I could be wrong now, but I don't think so!

I really enjoy the television series, Monk. The hero is an insufferably neurotic police detective on extended disability due to his mental disorders. Monk is certain that something horrible is just about to happen, as he absolutely knows that the world is full of germs, poisons, and the like. The theme song, “It’s a Jungle Out There” written by Randy Newman is perfect for this show. It also seems to apply to retirement planning. On my vacation I bought a used copy of Dave Ramsey’s book, “The Total Money Makeover.” One of Dave’s principles is to only buy at a deep discount, so never pay retail for a Dave Ramsey Book? At any rate, I certainly agree with most of the book’s content and I certainly admire what he has accomplished. However, when I read his chapter on retirement planning I thought some of his assumptions were wildly optimistic. Because:

It's a jungle out there
Disorder and confusion everywhere
No one seems to care
Well I do
Hey, who’s in charge here?

Dave is assuming a 12% annual return on retail mutual funds, his preferred vehicle for individual investors. He is also assuming 4% inflation, giving a net return of 8%.

From a recent Wall Street Journal entitled, Retirement Disaster Ahead; John West and Rob Arnott of Research Affiliates observe that over the last half century, corporate earnings have grown at 1% per year in inflation adjusted terms. That would be 1.2% since 1900. The last century was the American Century. Can we expect a repeat with an aging population and a heavy public and private debt burden? Can we continue to grow our economy in real terms now that China is becoming the world’s industrial powerhouse?

West and Arnott are projecting a weighted return of 4.1% for a balanced portfolio of 60% stocks and 40% bonds. The return on a more aggressive portfolio might rise to 5.2%. Like Dave Ramsey, the major public pension funds are projecting an after inflation return of 8%. West and Arnott are projecting about 2.1%.

People think I'm crazy, 'cause I worry all the time
If you paid attention, you'd be worried too

Again, from the article, here is what those numbers actually mean.

Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000. Someone who only manages 2.5% ends up with $420,000, big difference.

Back in January I wrote another article on this subject entitled, “Counting our Chickens.” In this article I observed, “The author also asked some respected experts what guaranteed rate of return after taxes and inflation would be realistically acceptable. John C. Bogle, founder of the Vanguard Group of mutual funds replied, 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.”

Do you really want to bet your future on an 8% after inflation return on your investments? The title of the latest report by West and Arnott is “Hope is not a Strategy.”

As the song says,

I could be wrong now, but I don't think so!
'Cause there's a jungle out there.
It's a jungle out there.