Retirement savings shortfalls are not a new problem, they have been visible on the horizon for at least the last 20 years. Willfully blind workers and savers have been misled by dishonest projections from financial sales firms and academics that have collected fees and refused to address the underlying problem of savings deficits.

Lance Roberts correctly points out that markets compound a smoothed annual return in theory, but not in real life. In real life, negative returns and bear markets set capital projections many years behind target. Pretending that these setbacks will be caught up over time without topping up contribution levels to target each year, is irresponsible, wishful thinking. The savings deficit problem grows larger every day it remains ignored.

Here is a link to Lance Robert’s recent article The pension crisis is worse than you think. Here’s a key excerpt:

Given real-world return assumptions, pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and maintain some solvency.

They won’t make such reforms because “plan participants” won’t let them. Why? Because:

It would require a 40% increase in contributions by plan participants which they simply can not afford.

Given that many plan participants will retire LONG before 2060 there simply isn’t enough time to solve the issues, and;
The next bear market, as shown, will devastate the plans abilities to meet future obligations without massive reforms immediately.

In a recent note by my friend John Mauldin, he discussed an email Rob Arnott, of Research Affiliates, sent regarding this specific issue.

“If our logic is sound, we earn 0.8% from our bonds (40% allocation x 2% return) and 2% to 3.2% from our stocks (60% x 3.3%, or 60% x 5.4%). Add up the return from stocks and the return from bonds, and we get 2.8% to 4% from our balanced portfolio.”

For those who are fully invested at present levels, this best-case portfolio return of 2.8% to 4% annually is before fees and taxes, and assuming no negative or bear market loss years in the investment horizon. Sound likely?