Declining Investment Returns Means More Independent Workers

While not initially obvious, investment returns have an impact on the number of independent workers.

The reason is retirement, or more precisely the financial ability people have to retire. If future investment returns are low, fewer people will have the financial resources to retire or they will have to work longer before they retire.

One of the reasons we are forecasting increasing numbers of independent workers is a growing number of people are working past the traditional retirement age.

Some are doing this by choice, others out of financial necessity. But either way, older workers tend to want higher levels of work/life flexibility and control than younger workers. This makes independent work attractive.

Age discrimination also makes finding a traditional job harder, making independent work often the best, or even only, option.

Because of these reasons, working Americans aged 60+ have the highest self-employment rate of any age cohort, with about 25% reporting being self-employed. This is substantially higher than the overall self-employment rate of 10%.

So anything that results in more older Americans staying in the workforce also results in more independent workers.

Declining investment returns is an example.

According to McKinsey's New talent tensions in an era of lower investment returns, we're entering "an era of overall investment returns that are substantially lower than those of the past 30 years."

As the article chart below shows, McKinsey is forecasting that the average annual equity returns over the next 20 years will be between 1.5 and 4.0 percentage points lower than they were in the past 30 years.

Fixed-income returns are forecast to be lower by 3% to 5%. 

This has huge implications on retirement savings. Key quote from the article:

A two-percentage-point difference in average returns over an extended period means that in order to live as well in retirement as would have been possible with higher returns, a 30-year-old today would have to either work seven years longer or almost double her savings rate.

Based on the current financial condition and savings of most Americans, I think it's safe to say relatively few will be doubling their retirement savings rate.

Instead, they're going to have to work longer and this means more independent workers. 

BTW, McKinsey's not the only one suggesting future returns will be lower.

In recent weeks Blackrock (the world's largest money management firm), Singapore's sovereign wealth fund and others have also said they expect lower investment returns going forward. 

Many Americans having already figured this out, which is one reason why more are planning on working longer. 

See our Baby Boomer and Demographic sections for more on this topic.

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