In its recently released 2016 Guide To Retirement, JP Morgan takes a fine-tooth comb to just about every imaginable variable impacting retirement readiness.

But it is the report's “retirement savings checkpoint” where JP Morgan introduces the wild card that may turn conventional retirement preparation thinking on its head for the decade going forward.

In modeling ideal savings levels relative to age and income (a 40-year old making $50,000 a year should have 1.2 times that in savings; a 60-year old making $100,000 should have 7.3 times that in savings), JP Morgan presumes 6.5 percent annualized returns on portfolios for pre-retirees, and 5 percent returns for retirees.

Those assumptions are markedly lower than historical returns. Between 1970 and 2014, the annual compound return on large-cap stocks was 10.5 percent, and for bonds it was 7.9 percent, according to data cited by Charles Schwab.

Like others, JP Morgan has tempered return projections, though not nearly as much as some retirement providers and investment luminaries.

Last October, Jack Bogle, Vanguard's founder, told Morningstar's Christine Benz that annualized returns on stocks could be as low as 4 percent for stocks in the next decade, and 3 percent for fixed income.

That would create a 3.5 percent nominal return on a balanced portfolio. Factor in inflation, and then all fees, and pre-retirees stand the chance to actually lose money on their portfolios over the next decade.

“You're talking about a really tough decade for equity investors,” Bogle told Morningstar. “Predicting at 7.5 percent or 8.5 percent return is just silly.”

Bogle acknowledged he could be wrong. But he's certainly not alone in his bearish projections.

David Blanchett, head of retirement research at Morningstar Investment Management, told BenefitsPro that he routinely talks to advisors who prefer to use historical return norms, which would apply the historical return on U.S. government debt of 5 percent, well below the 2 percent range Treasuries now yield.

That approach does not square with reality, as Blanchett sees it.

“It's bad news for a lot of people. Many pre-retirees are going to have to save more and retire later—that's just the way it is,” he said.

“I think returns going forward are going to be lower than historical averages,” added Blanchett. “The U.S. has pretty much been the best performing market for stocks in the world over the last 115 years, and I don't think it's realistic to assume this relative outperformance is going to continue.”

Blanchett cautions that return estimates have to be adjusted for different time horizons. Assuming the next decade's assumptions will hold true beyond that period is questionable, he says.

That matters for today's pre-retiree that is hoping to retire in 10 years; a 55-year old still has an investment horizon as potentially long as another 35 years, or more.

Blanchett said Morningstar is projecting a 6.5 percent annualized nominal return over the next 10 years—inflation, taxes and fees will take their share.

Morningstar expects U.S. large cap stocks to return 5.4 percent nominally in the next decade, while U.S. small caps will do better, at 6.8 percent. The firm's fixed-income expectations are in line with Bogle's—around 3 percent.

International stocks will post 8.1 percent nominal returns over the next decade, according to Morningstar.

While that would certainly be welcomed, Blanchett cautions panicky pre-retirees that may be forced to play catch up during a decade of tepid returns.

“Lower returns and low interest rates will definitely affect allocation models, but you are not going to be able to re-allocate your way out of a savings shortfall,” he said.

Other service providers are basing retirement readiness models on projections in line with Bogle's conservative estimations.

Fidelity assumes 3 percent annualized returns in its modeling, a conservative return used to account for market volatility and unknowns, like health care inflation in coming decades.

To Blanchett, the reality is clear, irrespective of variances in return projections.

“Today's advisors are going to have to use lower return projections in their modeling.”

Instant Insights /

Lower projected returns may challenge retirement modeling

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