The Road Ahead
by Pat Regnier

March 9, 2007

IT'S STILL LONG (EVEN AT YOUR AGE), AND IT WILL BE WINDING. AND IT WON'T LOOK A THING LIKE THE PATH THAT GOT YOU HERE.

You couldn't have seen it coming. Not like this anyway. This year the oldest of the baby boomers will turn 61, just inches away from being eligible to collect their first Social Security check. Roughly 60 million more are in their late forties or fifties, the season of life when 401(k) statements suddenly become really, really interesting. That much you knew would happen, even if it was hard to imagine when you were sitting in your dorm room decoding Jefferson Airplane lyrics. In fact, despite the generation's forever-young stereotype, many boomers started planning for retirement some time ago. According to the Congressional Budget Office, the typical boomer has accumulated about as much wealth relative to his income as the previous generation had by the same age. (Good thing, because he's less likely to have a pension.)

But whether you were a yippie or a yuppie or maybe both, this part must have surprised you: Your adult life coincided with the one of the greatest investment booms in history. Over the past 30 years, large-company stocks returned 12.5% a year compounded, enough in theory to turn $1,000 into $34,000. In real life it wasn't so simple—besides taxes and expenses, most of us eat away returns trying to outsmart the market—but that's a heck of a wind to have at your back. On top of that, many boomers are also sitting, perhaps a bit nervously now, on some seriously appreciated real estate.

Now remember what the world looked like in the mid-1970s, when you were just getting started. Vietnam and Watergate were fresh national wounds. The Arab oil embargo had pushed the economy into a deep recession. The stock market was still recovering from a major crash—the Dow had tumbled 45% from peak to trough—and annual inflation topped double digits. A cover story in this magazine offered advice on coping with the soaring price of meat, milk and margarine. Seriously.

America's economy—and even more so its markets—has traveled a long way in three decades. That's worth meditating on right now because you may very well have another three decades (or more) to make your money last. And history needn't surprise only on the upside. As you plan for the years ahead, you'll need to make some assumptions, and the first thing you should assume is that your investments will grow more slowly than recent performance might suggest.

That's no reason to become discouraged—there's a lot you can do to ensure that you'll thrive even when the markets disappoint. In this 35-page special report dedicated to boomers, you'll find plenty of practical strategies to make the second act of your life as rewarding as the first. But first we'll answer the tough questions about where the money you'll need is going to come from.

Q: How much can I expect to earn from stocks and funds?

A: Chris Cordaro of RegentAtlantic Capital, a wealth-management firm in New Jersey, assumes a large-cap stock return of just about 8% before inflation. That's a lot less than 12.5% or even the roughly 10% that large-caps have produced since 1925, according to Ibbotson Associates.

Cordaro's prediction echoes the view of a number of economists and market watchers that stock returns should fall. Why? Cordaro says that the big gains of the past were "the result of a repricing that you can't figure will keep happening." Investors, the argument goes, placed too low a value on stocks in the past. But a lot happened in the 20th century to make stocks more attractive. The U.S. emerged as an economic superpower, and the economy became more predictable, especially as inflation and interest rates moderated. With tools like mutual funds and 401(k)s, it's easier to buy stocks. And you've heard many times from your broker, the press, and books like Jeremy Siegel's Stocks for the Long Run that stocks have been consistent winners provided you hold them long enough. Roughly half of Americans own stocks, up from 32% in 1989. With high demand making stocks more expensive, it's reasonable to assume they have less room to rise; even the bullish Siegel expects after-inflation returns to be about a point lower than the long-run record.

Rob Arnott, a money manager and former editor of the Financial Analysts Journal, is even more pessimistic. "My message to boomers is simple," he says. "Don't count on the market to bail you out." He's calling for a 6% long-run equity return (before inflation). Arnott has an elaborate set of calculations to back up this call, but you really needn't agonize over whether Arnott or Siegel has the right number. What matters for your planning purposes is what could happen, and history shows that stocks can lose money, after inflation, for long periods. They declined at a rate of 0.4% from 1966 to 1981, Siegel notes. A bad stretch isn't such a problem when you're 30. But it can be a big problem after you've retired, especially if you were counting on 10%. So don't count on it.

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