year turns into over $284,000 over 45 years of saving. Make it two hundred a month and that’s over $750,000.
Still plan on retiring at 80 even though you’re only in your 20s right now? Great, start saving now and you can let your money build for 50 or 60 years.