Long term the US stock market has returned something in the ballpark of 12%. If you think that will no longer be true in the future, you at least have to support your statement with some kind of evidence of or argument about what has fundamentally changed. “There has been zero or negative growth in the last decade” is not such evidence; the market took 20 years to recover after Black Tuesday, but still grew at 12% long term. “Warren Buffet said so” is the appeal to authority fallacy – admittedly an impressive and relevant authority.

Alternatively, you could make a case for saving enough so that if returns are indeed only 7% (or whatever number you want to make up), at least your basic living expenses are covered. Then if returns are higher you can live a little more freely.

Basically, market sentiment is negative right now, but that does not prove that long term returns will be lower.

I’ll do the punchline first:
“It means save more.”

Now the broader: I usually took the “suggested projection” returns during any time and halved it to motivate myself. For example, in the late 90s/early 2000s, I would use 7-8% as my target growth rate. Now I use about 3%. This will all pick up and turnaround. The signs right now are really, and I mean really, look at it, far better right now than in the last recession. We are stronger underneath. We have recessions frequently in our history, we have to remember the last recession was historically significant, and if we do drift into a second “double dip”, that doesn’t mean we’re going into the same bad place. Companies have stripped their staff to the minimum. If a company needs to strip more costs off the books, it has to contract businesses or go under, and there are many cash-heavy companies (and banks) now that can weather a storm or will buy up the sliding businesses.

That’s not painting a rosy picture, it still talks about companies going under, but we’re not in armageddon. Not even close compared to the Great Depression and the (by today’s standards) conservatively measured 25-30% unemployment. I’m not talking about the “not seeking work people” either, those were also not included in the 25-30% back then the same way we’re not including them in our 9-10% ranges.

The irony I think is that people have learned that cutting back and saving isn’t something you do for the lean times, when you most need it, it has to be a lifetime plan. And I plan on 3-5% returns for the rest of my life!

Save as much as you can, assume a low rate of return, and assume that disability insurance and long-term care insurance will provide much in the way of headache and little, if any, cash.

Let me suggest a tip I never see anywhere & probably you won’t be able to use for at least 4-8 years. My best rate of return at the moment is in treasury I-bonds bought in 2001.

For those still doing long-term planning, US treasury bonds bought with about half of my then emergency fund in 2001 continue to accumulate and compound at 8%, while all my other investments are nearly static. Keep a cash reserve, and in inflationary times (which WILL come again) put as much as you can into 30-year treasuries. Despite the current hoo-ha, T-bonds do offer benefits to long-term planners.

@JS: Based on those assumptions, how much do you figure you need to save for retirement? When I run the numbers based on the same assumptions, the outlook is really pretty depressing.

I also use 4% for my post-retirement investments and assume that I won’t be getting Social Security (I’m in my late 20′s) when doing long-term planning, and I assume I earn 0% interest on my savings account when doing short-term planning. I’d rather be surprised by a windfall than a shortfall.

And here’s the kicker… the book went on to tell you buy whole/cash life insurance as an investment vehicle. What a bunch of garbage.

At least I’m intelligent enough to discern what I am reading, and not just soak it up as truth. Like a PP, I wonder how many people just blindly follow Ramsey and others, but don’t think research the facts for themselves.

I believe Dave Ramsey’s projections are very much influenced by the 80′s and 90′s during a time in which the Dow went from 1000 (1980) to over 10,000 (by 2000). Although he got burned in real estate over this time (with high inflation and changes in the US tax code). I do believe Ramsey’s projections are nowhere near reality.

For one, technology has contributed greatly to the prosperity from 1980 to 2000 and I just don’t see any new innovations coming along in the near future that will have such a positive effect on the “exaggerated” returns of the stock market enjoyed over the 80′s and 90′s that have greatly skewed total returns of the stock market upward over the last 110 years.

In order for us to get back to 11 to 12% returns over the next few decades, we’ll need to see some truly epic innovations occurring. The only place I can really see epic innovations occurring are in alternative energy, energy efficiency, and related fields.

But I just don’t think there is enough interest in the venture capital market to bring capital intensive alternative energy projects to scale where they can compete with oil, gas, diesel, etc.

One can only hope though! Sorry for the rant…

Ben

I’m joking of course and agree that things normally level out over the long term. 10% is way to high for an estimate I think.

The advice they give is usually very good, just don’t lie to make it sound better than it is. Trust the reader to be smart enough.

Thankfully, I think after 2008 we don’t see too many new books/blogs saying to expect returns over 10%.

7% or even a bit lower is probably the way forward.

By the way is the 3% return before or after the crash of the last few weeks? I’m down about 15% on the year and all I had were equity and bond index funds (with low MERs, of course).

You hit the nail on the head with Ramsey’s sketchy math. On the one hand, he rails about how bad it is to pay 6% interest on loans, and then turns around and runs his projections for wealth growth at 10-12%. However, in his world, why would you ever prepay loans when the market will return 12%?