Opinion: The Retirement Treadmill

Does it feel like you’re on a retirement treadmill, working harder and harder, and yet falling further and further behind?

You are not alone. The financial markets have played an incredibly cruel joke on retirees and near-retirees over the past few decades.

That’s because the very thing that made stocks soar was also the very thing that kept your portfolios from going that far in retirement. The markets give and take at the same time.

This “thing” that has both played a huge part in the stock market’s extraordinary recent performance and kept your retirement portfolio from going that far is falling interest rates. To illustrate, we need to go through the thought experiment to imagine where retirees would be today if interest rates hadn’t fallen in recent years.

Let’s focus on the stock market first. Remember that earnings multiples rise as interest rates fall, as those lower rates increase the present value of companies’ future earnings. For example, in 2008, investment grade corporate bonds returned 6.4% (as rated by Moody’s AAA Corporate Bond Yield Index). Today they yield 2.8%, less than half.

Sure enough, over this 13-year period, the cyclically adjusted price-to-earnings ratio (CAPE) has more than doubled from 16.4 to 38.0. If the CAPE ratio had remained constant over this period, the S&P 500 SPX,
today would trade for less than 1,900, compared to the current level of nearly 4,400.

Sure, falling interest rates aren’t the only cause of the CAPE ratio’s more than doubling since 2008. But you get the point: You owe falling interest rates a big thank you for how much your stock holdings have risen over the past 13 years.

Annuity payout percentages

As for the other half of the equation, let’s focus on annuity payout rates. They’re not the only way to illustrate how far your portfolio will go when you retire, but they’re one of the standard ways researchers use to make historical comparisons.

As the accompanying chart shows, annuity payouts have fallen steadily over the past 13 years, nearly equaling the yields on investment grade bonds. In 2008, a 65-year-old single man with $100,000 could have bought an annuity with a guaranteed monthly payout of about $675. Today, with $100,000, he could only buy an annuity that paid $460 a month.

To buy an annuity today that pays out as good as it was in 2008, a 65-year-old single man would need nearly $150,000.

It is clear that the payout rates of annuities, bond yields and the stock market are in a rough equilibrium. This suggests that retirees and near-retired people should be careful about what they wish for. They may say they want the Federal Reserve to continue to support the stock market with an increasingly easy money policy, but it’s not clear that they will be better off in the end, even if the Fed goes along and the stock market reacts accordingly.

There’s a silver lining to this rough balance, though: Higher interest rates aren’t as terrible as they might otherwise seem, even if they drive the stock market down. That’s because the diminished value of your stock portfolio would now continue in retirement.

Mark Hulbert is a regular contributor to MarketWatch. Are Hulbert Reviews follows investment newsletters that pay a fixed fee to be audited. He can be reached at mark@hulbertratings.com.