The WSJ had an interesting article about retirement planning that you will need a subscription to read.
The article isolates some omissions in process that could be very important. First the article tackles inflation. Many people fail to account for inflation in their planning and the contention in this article is that those that do often figure too low. The standard 3% assumption might be too low. While I am not sure if 3% is too low I do know that if 5% turns out to right and you plan for 3%, a lot of your numbers will be way off.
The idea of rerunning your numbers with a 5% inflation rate to see what happens makes sense. A couple of tweaks could mitigate a chunk of the damage caused by a higher inflation rate.
Next the article touches on spending. People that are in the early years of retirement are likely to spend more on lifestyle (travel and hobbies) than people later in retirement. But older retirees are likely to spend more, a lot more, on medical care than younger retirees. The article doesn't really offer much on this topic.
The article touches on longevity. This is important. Based on medical innovation it is a reasonable bet that today's average 50 year old could live ten years longer than they might otherwise expect.
The article also touches on the withdrawal rate that I have mentioned on this site before and drew so many comments. The article went with 4%. Obviously the number is reasonable, but the lower the better.
I was disappointed that the article did not focus at all on alternative ideas for creating income. It makes sense to me that innovative ideas along these lines will help ensure a successful retirement, financially.
Monday, March 27, 2006
Monday, March 20, 2006
Barron's On Retirement Planning
Once or twice a year Barron's devotes an issue to retirement, including planning, products and whatever else strikes their fancy.
You will need a subscription to read the articles. There were two that caught my eye because I think they play into what I have been writing about on this new blog. One article was about moving to another country and the other profiled a fictitious couple and real advice from three different financial planners.
I was encouraged to read more of a shift to thinking outside the box. While I would not suggest that anyone move to Croatia per se, exploring different ideas along these lines can be worthwhile. Most of the destinations in the moving article probably do have a lot to offer in the way of lower cost of living and tax breaks.
Perhaps splitting time between one of those places is an option? Or perhaps living there for a few years until maybe age 70 and then coming back when you are likely to need more medical care could be an idea. I am not an expert on this subject and there are flaws to what little I have in this post but the point is to explore these idea and see if any of them can be applied in some way to your retirement plan.
The planning article also had a little outside the lines thought with consulting during the first few years of post-retirement, monetizing a genealogy hobby and eBaying stuff.
On a somewhat related note a neighbor of mine has a vehicle kind of like this one that he uses to plow the road and people's driveways.
I mentioned him on my Big Picture blog in passing. For some reason he has been plowing me out for free. He could reasonably charge $40-$50 for the 2 minutes it takes to plow me out.
There are easily 50 people that he could plow out and charge for the work. On our mountain we average about five snowstorms per year. Assume only 25 people hire him at $40, it works out to $5000 per winter. That could easily cover one month's expenses for someone with a modest lifestyle.
Two or three things like this to cover expenses for two to three months out of the year can reduce the demands placed on a portfolio.
Buying a snowcat is very capital intensive but buying a big plow blade to put on the front of your pick up or SUV is not.
Again the idea is not for you to plow your neighbor's driveway. My neighbor has a snowcat and can potentially make money from it. His idea is capital intensive and the much cheaper plow blade is an easier spin on the idea.
Focus on process not product.
You will need a subscription to read the articles. There were two that caught my eye because I think they play into what I have been writing about on this new blog. One article was about moving to another country and the other profiled a fictitious couple and real advice from three different financial planners.
I was encouraged to read more of a shift to thinking outside the box. While I would not suggest that anyone move to Croatia per se, exploring different ideas along these lines can be worthwhile. Most of the destinations in the moving article probably do have a lot to offer in the way of lower cost of living and tax breaks.
Perhaps splitting time between one of those places is an option? Or perhaps living there for a few years until maybe age 70 and then coming back when you are likely to need more medical care could be an idea. I am not an expert on this subject and there are flaws to what little I have in this post but the point is to explore these idea and see if any of them can be applied in some way to your retirement plan.
The planning article also had a little outside the lines thought with consulting during the first few years of post-retirement, monetizing a genealogy hobby and eBaying stuff.
On a somewhat related note a neighbor of mine has a vehicle kind of like this one that he uses to plow the road and people's driveways.
I mentioned him on my Big Picture blog in passing. For some reason he has been plowing me out for free. He could reasonably charge $40-$50 for the 2 minutes it takes to plow me out.
There are easily 50 people that he could plow out and charge for the work. On our mountain we average about five snowstorms per year. Assume only 25 people hire him at $40, it works out to $5000 per winter. That could easily cover one month's expenses for someone with a modest lifestyle.
