As we enter the home stretch of 2018, investors have a number of big questions: Will the economy continue to expand? How will geopolitics and rising interest rates affect my portfolio? Will volatility continue to climb?
TIAA believes that the U.S. is well positioned to maintain our recent strong performance throughout the rest of this year. While the long-running global economic expansion and equity bull market may be getting old, “old” doesn’t mean “over.” However, the next several years may prove challenging.
Investors have been conditioned to expect recessions to result from major financial asset “bubbles” bursting. However, we believe the next slowdown may very well be caused by far more conventional factors. We are predicting solid to strong U.S. growth over at least the next 18 months, but we’ll be closely watching for evidence of late-cycle dynamics, including higher inflation and interest rates — factors that have slowed growth in the past.
One reasonably good predictor of past recessions has been the slope of the U.S. Treasury curve. When short-term interest rates rise to the level of longer term rates, flattening the curve, a recession has typically followed in a year or two. However, while short-term rates have risen this year, longer term rates have followed suit, a sign the bond market believes more growth lies ahead.
What does this mean for investors? The bottom line is that nobody can predict exactly what lies ahead. So the best approach is the timeless one: identify your long-term goals and have well-laid plans for saving and investing to meet them, with a diversified investment portfolio that matches your risk tolerance. Keep a long-term perspective in the face of the market’s inevitable ups and downs.
How an aging society will affect investors
TIAA also advises all Americans to consider the impact of demographics — specifically our rapidly aging society — when planning for a financially secure future. Americans are living longer than ever, as the U.S. birthrate has fallen to a 30-year low. Today, more than half of 65-year-old men will live past 85, and one in three is expected to live to at least 90. Life expectancy is even higher for women. Nearly two-thirds of 65-year-old women are expected to reach 85, and almost half will live to 90. As a result, by 2035 the nation is expected to have more older people than children for the first time ever.
Longer lifespans mean that we are all likely to spend many more years in retirement than previous generations. While that’s great for getting through the bucket list, the challenge is ensuring financial security throughout those years.
Many Americans have not saved enough to reflect the new demographic reality. Studies have put the “retirement income deficit” — the difference between what retirees should have saved and what they have actually saved — between $4 trillion to more than $7 trillion. As a result, many Baby Boomers and Gen-Xers face the prospect of outliving their retirement savings.
One way to address the retirement challenge is through lifetime income solutions. Among economists, there is a consensus that lifetime income solutions in the form of annuities offer exceptional protection against retirees outliving their savings. This is because certain annuities can guarantee the payment of a stream of retirement income for as long as a person lives. To boost Americans’ understanding of the ability of annuities to provide income for life as part of a diversified retirement portfolio, TIAA has joined with 24 leading financial services organizations to create the Alliance for Lifetime Income.
Today, Social Security is, for most retirees, the only source of guaranteed income. But Social Security payments typically cover only 30 percent to 50 percent of a person’s pre-retirement income — not the 70 percent recommended by many financial planners. For most people, Social Security alone won’t be enough.
Moreover, Social Security is under increasing pressure. As the population ages, the ratio of older adults to working-age adults is projected to rise, putting increased pressure on our already-stressed Social Security and Medicare programs. By 2020, there will be about three-and-a-half working-age adults for every retirement-age person. Yes, by 2060, the ratio will fall to just two-and-a-half working-age adults for every retirement-age person. This year, the Social Security program’s costs will exceed its income, forcing it to dip into its trust fund to pay out all the benefits it owes retirees. Unless Congress takes action, the trust fund is projected to be depleted by 2034.
We may not know exactly what will happen with markets and the economy in the coming months and years. However, we’ve known for some time that our aging society would create a number of challenges around retirement security for the U.S. It’s imperative that we address these challenges, and we must do so sooner rather than later. That will have a far greater effect on most Americans’ long-term financial security than how much longer the global economic expansion and equity bull market may run.