How retirees should prepare for the end of the bull market

The image shows a pull figure signifying a bull market.  T. Rowe Price says investors should expect lower returns over the medium term.

The image shows a pull figure signifying a bull market. T. Rowe Price says investors should expect lower returns over the medium term.

In 2022, the S&P 500 had its worst annual first half in five decades. With the tailwinds that boosted global economies during the pandemic recovery disappearing, those saving for retirement must take several steps to weather the decline in stock and bond yields, including adding more growth oriented assets to their portfolios, according to T. Rowe Price’s 2022 US Retirement Market Outlook.

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Why investors can expect lower returns

An image shows a woman looking out a window.  T. Rowe Price says investors should expect returns in the next period to be lower than in recent years.

An image shows a woman looking out a window. T. Rowe Price says investors should expect returns in the next period to be lower than in recent years.

Despite the economic turmoil caused by the COVID-19 pandemic, the stock market rallied in 2021 to new highs after the massive sell-off in March 2020. S&P 500, Dow Jones Industrial Average and Nasdaq Composite climbed to historic highs amid vaccine rollout and increased economic activity.

The recent stock market move comes after the longest commodity exchange in history, which spans 2009 to 2020. Since 2009, the S&P 500 has posted only one losing year for total returns (2018). In fact, the index has posted total annualized returns of more than 15% in seven of those 12 years. The index, which tracks the performance of 500 large public companies, is up more than 25% in 2021.

But the T. Rowe Price report, which was issued in the fall of 2021, warned of less robust returns.

“We believe medium-term returns will be lower than those seen in previous periods – in some cases significantly lower.” This has significant implications for pension plans and who they benefit from,” the firm said in its report.

The financial services firm first pointed out fixed income markets and near-historically low interest rates—now being raised by the Federal Reserve. It’s a trend the company expects to continue. As for equity markets, “We expect returns in many large markets such as the US to be limited relative to recent history,” it added. “While valuations across asset classes vary and some assets are attractively valued, most asset valuations are elevated by these measures.”

Finally, T. Rowe Price pointed to several risks facing markets, including inflation – which was at a 40-year high in June 2022. While fiscal stimulus, earnings growth and economic activity have helped spur the recovery from the pandemic, inflation fears were evident at the end of 2021. In October 2021, for example, the consumer price index for all urban consumers rose 6.2% from 12 months earlier, the largest increase since 1990.

The risks extend beyond US markets. The T. Rowe Price report noted that China is facing supply chain disruptions and rising commodity prices. Elsewhere, viral mutations and challenges in vaccine deployment may also hamper returns on investment.

“While the global economy has been supported by a period of exceptional liquidity driven by fiscal and monetary stimulus, these tailwinds are likely to disappear as central banks begin to pursue more accommodative policies,” the report said. “While these conditions may not materialize as significant headwinds to growth, we believe they contribute to a less compelling risk/reward profile going forward.” Pension investors will need to be positioned accordingly.”

How Retirement Savers Can Respond

Image shows a couple looking at their retirement investments.  T. Rowe Price says investors should expect returns in the next period to be lower than in recent years.

Image shows a couple looking at their retirement investments. T. Rowe Price says investors should expect returns in the next period to be lower than in recent years.

Investors saving for retirement have three options for dealing with the challenge of lower-than-expected future returns:

Save more or delay retirement: T. Rowe Price admits this may be the “least attractive” option, but saving more or simply delaying retirement can help offset lower returns. By delaying retirement, a person can reduce the number of years they will need income in retirement. Postponing retirement and working longer may also enable the individual to claim Social security later. Slowing down Social Security beyond full retirement age will lead to greater benefit.

Acquire more growth-seeking assets: The second option may mean increasing the equity composition of the portfolio or introducing fixed income securities that offer higher returns. This can lead to more risk, but a growth-oriented target date fund sliding can be a good option for that, especially for investors who are years away from retirement, T. Rowe Price said.

Limit spending in retirement: The third and final option is to limit spending in retirement. “T. Roe Price’s analysis of retiree spending reveals that retirees tend to adjust their spending relative to their income,” the report states. “Most retirees who adjust their spending have the means and flexibility to do so. The most -however, poor households cannot spend less.

Bottom row

As the US and other nations continue to navigate high inflation and a slowing economy, T. Rowe Price warns that investors should expect lower returns. To limit the impact of lower investment returns, those planning for retirement can simply save more or delay retirement. They may also add more growth-seeking assets to their portfolios or adjust their spending habits after retirement.

Retirement Planning Tips

  • Do you know how much you need to save for retirement? of SmartAsset Retirement calculator can help you estimate how big of a nest egg you’ll need to fund your lifestyle after retirement.

  • A financial advisor can help you invest your retirement savings and create a tax-efficient withdrawal plan. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisor matches for free to decide who is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now

Photo: ©iStock.com/Kameleon007, ©iStock.com/PeopleImages, ©iStock.com/FG Trade

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