Opinion: Gen Z are extremely unrealistic about how much money stocks, crypto and other investments will give them for retirement

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A lot of Gen Z have no idea how to build wealth in their lifetime. A worrying proportion of them have extremely unrealistic expectations of what they can achieve with their investments.

Take the example of a recent survey of more than 2,000 American consumers conducted at the end of September by MagnifyMoney. The results: 27% of Gen Z said they hope to retire before the age of 50. According to my analysis of the typical financial situation of Gen Z, the chances are extremely low that they will be able to retire this early, if at all.

I came to this conclusion by projecting how much retirement wealth the typical Gen Z will accumulate by age 50. hypotheses:

Earning the average salary of people this age (according to data from the Bureau of Labor Statistics) and salary increases each year are equal to the national average. 401 (k) is worth $ 26,000 (which is the Gen-Z median). Contributes 15% of salary to 401 (k) (which is the average for Gen Z, according to the Transamerica Center for Retirement Studies); I assumed the correspondence with the employer was an additional 3% (which is typical). Invest 100% of the 401 (k) in the stock market Stock returns will exceed inflation over the next 25 years by 6% on an annualized basis (which is the US average since 1793).

Given these assumptions, this Gen Zer by the time she turns 50 will have amassed a portfolio worth approximately $ 607,000 in today’s dollars. If she uses the standard 4% rule for annual withdrawals from this portfolio, her annual retirement income would be just over $ 24,000. This represents about 40% of his annual income in the last year before retirement. (All of these amounts are expressed in current dollars.)

Yet even this finding, as sobering as it is, is too optimistic. This is because today’s stock market is vastly overvalued, making it unlikely that it will produce an inflation-adjusted annualized return of 6% in the years to come. Each of the eight valuation metrics with a history of long-term success suggests that stock performance in the coming years will be below the historical average.

Some oppose this bearish conclusion on the grounds that the ancient history of the United States is irrelevant to the current stock market. But this argument, while convincing on the surface, does not hold water. Consider what I found when building a simple econometric model for each of the eight indicators, using only data going back to 2000. On average, they predict the S&P 500 SPX, + 0.39% over the next decade will produce an inflation-adjusted total return. of minus 5.4%.

Indicator Projected annualized total return of the inflation-adjusted S&P 500 over 10 years, based on the historical relationship between the indicator and the market since 2000 Price / earnings ratio 5.9% CAPE ratio -2.4% Dividend yield 2 , 5% Price / book ratio -5.5% Price / sales ratio -18.5% Buffett indicator -15.7% Q-ratio -6.6% Average allocation of household equity -3.2% AVERAGE -5.4%

If this average projection is even close to being accurate, our hypothetical Gen Zer will be in a much worse state than in the simulation I reported above. Consider how much she will need to retire assuming the inflation-adjusted return on stocks in the coming years is zero. In this case, she will have to live on less than $ 11,000 per year (in today’s dollars) when she retires at age 50.

There is more: the 4% rule applies less to those who retire before the traditional retirement age of 65. I explained why in a column last summer. Basically, the chances of running out of money in retirement increase dramatically as the number of years in retirement increases.

Be real

My analysis underscores the critical need to base our long-term financial plans on realistic assumptions. Not only Gen Z, but all of us, are more likely to be financially comfortable in retirement as we start making a realistic financial plan early.

Unfortunately, many investors are not only aware that their plans are unrealistic, they have shut down one of the main channels through which they could gain reality check. According to the MagnifyMoney website, only 21% of those polled in their survey said they are currently working with a financial advisor – and more than half (54%) said they had no intention of doing so. to do. This suggests to me that there is a dangerous level of overconfidence among investors about building retirement wealth.

Studying history gives us the opportunity to learn before it is too late. With the stock and bond markets at or near historic highs, now is a great time to do so.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]

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