Goodbye retirement

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“Seven years of near-zero interest rates have caused investors to chase higher returns in the stock market. But a study out this morning from the McKinsey Global Institute says that quest may become an increasingly futile one in the years ahead.

The report shows that equity returns over the last three decades have been exceptionally high, driven by declining inflation, strong global GDP growth, the rise of China and an exceptional period of corporate profits. Publicly listed North American companies increased their post-tax margins by 65 percent during this period, according to the McKinsey analysis, producing real total returns for investors in the U.S. and Western Europe of 7.9% a year.

But those returns were well above the 100-year average, and are unlikely to be repeated in coming decades, as competition increases from emerging market companies and as technology continues to disrupt traditional business models. Instead, you should expect significantly lower returns to shareholders. “For U.S. and Western European equities, the difference could be between 150 and 400 basis points,” the report concludes.

Bottom line: Goodbye retirement. ‘A two percentage point difference in average returns over an extended period would mean that a 30-year old today would have to work seven years longer (assuming no increase in life expectancy) or almost double her savings rate in order to live as well in retirement,’ says Richard Dobbs, one of the authors of the report.

Enjoy the day. And keep working.”


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