Unrealistic expectations threaten your retirement

Don’t fall into the trap that has grabbed a lot of your fellow workers: they have unrealistic expectations about investment returns and retirement assets and face disappointment in their golden years. A recent survey by Merrill Lynch uncovered some not so surprising mistakes workers are making in their retirement planning. Two of the top concerns of the 1,100 survey participants were”managing retirement assets” and “retirement planning.” But many were not financially or mentally prepared for the challenges they face, the survey found.

First, the median value of retirement savings among respondents was just $51,000. Many retirement planners would caution a retiree who had that amount of money and who invested it in a diversified manner to spend no more than about $2,500 per year from it.

Second, a shocking one-quarter of participants said they expected investment returns of 25% or more per year, while the median expected return among those surveyed was 10%. Those expecting 25% per year are dreaming: there has never been an extended period when the investment markets offered a return that high. Although the annualized return of the Standard & Poor’s 500 Index is 10.4% since 1926, there have also been plenty of 30-year periods (equivalent to a long retirement) with annualized returns of less than 9% and some as low as 7.8%.

Finally, those surveyed expected to withdraw an average of 21% per year from their savings. At that rate, a diversified portfolio might last only four or five years at best. Many retirement experts caution retirees to take no more than 4% to 5% from their portfolios each year. That withdrawal rate is expected to keep up with inflation in all types of markets.