Don't Bet Your Retirement On An 8% Return

If there's one lesson in investing, it's that time in the market matters.  The longer you leave your capital alone, the more it can grow.  If past growth rates continue, the time you leave your savings alone is more important than how much you save.  The problem with that, though, is that past growth rates are not likely to continue.  Over the last 30 years, the stock market has averaged 7.8% growth.  That growth rate is the foundation of many retirement plans, including some professionally managed funds.  If you've invested your whole 401(k) in total market index funds hoping to chase that growth, you may be in for a surprise.

That nearly 8% growth is a historical anomaly that's driven by a number of shifting demographic factors.  Because of slowing industrial growth, decreasing population growth, and more competitive overseas markets, economists are projecting that rate to slow as much as 2% in the next year, and possibly longer than that.

If you think that's too little to make a difference, you're underestimating the power of compound interest.  For 25-year-olds currently savings for retirement, a two-point drop over the next decade could require them to save twice as much before they retire.  That's a frighteningly realistic scenario.

When dealing with macroeconomic trends, it's easy to get overwhelmed.  After all, the changes in the global economy are way bigger than one person.  That doesn't mean you have to be unprepared, though.  You can take these four steps to prepare your portfolio for struggling gains.

1.) Max Out Employer Match
About 31% of American workers with access to a 401(k) don't use it at all.  With that level of participation, it's small wonder that Americans are worried about retirement.  Beyond missing out on the savings, employees are also missing out on matching funds programs. 
Think of matching funds programs as interest payments.  Your company is willing to pay 100% interest on your 401(k) deposits.  Even if you have expensive credit card debt, it's unlikely anyone is charging you 100% interest.  Increasing your 401(k) contributions at least to the maximum match level will help minimize the impact of slow growth within your portfolio.

2.) Watch The Fees
If a 2% decrease in return can require doubling your savings to catch up, every point is important.  That's why one of the biggest differences between successful 401(k) investors and those who keep working long into their retirement is the fees that that each pays on their investments.  By law, companies must disclose the fees they charge for investment management.  You can get a breakdown from your HR representative.
Once you see the fees you're paying, it's time to gauge if they're reasonable.  For comparison, most small companies have fees around 1.4%, medium companies have fees around 0.8% and large companies have fees around 0.5%.  If you're paying more than that, it might be time to switch the funds you're using.

3.) Revisit The Roth Question
Most of the time, a Roth 401(k) makes the most sense for young people.  Taxes are likely to be higher in the future, so paying them now results in a savings in the long run.  With returns expected to drop and savings amounts likely to be a larger determinant of total wealth accumulation, it might be time to revisit conventional wisdom.
If taking a tax deduction now in the form of a traditional 401(k) contribution would enable you to save more, it might be worthwhile.  You can find other ways to manage taxes once you've saved enough for retirement.  If the meantime, growing your nest egg may be the most important step.

4.)  Look For Predictable Returns
As interest rates rise, growth is likely to slow down.  This is a natural result of decreased credit availability.  The same force that makes the market a less attractive option also makes savings through other instruments more valuable.
An Individual Retirement Account (IRA) can hold savings certificate funds, like those available at Health Care Family Credit Union.  These instruments offer a predictable rate of return that is not dependent on those macroeconomic forces.  As a hedge against market slowdowns, adding certificate accounts to your portfolio can be an excellent step toward minimizing risk.
Despite the changing economic winds, the principles of smart retirement planning remain the same.  Spend less than you earn.  Avoid debt. Invest as much as you can, as often as you can and as cheaply as you can.  With a little luck and a lot of hard work, you can enjoy a safe, prosperous retirement.