According to an April 2016 report from McKinsey & Company, investors should be prepared for lower-than-average returns in the coming years. While the economy has been slowly recovering since the recession, there are several factors that point to weak investment returns in the near future, including interest rates rising (they’ve got nowhere to go but up), an aging labor force and a “meh” forecast for our gross domestic product growth. These variables combined suggest that, for equities, “average annual returns could be anywhere from approximately 150 to 400 basis points lower, or 1.5 to 4 percentage points,” according to McKinsey & Company.
To put this in perspective, the report adds, “a two-percentage-point difference in average annual returns over an extended period would mean that a 30-year-old today would have to work seven years longer or almost double her savings to live as well in retirement.”
In other words, the outlook for traditional investing may be a bit bleak. But that doesn’t mean your financial future or retirement is hopeless. Let’s take a look at some useful alternatives that can help you get ahead during your working years. In the event that these traditional returns are as cloudy as predicted, you can still safely protect and grow your nest egg.
Real Returns with Real Estate
Mark P. Cussen of Investopedia wrote a rundown of the McKinsey report in July, pointing out some key omissions that had been left out for the sake of simplicity. One of those omissions was real estate, which, according to Cussen, “has historically outpaced inflation along with the stock market.”
Getting started in real estate, whether you’re flipping a house or renting it out, can be a great alternative to traditional investing. The beauty of real estate is that you can directly influence your return. For instance, adding a new door to the property or furnishing the house may improve the likelihood that you’ll attract good (and higher paying) renters. The stock market doesn’t really work that way. It doesn’t matter how much Diet Coke you buy – you’re probably not going to be able to influence the price of Coca-Cola stock.
The greatest perk of real estate is also its Achilles’ heel. If you’re investing in real estate individually, you’ll have to deal with the risks of owning property. Fallen trees, bad tenants, leaky faucets, break-ins, termites – the list goes on and on. Getting started with real estate can be extremely time consuming. And if you plan to buy an investment property, you should carefully weigh the risks and rewards.
Small Business, Big Returns
If you’re the entrepreneurial sort, consider starting or investing in a small business. While going this route can be risky in and of itself, Cussen points out that small company returns are often higher than that of traditional investments. Before slipping into a small business pursuit, spend some time thinking about your specific skills, talents and industry interests. Then you should create a business plan and look for opportunities for funding.
If you’re considering a small business to supplement your retirement funds, make an automation plan. After all, during retirement you’ll likely need to work fewer hours. As you begin, look for ways to optimize and delegate your work, whether that’s through local workers or the help of virtual assistants.
Getting started with a small business can be financially challenging, but there are options to help you grow, such as personal loans or small business loans. For the right person, a small business may be a great option for supplementing retirement income.
While this option may not be as exciting as the others, simply putting more of your earned income toward traditional investments may be the right choice for you. While the returns could be less than what’s been seen in the past, you can still expect, with a decent amount of confidence, to see some return – surely more than you would if you kept all your money in a savings account.
A key aspect to this approach is time. The earlier you’re able to start investing, the more time your investments will have to accrue interest. Take a look at this handy investment calculator that helps you understand the impact of your investments.
As you look to your financial future, make sure you’ve taken the time to consider the options and possibilities. While the stock market may have a hazy outlook, there are still opportunities for you to accumulate wealth and pursue a financially secure retirement.
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