Hurray! We’re all living longer!

The good news: life expectancy in the U.S. increased by 50% during the 20th century. The bad news: we’ll all need a good deal more money during retirement.

The average 65 year old man can expect to live to age 84. The average 65 year old woman: 87. When you think of couple living off their retirement income, there is a 50% chance that one spouse will make it to 95. That means that most people should have 30 years of retirement planned (assuming they retire at age 65–not necessarily a valid assumption).

This makes a focus on long term returns more important than ever. Specifically, the conventional view of retiring with a conservative portfolio of bonds is probably not the way to go. We’ll all need the growth and inflation protection of stocks to keep from running out of money.

It also means the most conservative period of investing is probably right before and after retirement. A large setback in your portfolio right before or after retirement may be very difficult to recover from.

That is why many advisers are recommending high stock portfolios in your early years, low stock allocations close to and right after retirement, and than increasing that stock allocation as you get older. 

We simply need the growth and inflation protection that only stocks can offer to build wealth early and then sustain us into old age. But it also means you may want to reduce that stock allocation right before and after retirement.

Longer lives are great. But, to make it great, we’re going to have to plan for longer lives.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Hurray! We’re all living longer!

Planning to work in retirement?

Two-thirds of workers plan to work in retirement, mostly because they know they haven’t saved enough to support their current standard of living. In reality, less than one-quarter of those in retirement work for pay (WSJ, no subscription required). 

There is a big disconnect between those who think they can work in retirement and those who actually succeed in doing so.

Why? The three big reasons are health crises, layoffs and ageism. If you are unhealthy, you can’t work. If you get fired and can’t get a new job, then there’s no paycheck. If you are too old to do the job or employers simply won’t hire someone your age, then employment won’t fill your spending gap.

Working in retirement seems like a great idea. It keeps you mentally and physically active. The evidence shows that those who keep working show less cognitive decline. Most who work in retirement do it because they enjoy it, not because they need it to cover their spending.

The bad news is that retirees find it hard to find employment or remain employed.

The good news is that most retirees learn to get by on a lower standard of living. Studies show that such retirees are happier and less stressed than they expected to be.

If you’d prefer to avoid the “getting by” solution, then the best thing to do is save more for retirement rather than planning to work.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Planning to work in retirement?

Frugality for Fortune

When most think of building a fortune, they think of starting a business, taking a big gamble, or getting wildly lucky.

The reality is that building a fortune is easily accessible to anyone willing to live within their means, save diligently, and invest wisely.

The Millionaire Next Door illustrates this point well. So did a recent article in the Wall Street Journal (subscription required).

Ronald Read recently passes away at the age of 92 with $8 million in investments and saving. Did he start a business, take a big gamble or get wildly lucky? Nope.

He “displayed remarkable frugality and patience–which gave him many years of compounded growth.” “He lived modestly, working as a maintenance worker and janitor at a J.C. Penney store after a long stint at a service station….”

“Those who knew him talk of how he at times used safety pins to hold his coat together and sometimes parked his 2007 Toyota Yaris far from where he was going to avoid having to feed the parking meter.”

This isn’t quite the 1% popularly portrayed in the media. This was a normal guy who worked, saved and invested.

“Mr. Read owned at least 95 stocks at the time of his death, many of which he had held for years, if not decades.” Not really day trading.

His holdings were “spread across a variety of sectors, including railroads, utility companies, banks, health care, telecom and consumer products. He avoided technology stocks.” He invested in things he understood after doing his own research.

“Friends say he typically bought shares of companies he was familiar with and those that paid hefty dividends. When dividend checks came in the mail, he plowed the money back into more shares….”

No six-figure income. No internet start-up. Just living within his means, saving consistently, investing after doing his homework. Being patient, being frugal, thinking long term.

Financial success doesn’t require lots of luck or risk taking. Just simple strategies implemented consistently. 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Frugality for Fortune

The big benefits of boosting your savings–even by small amounts!

Everyone knows they need to save more for retirement. But most don’t because they think they can’t afford it.

The reality is that even small boosts in savings can have large impacts over the fullness of time.

A Wall Street Journal article and a report by Fidelity Investments makes this point clear: even boosting your savings by 1% will have a meaningful impact on your retirement income.

It’s more fun to focus on getting higher returns, but the most potent force in anyone’s retirement plan is their own willingness to save.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The big benefits of boosting your savings–even by small amounts!

Stock market up 60% since 2007 peak

Building wealth over time requires the fortitude to stick to your plan.

Colorado Spring’s own Allan Roth made this point nicely in a recent Wall Street Journal article. His basic point is that even if you had been unlucky enough to buy at the stock market peak of 2007, your wealth would still be 60% higher now if you had stuck with it.

The problem is that so few stick with it.

Yes, the market went down over 50% from that 2007 peak. But, those losses were temporary. The U.S. businesses underlying the market rebounded and are doing well.

