---
title: Avoiding Slow Failure in Retirement Planning
description: Retirement planning often begins years and years in advance of the actual event, with specific milestones mapped out along the way. So, how can milestones be measured to ensure that your investments are optimized toward your ideal retirement? Could this prevent slow failure?
image: https://www.letsassemble.com/hubfs/blog-files/Newfound%20Research%20-%20Avoiding%20Slow%20Failure%20in%20Retirement%20Planning.png
---

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# Avoiding Slow Failure in Retirement Planning

Posted by [ Guest Author](https://www.letsassemble.com/wealth-management-blog/author/guest-author)  
 May 30, 2018

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*![Newfound Research - Avoiding Slow Failure in Retirement Planning](https://www.letsassemble.com/hs-fs/hubfs/blog-files/Newfound%20Research%20-%20Avoiding%20Slow%20Failure%20in%20Retirement%20Planning.png?width=404&name=Newfound%20Research%20-%20Avoiding%20Slow%20Failure%20in%20Retirement%20Planning.png)Editor’s Note: This article was written for the WrapManager Wealth Management blog by guest author Justin Sibears, a Portfolio Manager at Newfound Research. More information about Justin and Newfound can be found at the bottom of the article.*

Slow failure in investing happens when portfolio returns are insufficient to generate the growth needed to meet your objectives. No one event causes this type of failure. Rather, it slowly builds over time. Think death by a thousand papercuts or your home slowly being destroyed from the inside by termites.

Traditionally, this type of slow failure was probably the result of taking too little risk. Oversized allocations to cash, which as an asset class has barely kept up with inflation over the last 90 years, are particularly likely to be a culprit in this respect.

[![Annualized Returns 1928 to 2018 - Newfound Research](https://www.letsassemble.com/hs-fs/hubfs/blog-files/Annualized%20Returns%201928%20to%202018%20-%20Newfound%20Research.png?width=13200&name=Annualized%20Returns%201928%20to%202018%20-%20Newfound%20Research.png)](https://www.letsassemble.com/hubfs/blog-files/Annualized%20Returns%201928%20to%202018%20-%20Newfound%20Research.pdf) 

Take your average 60% stock / 40% bond investor as an example. Historically, such an investor would have seen a $100,000 investment grow to $1,494,003 over a 30-year horizon. Add a 5% cash allocation to that portfolio and the average result drops to $1,406,935, an $87k cash drag. Double the cash bucket to 10% and the average drag increases to nearly $170k. This pattern continues as each additional 5% cash increment lowers ending wealth by approximately $80k.

Ultimately, this was not a problem for many investors who relied on balanced portfolios, as a 60% stock / 40% bond portfolio averaged 8.3% before inflation and 5.1% after.

Unfortunately, today’s investors face a more daunting problem. Low returns may not be limited to cash. Below, we present medium term (5 to 10 year) expected returns on U.S. equities, U.S. bonds, and a 60/40 blend from seven different firms/individuals. The average expected return on the 60/40 portfolio is less than 1% per year after inflation. Even if we exclude the outlier, GMO, the average expected return for the 60/40 is still only 1.3%. Even the most optimistic forecast from AQR is downright depressing relative to historical experience.

[![Medium Term Real Expected Return Forecasts - Newfound Research](https://www.letsassemble.com/hs-fs/hubfs/blog-files/Medium%20Term%20Real%20Expected%20Return%20Forecasts%20-%20Newfound%20Research.png?width=13200&name=Medium%20Term%20Real%20Expected%20Return%20Forecasts%20-%20Newfound%20Research.png)](https://www.letsassemble.com/hubfs/blog-files/Medium%20Term%20Real%20Expected%20Return%20Forecasts%20-%20Newfound%20Research.pdf) 

And the negativity is far from limited to U.S. markets. For example, Research Affiliates forecasts a 5.7% real return for emerging market equities. This is their highest projected return asset class and it still falls well short of historical experience for the U.S. equity markets, which have returned 6.5% after inflation over the last 90 years.

