Example Of Inflation

The Economic Beat column in Barron's was primarily about the run up in gold, whether it has been justified or not and how far it might go. One point made that is relevant to this blog is that gold, adjusted for inflation would need to go to $2000 to equal its 1980 high of $850.

The point here is not to debate what gold will do or how useful looking at gold adjusted for inflation is.

Think of the $850 as someone's monthly living expenses in 1980. The same lifestyle today would cost $2000. Applying the same inflation rate over the next 26 years would take today's $2000 in expenses up to $4705 per month. A portfolio today would need to be worth $480,000 to meet the $2000 monthly income need. That same portfolio would need to grow to $1,129,200 while paying out the income need along the way.

However much an investor put into bonds 26 years ago is how much he has today. The S&P 500's high water mark in 1980 was 140 and today it is 9.3 times higher at 1310. So in the last 26 years inflation is up 2.35 times and stock prices are up 9.3 times.

This idea is probably not new but it reiterates the point of how important equity exposure is.

It is very possible that the next 26 years will not offer the same returns as the last 26 years. The domestic returns cold be much worse. This creates the potential need for better understanding of foreign stock markets. The starting point of these decisions can be a very simple logic. The numbers are what they are and will be very similar in the future even if you have to go to other countries for those same numbers.

Retirement - New York Times

Business News - Retirement - New York Times

The Times has several articles on this link that I believe tie in with some the things I have been writing about on this site.

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Longevity

Barron's had an interesting cover story about longevity possibly expanding well beyond what people now think in terms of how long they will live.

On one level longer life seems intuitive in that all technology is advancing at an accelerating pace. Michael Miliken says cancer will be gone by 2015. There will also be advances in how heart disease is managed and treated. There article then talks about nano technology creating little robots that go all through the body fixing things.

A big part of aging is caused by damage that occurs in cells. Science will find more and more ways to prevent or reverse this damage. Some of this will happen within the timeline stated in the article. How much will happen is the variable.

I do not want to turn this into a morality debate. It makes sense to think about living longer from a dollar and cents standpoint.

This could mean (recurring theme alert) planning retirement will have to be done differently. We will have to work longer, we will have to own a lot of equities longer and it will create many stresses on our economy, our social services, natural resources and many other things.

This ties into an idea that the US will need evolve in order to prosper. I believe that it can but this could be serious.

In my opinion successful retirement planning includes staying in touch with new fill in the blank. New will never stop. Staying in touch with new can make retirement planning much easier or perhaps a better way to look at would be that staying in touch with new can stave off hardship.

Managing the Income Portfolio

Managing the Income Portfolio -- GuruFocus.com

This is a very good read with a lot of detail

CD Product

A reader expressed an interest in buying a CD from Millennium Bank that appears to be a very high yielding product.

The reader wonders whether I would buy something like this and then why or why not. While I did not read the fine print, the main page is very clear that there is no getting your money out early. They are not saying if you break the CD you pay a penalty, they are saying you cannot get to the money, period.

As a matter of philosophy I don't like to lock up money in this way. This is not a comment on investing but personal preference and so probably does not offer much value. I prefer to keep options open to me, not just financially.

I can't say that the reader should or should not but the CD I am just saying this is not for me.

Coming Up Short?

This is the general warning from an article in the WSJ. Too many Americans will come up short in their retirement savings. One scary tidbit was that only 25% of Americans over age 55 have $250,000, or more, saved for retirement. The scary part is that people who live to age 90 will need $215,000 for medical expenses. That leaves $35,000 from to draw 5% from. Oops.

The article also talks at length about planning to need 70% of what you make now to live on and questions whether instead of 70% you should target replacing 85% of your income.

Advice like this is too broad. Plenty of people have a mortgage when they are younger. Whether the mortgage is paid off in retirement matters and would be a huge determinant as to how much of your income you need to replace. Some people need to drive a particular type of vehicle when they work, pay for it a particular way and replace it at a specific time interval. No car payment or a lower car payment could also affect income need in retirement.

The bigger point is to not rely on a generic number but to analyze your own situation to determine how much you need. If the number you come up with is too low you might want to reassess.

My wife and I have almost no expenses now. Really, all we pay for is utilities, groceries and various insurance premiums. Layer on top of that two trips per year.

I expect my expenses will increase in retirement due mostly to normal health costs. Also, we currently make no car payments but they way have lived so far we have a car payment about 1/3 of the time, we drive cars until they die, well close to it anyway.

I am often critical of brokers and bankers for trying to label customers as tab A or tab B and then fitting them into slot A or slot B. Don't label yourself in the same way.