Unlock Your Dream Retirement: Why 2025 Could Be Your Perfect Year!
December 29, 2024
0 3 minutes read
The picture right now is pretty good. – Getty Images/iStock
Thinking about retirement? Now might not be the absolute best time to overhaul your investment strategy from growth to retirement income, but trust me—things are looking quite promising.
In the grand scheme of things, we’re in a pretty solid spot.
If you’re nearing retirement and you’ve been riding the wave of U.S. stocks, your portfolio is likely bursting at the seams with growth—more than you ever expected. In fact, the real, inflation-adjusted returns on the S&P 500 over the last 15 years rank in the top 20% of all historical outcomes since World War II.
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And guess what? Bond yields are on the rise! This means you can secure a higher level of guaranteed lifetime income than you usually would—talk about a win-win!
The baby-boom generation has truly landed on its feet once again. Fantastic past stock performance combined with promising future bond yields couldn’t have come at a better time for those hitting “peak 65,” with over 11,000 people retiring daily.
A word of caution: no one should flip their investments from stocks to bonds all at once. This transition is typically a gradual process, unfolding over the years or even decades. However, any moves you make today are historically favorable. Stocks, which you’re selling, are currently trading at a premium, while bonds and annuities are available at bargain prices.
The S&P 500 has been on fire, clocking in a remarkable 28% return this year, following a 26% bump last year. That’s right—your investments have doubled in value over the last five years, with double-digit gains in 11 of the last 15 years. Sure, there were some hiccups along the way, but overall? Exceptional!
Let’s get real: what we’re witnessing is not the norm.
Since the 1920s, large U.S. stocks have historically returned an average of 6.6% per year, plus inflation. And since World War II, the S&P 500 has generally provided investors with an approximately 200% return over 15-year periods when accounting for both price appreciation and reinvested dividends.
But in the last 15 years? A staggering 400% return above inflation—twice the historical average!
Our analysis shows that the 15-year returns we’ve seen are in the top 20% of outcomes since 1945.
Historically, these returns have come in waves. Those who retired in the early 1960s or late 1990s enjoyed similar or even better gains, while those retiring during the challenging 1970s and ’80s didn’t fare as well.
However, those claiming the S&P 500 isn’t overpriced today often lean on the “this time is different” argument, which is a slippery slope.
As Sir John Templeton famously remarked, “this time is different” may be the riskiest phrase in investment history.
Currently, the S&P 500 is trading at 22 times expected earnings—only previously seen during the peaks of 2000-’01 and 2020-’21, both of which were less than favorable times to buy.
What about bonds? Inflation-protected U.S. Treasury bonds, known as TIPS, currently offer yields well above 2% over inflation. For instance, five-year TIPS guarantees inflation plus 2.04%—not too shabby!
Since 1928, regular 10-year U.S. Treasury bonds earned an average return of 1.6% above inflation for those who held them for a decade. In contrast, today’s TIPS are outperforming that historical average by a considerable margin.
Regular bonds, however, can be vulnerable to inflation. While TIPS are designed to protect against it, traditional bonds have historically lost purchasing power during high-inflation periods.
In contrast, TIPS bonds—now offering guaranteed inflation protection—look enticing. But, always keep in mind that tomorrow may bring even better opportunities.
The relationship between bond prices and yields is like a seesaw: as yields rise, prices drop. That’s the dynamic we’re seeing with TIPS right now.
For those seeking a lifetime of hassle-free income, a lifetime annuity from an insurance company is a solid option. It converts your lump sum into a reliable monthly pension-like payout for life, albeit with no residual for heirs. The rates on these products are on the rise, thanks to the current bond and interest-rate climate.
For instance, a 65-year-old man could secure a 7.7% lifetime return—transforming a $100,000 investment into a monthly income of $640. A woman of the same age would see a 7.3% return, or $610 monthly. Those payouts are almost 30% higher than just two years ago!
To gauge just how favorable this timeframe is for retirees: historically, a broad portfolio of U.S. stocks could be sold for an average price of 16 times the last year’s earnings. Today? You can cash out your S&P 500 index for a whopping 28 times earnings—a staggering 75% premium!
On the flip side, those who invested in U.S. Treasury bonds in the past earned an average of 1.6% above inflation. Today, you could reap 2.24%, a significant 40% boost!
When you put both of these figures together, the retirement landscape is about 140% better than historical averages. What does the future hold? Only time will tell, but the current market dynamics are certainly in your favor!
