In the past a savings account generated annual interest income of approximately 5%. Today, it generates 0.1%, virtually nothing! For retirees going into pension now this is absolutely unfair. These people worked for 30 or 40 years to build up a retirement nest egg they could live on during retirement. And now that they have reached their retirement years, the nest egg from that life of work pays next to nothing. This retirement generation was supposed to work hard and save and they did their part for decades, only to be deserted in their retirement years.
Savings accounts pay nothing. Term deposits and government bonds neither. Real estate may be too labour-intensive for the older generation. That leaves people in retirement age now only with one real option: Investing in the stock market to fund their retirement.
The stock market currently yields more through dividend income than any savings account or term deposit. The stock market tends to keep going up over time. But stocks are not the perfect solution for people who are living off their savings. The stock market might go up in the long term but the ride is usually bumpy.
But retirees should consider the following:
On average, the stock market goes up 9% to 10% per year. That is true for the 41 years covered by this chart and for the 40 years before that. This is a proven place to keep growing your wealth.
In most years, the stock market goes up but not always. In 31 out of the 41 years covered in this chart, the stock market has posted positive full-calendar-year returns. That means almost 25% of the time, the market went down.
While most years the market does go up, at some point in every single year, the stock market will be down from its starting point and sometimes not by a small amount:
In 5 of those 41 years, the stock market was down by 30% or more during the year.
In 8 of the 41 years, it was down by 20% or more.
In 15 of the 41 years, it was down by 15% or more
In 23 of the 41 years, it was down by 10% or more.
On average, the stock market experienced a maximum drawdown of 14.3% each year, even though it finished ahead every year by an average of 10.4%.
With interest rates so low retirees need to be in stocks to some degree to make their retirement money last long enough. But they must be prepared to experience volatility. And as our statistics show, probably a lot or more than they wish for. The key is to not panic and not cash out at the worst possible time after the stock market has one of its inevitable declines. But do not have money in the stock market that you need within the next 18 months.
Sven Franssen