Nothing in life is free. The price of generating good long term investment returns is having the courage to stick to a good plan. 

That means you have to be able to ride the market up and down without getting so that scared you sell at the bottom or so euphoric that you don’t adjust your portfolio at the top.

Becoming wealthy is not rocket science. Spend 80% of you income, invest the other 20% in the highest performing asset class over time–stocks–and have the intestinal fortitude to stick to that plan over time.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Stock market up 60% since 2007 peak

Perhaps a Roth IRA isn’t so safe after all

If you could perfectly predict the future, financial planning would be a piece of cake.

Unfortunately, that’s not possible. Future rates of return and inflation are not precisely predictable. Neither is how long you will live. Neither are tax rates.

Which brings me to the topic for today. The Roth IRA is a great deal because it allows you to save and invest after-tax dollars that won’t be taxed on withdrawal. Even better, unlike a traditional IRA or 401(k) plan, retirees aren’t mandated to pull certain amounts out each year, providing flexibility in income and tax planning. Better still, you can pass those dollars on to heirs with much fewer restrictions than is the case with a traditional IRA or 401(k).

That is, unless they change the rules.

Well, apparently, changing the rules is precisely what is being considered. According to an article in the WSJ, two proposals being sent to Congress are trying to do just that.

First, one proposal seeks to require Roth owners to start taking distributions at age 70 1/2, just like with traditional IRAs and 401(k)s. That would remove a major element of the Roth’s appeal both for retirees and their heirs.

Second, the other proposal attempts to end the ability of heirs to stretch out distributions. This would eliminate another of the major appeals of the Roth IRA as an estate planning tool.

The Roth IRA has created a garden industry of advisers, lawyers and accountants who have helped investors (for an hourly fee, of course), to shuffle assets from traditional IRAs to Roths and back again in order to dodge the tax man. This has always been premised on the predictability of the law, which is now in question.

And, this brings us back to the difficulty of financial planning. It isn’t easy, nor is it rocket science. What makes financial planning difficult is that it is inherently decision making under uncertainty. If you say X will result if Y occurs, there is usually an assumption behind that. When that assumption can and almost certainly will change–like tax laws–you can wind up with plans that aren’t quite as solid as they were described to be.

I frequently council investors against setting their financial plans in too much concrete. Instead, a range of assumptions for returns, inflation, taxes, etc. should be used. Nor should it be assumed that things like Social Security will be around, especially for younger investors; at any point in time, the majority or vocal minority can yank away the benefits you were promised. 

Instead, it’s best to plan to take care of yourself regardless of how the rules are changed. It’s better to be approximately right than precisely wrong.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Perhaps a Roth IRA isn’t so safe after all

Is stock picking dead?

Is it time to throw in the towel on stock picking (active investing)? Should everyone become an index investor (passive investing)?

As Vanguard Group, the king of passive investing, approaches $3 trillion in assets under management, and as mounting evidence shows that most investors should buy cheap index funds instead of trying to pick market-beating money managers, it’s a good time to ask the question: is stock picking dead (Jason Zweig asks just this question in The Decline and Fall of Fund Managers in the Wall Street Journal, today).

To advocates of passive investing, there is simply no argument. The average return of the average investor is average minus fees. Therefore, to maximize returns, most people should buy cheap index funds to minimize fees. 

The evidence fully supports this view. Investors do a terrible job of picking money managers and timing the market. They would be better off just buying an index fund with low costs.

Most money managers lose to the market. Many who do win over 3, 5, even 10 year periods do it by luck that isn’t repeated over the following 3, 5, or 10 years. Given that, the average investor is unlikely to successfully figure that out going forward.

Do some money managers beat the market? Yes. Do most of them do it by luck and not skill? Yes. Do any money managers do it by skill and over the long run? Yes. Are they almost impossible to pick ahead of time? For the vast majority of people, yes.

The money managers who do beat the market are unusually intelligent, think long term, are fiercely independent, and align their interests with their clients. Because most investors don’t look for those things (they tend to look at past performance or for friendly people), and most money managers don’t possess those traits, most investors should buy low cost index funds.

Suppose everyone invested in index funds? Would that make everything right in the world? The problem then would be that without anyone analyzing and pricing individual securities, securities markets useful function, price discovery, wouldn’t happen. That would be bad because markets need effective pricing to work.

But, how many people need to be picking stocks to still have securities markets perform their price discovery function? No one knows the answer precisely, but it is not zero. Someone needs to analyze and price securities, or markets wouldn’t work. But, the number of people doing this doesn’t need to be as great as it is now (an article in the Financial Analysts Journal (not free) by Charlie Ellis, points this out).

So stock picking isn’t dead, it just doesn’t need to be done by as many analysts and portfolio managers as are currently doing it.

Is passive investing the right choice for most investors? Yes. Does that mean stock picking is dead? Definitely not.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is stock picking dead?