Two or three things like this to cover expenses for two to three months out of the year can reduce the demands placed on a portfolio.
Buying a snowcat is very capital intensive but buying a big plow blade to put on the front of your pick up or SUV is not.
Again the idea is not for you to plow your neighbor's driveway. My neighbor has a snowcat and can potentially make money from it. His idea is capital intensive and the much cheaper plow blade is an easier spin on the idea.
Focus on process not product.
Sunday, March 19, 2006
A Word Of Caution
This may sound hypocritical and fair enough if you think that.
I can tell from the emails I receive in my Street.com account from those readers that a lot people read an article, be it mine or someone else's, that makes intuitive sense and take action without proper study.
This is dumb anyway you cut it. Just about every article is plausible but far from every article turns out to be correct.
If you are going to manage your own portfolio you have to properly understand what you own, why you own and what can go wrong. I doubt that too many people would disagree with this yet many people buy stocks based on articles or based on TV touts.
Trying to make money trading off of TV and print is a path of much resistance. This is the wrong approach for most people yet a lot of people do try to speculate this way. Beware.
I can tell from the emails I receive in my Street.com account from those readers that a lot people read an article, be it mine or someone else's, that makes intuitive sense and take action without proper study.
This is dumb anyway you cut it. Just about every article is plausible but far from every article turns out to be correct.
If you are going to manage your own portfolio you have to properly understand what you own, why you own and what can go wrong. I doubt that too many people would disagree with this yet many people buy stocks based on articles or based on TV touts.
Trying to make money trading off of TV and print is a path of much resistance. This is the wrong approach for most people yet a lot of people do try to speculate this way. Beware.
Friday, March 10, 2006
Should You Hire An Investment Manager?
I think I can be objective about this.
I think the basics of building and maintaining a portfolio can be learned by a lot of people. This can be done without individual stocks and allow an investor to stay close to the market and perhaps manage the risk effectively, for example using a dividend ETF for a portion of large cap exposure.
One of the biggest obstacles for do-it-yourself is emotion. There are studies from various financial institutions that show mutual fund holders lag the funds they hold due to poor timing of purchases and sales. This can be reasonably attributed to buying high and selling low.
I can tell from conversations I have with some clients, neighbors and friends that getting a handle on the emotional aspect of portfolio management is a much tougher skill to learn.
History shows that stock market crashes come at bottoms not tops. I don't know how many times I have said and written that. Yet I know that the next time there is a crash I will get comments left on the blog about selling, clients will also ask about selling. People can process crashes come at bottoms today, when there is no crash. It is tougher to do when a crash comes.
A successful do-it-yourselfer needs to really embrace the history of something like this to be a good money manager. This is just one example there are many others.
If you plan to go it alone, I would urge you to learn as much as you an about stock market history. There are plenty of books that tell the stories of the market and I would also advise getting something like the Stock Trader's Almanac to see the actual numbers. Everyone knows what a terrible stock market we had from 1968 to 1981, right? It was awful!
Well not exactly.
1972 SPX up 15.6%
1975 SPX up 31.5%
1976 SPX up 19.1%
1980 SPX up 25.8%
So during that 14-year period there were four years unambiguously better than the long-term average. There were five other years during that time period that were up slightly. So nine out of 14 years in this "awful" period were actually up.
The remaining years were absolute stinkers.
1969 SPX down 11.4%
1973 SPX down 17.4%
1974 SPX down 29.7%
1977 SPX down 11.5%
1981 SPX down 9.7%
Most of the damage of this time period was done in 1973 and 1974. I would note that the index went below its 200 DMA (my trigger to start getting defensive) in the spring of 1973 only about 10% from the high set in January of 1973. The SPX went back above the 200 DMA early in 1975, about 15% from the bottom.
Being faithful to this exit strategy then would have allowed you miss most, not all, of down a lot. This would have added dramatically to returns for that time period. This will happen again in the future.
This is all about numbers not sentiment. Understanding how numbers have worked in the past can build a foundation for you to begin to assess how numbers might work in the future.
Only you can really know whether you can do this. Coming up with the right answer requires introspection.
I think the basics of building and maintaining a portfolio can be learned by a lot of people. This can be done without individual stocks and allow an investor to stay close to the market and perhaps manage the risk effectively, for example using a dividend ETF for a portion of large cap exposure.
