Your retirement lifestyle is largely determined by this surprising thing

Most of what we focus on when planning for retirement makes little long-term difference.

The single biggest determinant, having more importance than all other factors combined, is the performance of the stock and bond markets. We nevertheless tend to ignore the powerful role they play because we are helpless to alter their future course. So we gravitate instead to sideshows in which we have more control, even if they make little long-term difference.

The accompanying chart shows how close the correlation is between the stock and bond markets’ returns, on the one hand, and retirement portfolio returns on the other. The data are from annual editions of the “How America Saves” yearbook, in which are Vanguard summarizes the yearly behaviors and experiences of the nearly 5 million defined-contribution plan participants with accounts at the firm.

The correlation is almost perfect, as you can see. Assuming the future is like the past, this implies that the size of your retirement portfolio will overwhelmingly be a function of the performance of the stock and bond markets between now and when you start withdrawing from it.

That doesn’t mean you should ignore all the other logistical details of retirement planning. But it does mean that you need to base your retirement on a realistic assessment of the stock and bond markets’ likely future performance.

The markets’ likely future performance

Let’s start with projecting bonds’ future returns, which turns out to be easier than for stocks. That’s because the long-term return of a bond fund or ETF is quite predictable, so long as you hold it for at least one year less than twice its average duration. (This formula was derived many years ago and introduced in the Financial Analysts Journal in 2015.)

To illustrate, take the iShares Core U.S. Aggregate Bond ETF
which is benchmarked to the total U.S. investment-grade bond market. Its current average duration is 6.33 years, according to iShares, and has an average yield to maturity of 4.82%. So long as you hold the AGG for 11.7 years (6.33 times two, less one), your return will be very close to 4.8% annualized—regardless of the course of interest rates along the way.

To project stocks’ performance, I turned to the eight indicators that my research has found to have had the best track records in forecasting the stock market’s return over the subsequent decade. The median current forecast of all eight is an inflation-adjusted total return of minus 1.0% annualized. If we add back in the 10-year breakeven inflation rate, we get a forecast of a nominal return of plus 1.3% annualized between now and 2033.

These returns imply a 10-year nominal total return for a 60:40 portfolio of 2.7% annualized, which is well below historical averages.

Could the markets do significantly better than this? Of course. These valuation models have a wide margin of error, both on the upside and the downside. But my projected 2.7% annualized 10-year return will almost certainly be more accurate than the wildly inflated expectations I reported upon last week—with the average investor in a large survey expecting to beat inflation by close to 20% per year over the next decade.

My advice is to plan your retirement on the expectation that the stock and bond markets will produce a 2.7% annualized return over the long term. If the markets turn out to produce far better returns, you will be pleasantly surprised—and can spend your windfall then.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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