Transcripts

Commentary: Don't Rely On Returns For Retirement

SUSIE GHARIB: Tonight`s commentator says it was nice while it lasted, but he thinks the party`s just about over for those big investment returns we`ve been seeing over the past few years. Here`s Mark Zandi, chief economist at moodyseconomy.com.

MARK ZANDI, CHIEF ECONOMIST, MOODY`S ECONOMY.COM: The recent turmoil in global financial markets will prove temporary, but it provides a vital message, namely, that we shouldn`t count on big returns in our investment portfolios to provide for a comfortable retirement. Over the past quarter century, we have enjoyed out-sized gains on our assets ranging from stocks to housing. The period was characterized by steadily declining inflation and interest rates, which in turn supported rising asset valuations. In other words, asset prices rose more quickly than the growth in the earnings generated by those assets.

Economy-wide, this is evident in the six-fold increase in the value of household assets over the period, while GDP, the value of all the things that we produce, increased a much more modest four-fold. Recent events highlight that the long-running decline in inflation and interest rates is now over. They might not rise much going forward, but they aren`t going lower, at least not consistently. Asset prices are adjusting to this new reality, and future increases in our wealth will be more consistent with the growth in GDP.

Bottom line, this means that instead of enjoying high-single digit annual returns on our portfolios we should plan on mid-single digit returns. While this doesn`t mean much in a given year, it means everything over a period of a decade or two. Those of us counting on the out-sized historical returns to continue on and thus make up for our paltry saving will be ill-prepared at retirement. It`s time to save more. This is Mark Zandi.