One of the biggest obstacles for do-it-yourself is emotion. There are studies from various financial institutions that show mutual fund holders lag the funds they hold due to poor timing of purchases and sales. This can be reasonably attributed to buying high and selling low.
I can tell from conversations I have with some clients, neighbors and friends that getting a handle on the emotional aspect of portfolio management is a much tougher skill to learn.
History shows that stock market crashes come at bottoms not tops. I don't know how many times I have said and written that. Yet I know that the next time there is a crash I will get comments left on the blog about selling, clients will also ask about selling. People can process crashes come at bottoms today, when there is no crash. It is tougher to do when a crash comes.
A successful do-it-yourselfer needs to really embrace the history of something like this to be a good money manager. This is just one example there are many others.
If you plan to go it alone, I would urge you to learn as much as you an about stock market history. There are plenty of books that tell the stories of the market and I would also advise getting something like the Stock Trader's Almanac to see the actual numbers. Everyone knows what a terrible stock market we had from 1968 to 1981, right? It was awful!
Well not exactly.
1972 SPX up 15.6%
1975 SPX up 31.5%
1976 SPX up 19.1%
1980 SPX up 25.8%
So during that 14-year period there were four years unambiguously better than the long-term average. There were five other years during that time period that were up slightly. So nine out of 14 years in this "awful" period were actually up.
The remaining years were absolute stinkers.
1969 SPX down 11.4%
1973 SPX down 17.4%
1974 SPX down 29.7%
1977 SPX down 11.5%
1981 SPX down 9.7%
Most of the damage of this time period was done in 1973 and 1974. I would note that the index went below its 200 DMA (my trigger to start getting defensive) in the spring of 1973 only about 10% from the high set in January of 1973. The SPX went back above the 200 DMA early in 1975, about 15% from the bottom.
Being faithful to this exit strategy then would have allowed you miss most, not all, of down a lot. This would have added dramatically to returns for that time period. This will happen again in the future.
This is all about numbers not sentiment. Understanding how numbers have worked in the past can build a foundation for you to begin to assess how numbers might work in the future.
Only you can really know whether you can do this. Coming up with the right answer requires introspection.
Monday, March 06, 2006
Ben Stein
Sorry for the infrequent posts, work and life have been busier than normal.
I read an interesting article by Ben Stein on Yahoo that on its surface is quite grim. He is very concerned that the standard of living for baby boomers is going to decline in an ugly fashion because baby boomers are not saving enough for their retirement.
He says you will need 15 times your income need saved to generate enough income to live comfortably. Maybe he is factoring in getting social security but I think it is more like 20 times your income need. If you buy into taking no more than 5% out for income, I think that gets you to 20 times.
A slightly different spin would be the things I have talked about. Whatever dollar amount you have, that's it. You can't take more than 5% out per year. If that 5% is not enough you need to find ways to build the remainder of your paycheck.
That people won't have enough is not new. The thinking behind Mr. Stein's article is the catalyst for this site in the first place. More and more people will need to find innovative strategies to fund retirement. This ties in with an even bigger theme which that the US' economy will have to evolve, as it has always done, to still be a great country. I have no doubt it will but it won't be simple or painless.
The article underscores the importance of having some sort of clear and simple plan in place and a way to monitor your progress vs. the schedule of your plan. For example if your 401k needs to be at $420,000 by age 52 and you only have $310,000 at age 51 you can know this and implement a strategy, with a time table, to catch up.
I read an interesting article by Ben Stein on Yahoo that on its surface is quite grim. He is very concerned that the standard of living for baby boomers is going to decline in an ugly fashion because baby boomers are not saving enough for their retirement.
He says you will need 15 times your income need saved to generate enough income to live comfortably. Maybe he is factoring in getting social security but I think it is more like 20 times your income need. If you buy into taking no more than 5% out for income, I think that gets you to 20 times.
A slightly different spin would be the things I have talked about. Whatever dollar amount you have, that's it. You can't take more than 5% out per year. If that 5% is not enough you need to find ways to build the remainder of your paycheck.
That people won't have enough is not new. The thinking behind Mr. Stein's article is the catalyst for this site in the first place. More and more people will need to find innovative strategies to fund retirement. This ties in with an even bigger theme which that the US' economy will have to evolve, as it has always done, to still be a great country. I have no doubt it will but it won't be simple or painless.
The article underscores the importance of having some sort of clear and simple plan in place and a way to monitor your progress vs. the schedule of your plan. For example if your 401k needs to be at $420,000 by age 52 and you only have $310,000 at age 51 you can know this and implement a strategy, with a time table, to catch up.
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