One immediate solution that may come to mind is just to take more risk. For example, a 4% return after inflation, which is what most retirement calculations are based on, may still be *technically* achievable. However, assuming that the above forecasts are relatively accurate, this still requires buying into and *sticking with* a portfolio that holds around 40% in emerging market securities, more than 20% in real assets/alternatives, and exactly 0% large-cap U.S. equity exposure.

This may work for those early in their careers, but it certainly would require quite a bit of intestinal fortitude. For those nearing, or in, retirement, the problem is more discouraging. Larger losses in the years prior to and right after the retirement age can cripple a portfolio permanently – a phenomenon known as *sequence risk*.

## What Can Investors Do About These Low Returns? 

Rather than simply taking on more risk in search of higher returns, investors are better served by implementing marginal improvements, with their wealth manager’s help, that compound on each other.

No one can control the returns of U.S. stocks or bonds (or any asset class returns for that matter). But you can take control of the factors that you can influence.

For a current or future retiree, this means:

1. Controlling to the extent possible factors like taxes, saving, and spending: [Saving a little more or spending a little less, or simply being more flexible in these areas, can be treated as extra money toward your retirement goals.](https://www.wrapmanager.com/wealth-management-blog/why-high-income-earners-need-a-budget)
2. [Being strategic, not static](https://www.wrapmanager.com/wealth-management-blog/retirement-planning-using-goals-based-wealth-management): Have a thoughtful, forward-looking outlook when working with your wealth manager to develop a strategic portfolio. This could mean having a willingness to diversify U.S. stocks and bonds with the ever-expanding palette of complementary asset classes and strategies.
3. [Directly address the role of behavioral finance](https://www.wrapmanager.com/wealth-management-blog/investment-psychology-financial-planners) by recognizing that you must have the willingness to stick with a plan in order to succeed (e.g. the journey is just as important as the destination). Staying the course reduces the detriment of poor market timing and the effect of unnecessary tax bills.
4. Be fee-conscious, not fee-centric. For many investments (e.g. traditional core stock and bond exposure), minimizing cost is certainly appropriate. However, do not let cost considerations preclude the consideration of strategies or asset classes that can bring unique return generating or risk mitigating characteristics to the portfolio.
5. Look beyond bonds for risk management given low interest rates.
6. Recognize that the whole can be more than the sum of its parts by embracing not only asset class diversification, but also strategy/process diversification.

Retirement success and muted future returns are not mutually exclusive. However, achieving financial goals in such an environment requires careful planning for factors that may have been safely ignored given the generous market tailwinds of prior decades.  

**About the Author:** Justin Sibears is a Portfolio Manager at Newfound. A frequent speaker on industry panels and contributor to ETF Trends, Justin holds a Master of Science in Computational Finance and a Master of Business Administration from Carnegie Mellon University as a well as a BBA in Mathematics and Finance from the University of Notre Dame.

**About Newfound:** Newfound is a Boston-based quantitative asset management firm focused on rules-based, outcome-oriented investment strategies. Newfound specializes in tactical asset allocation and risk management solutions. Founded in 2008, Newfound offers a full suite of tactical ETF managed portfolios covering global equity, U.S. small-cap equity, multi-asset income, fixed income, and alternative asset classes.

To learn more about Newfound Research, [request a detailed money](https://www.wrapmanager.com/money-manager-research/newfound-research-llc)[ manager research report here](https://www.wrapmanager.com/money-manager-research/newfound-research-llc). To find out if Newfound Research could be an appropriate investment for your goals-based investment plan, [request your free Money Manager Recommendations here](https://www.wrapmanager.com/free-money-manager-recommendation-part1).

 

---

The information and opinions contained in this material have been produced by Newfound Research and though they are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.

Past performance is not indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable or equal the corresponding indicated performance level(s). This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you.

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