An Ugly Surprise

I had an unpleasant surprise at the airport last week.

I walked into the TSA Pre line and handed the agent my boarding pass and ID. But rather than being greeted with the knowing wink and nod that comes with taking the VIP line, the agent dismissively pointed me in the direction of the general security line with the rest of the filthy hoi polloi.

Now, keep in mind, I travel frequently and have been TSA Pre approved for ages. So, the thought of – gasp! – taking off my shoes, removing my jacket and putting my laptop into one of the gray bins with the rest of the unwashed masses was absolute anathema to me.

How dare they!

I’m a little embarrassed by how poorly I handled this situation… and I’m probably lucky the TSA agent didn’t toss me out of the airport for the attitude I gave him. I was that guy… the one who throws an absolute fit over what was nothing more than a minor inconvenience.

And it was likely my fault. I made the reservation in a hurry, and it is likely I simply forgot to include my TSA Pre number, which is why the airline didn’t print it on my boarding pass.

I tell this story to make a point about expectations. It’s not that the general security line was that bad. It’s just that was expecting the VIP treatment in the TSA Pre line. And not getting what I expected was a letdown.

I fear that millions of Americans are due for dashed expectations as well… for something vastly more important than my travel comfort.

Retirement.

I wrote last week that Social Security – the bedrock of most Americans’ retirement plans – is starting to deplete its “trust fund.” Of course, there really is no trust fund. It was never more than accounting gimmickry.

The trust fund was invested in U.S. government bonds, which means that Uncle Sam was essentially borrowing from himself and calling it an asset. The larger problem is simply that Social Security is paying out more in benefits than it is taking in via tax revenues, which means the money has to be pulled from elsewhere in the budget.

In case you haven’t noticed, our government wasn’t able to balance its budget even when Social Security was running surpluses. Adding Social Security blows out the budget deficit all the worse.

The most likely “solution” is that Congress will move the goalpost by either raising the retirement age, raising taxes on benefits, or means-testing the benefits, effectively telling middle-class and wealthy Americans that they no longer qualify for the program.

None of these options are that bad.  But they are certainly going to fell that way because they are not at all what most Americans are expecting.

Let’s take this a step further and look at expectations for stock returns. Many – perhaps most – Americans are expecting stock returns to be 8% to 10% per year or better. Their retirement plans are built around those assumptions.

But what if those returns come in below expectations?

One of my favorite models for finding a “quick and dirty” estimate for stock returns over the next decade uses the cyclically-adjusted price/earnings ratio (“CAPE”). The CAPE compares current stock prices to an average of the past 10 years’ worth of earnings. Using a 10-year average smooths out the booms and busts of the business cycle and makes it easier to compare valuations over time.

Using the current CAPE value, you can estimate what stock returns will look like if valuations move back to their long-term averages.

Well, today stocks trade at a CAPE ratio of 32.5, which is more than 92% higher than the long-term average of 16.9.

Crunching the numbers, this implies that stock will actually lose 2% to 3% per year over the next decade. If you’re retirement plan depends on gains of 8% or better, that’s a big problem.