A reader left a horrible comment on a post of mine syndicated on Seeking Alpha that reveals a lot about long term thinking and my hope is that we can all learn something from it.
You can read the full comment here.
Basically the reader is 50, wants to retire at 62 and his plan appeared to need (based on how the comment read) 15% annual growth for his portfolio plus additions made every year. By his numbers and math that gets him to just comfortable not wealthy.
I don't disagree that the number he is shooting for is below that of wealthy. He goes on to share how much less he would have if instead of 15% he only averages 10%--only 10%. It pains me to say that the entire plan is a disaster.
You can only take what the market gives. This is a cliche of sorts that basically means you can't expect 15% in an 8% world, if 8% is what the average ends up being over the next 12 years. Certainly someone could end up with 15% in an 8% world but a plan the relies on it is a plan that needs to be changed.
People don't beat the market by that much with that sort of consistency unless they are Warren Buffet (I don't know what his actual track record is but you get the point).
I have had many posts about this sort of thing and I take a very simplistic view (although I realize it is also cold) which is save as much as humanly possible, live below your means (I am becoming more aware all the time how difficult this is for people) and then when you do retire do not exceed more than a 4% withdrawal.
If 4% doesn't give enough then you need to figure something else out besides "I 'll take more this year but next year I'll take less." If you have a gap and you are lucky you can work part time, figure an effective way to down size (this is not so easy to figure) or do something else but "I'll take less next year" is bad, bad solution.
The 50 year old commenter does not have plenty time to make his number if he want to retire at 62 but he does have plenty of time to calculate a more realistic expected return, determine if there will be a gap between what he can safely take and what he needs and figure out what he can do to fill that gap.
A slightly different take on my "whatever you got; 4%" meme is that in life there will be times where yo do need to take more money out in a given year as you get older for maybe a health matter, to bail out (literally or figuratively an adult child) or maybe pay for something for your 96 year old parent. Sticking to the 4% will allow you to more easily absorb some unexpected expense.
The reader in question will probably tell me to go to hell but hopefully you can learn something from what he is doing.
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23 comments:
Many people have rather unrealistic expectations of future returns. I am not even sure your 4% spend is realistic at this point in time.
My return has been 16% for a number of years, and I see a very hard time keeping that rate of return in the future.
One question I think you need to ask is what has your rate of return been over the last 10 years? (not just the good years)
Roger I do not know why you do this, but your continual dose of reality will hopefully slowly make a point with some people. You can not expect people to change their thinking over night.
I'm not 100% sure whether that reader is actually in that situation or he's just debating and in a roundabout way bragging on how he kills the market.
Anon, my take on 4% is not if you retire today with $1 million you can take $40,000 out every year. it is if you retire today with $1 million you can take $40k out this year. If next year the portfolio is $900,000 you can take out $36,000.
But you are correct it is not sure fire. 4.4% gives something like a 95% chance of success.
SD, that is not how read the comment but if that is the case well, never mind:->>
Roger, obviously I agree with the generic point you are making about this stranger's market expectations (though a lot of people who are nowhere near as smart as Buffett, including me, beat the market by more than 10% on a consistent basis). But what struck me about his postings is that if you take his return expectations at face value you are still looking at a guy who seems to be pretty smart about the markets and pretty dumb about retirement planning. In particular, he seems only willing to save for retirement in tax sheltered accounts and unwilling to continue focusing on his investments after he retires at 62 (when he presumably has more time to spend as he sees fit). If he is really taking high risk with investments, then he needs to curtail some of that risk as he approaches retirement (presumably lowering returns). If he is not taking high risk, then why isn't he willing to keep investing money that he doesn't need to access in the short or intermediate term after he retires in a similar manner? And if he is only planning to live until 72 then obviously there is a big problem there too. I'm trying to say that in reality, other aspects of his retirement planning concepts, related to his ability to save and his expectations for post eearly retirement lifestyle, might be more misguided than his expectations that he could keep doing what he has been doing with his portfolio going forward.
Josh, fantastic comment.
In a society where public schools at all levels through graduate school give student rewards via grade inflation and accolades for "showing up", the reality of personal responsibility and living beneath one's income level with realistic investments as a means for long term benefit have been eroding from our nation for decades.
Is the answer more feel good academics,higher taxes and a government that knows what is best for you? More of the semi-educated are saying YES.
T
T you and I have each made similar comments b4. we all know people (or in my case are related to people) who need lessons on how to be responsible adults.
Not only is a lower rate of return more realistic, I think a less actively managed portfolio is appropriate for retirement.
I see the mental status of my dad decline and realize that a bullet proof lazy portfolio is what will be needed in retirement. How do can anyone expect a bullet proof lazy portfolio to perform significantly different than the market over time?
Roger I here what you say about taking only 4% out of the 900k if markets go down, I just do not think that is realistic. I think it is more realistic to take less than 4% thereby having a much greater chance of the amount you can take out to increase year after year.
Even better is to phase into retirement while still working some which you have also touched on.
As long as people base their sense of self worth on how much money they spend, there will NEVER be enough. charlie
Bullship. And the meter is pegged to extreme bullship.
All the folks with 16%, 22%, 10% over the market, returns anually - either provide proof of this or go back to Yahoo boards. What's you Alpha investments for '08? What's your beta look like?
Why aren't you running your own hedge fund or working at Goldman Sachs making $20M per year rather than fouling up a decent blog for regular folks?
Showing off the big hat and fancy boots - where's the cattle?
Who remembers that little old ladies' investment club and their great returns and their book deal...
...and their math errors in calculating their return?
Beardstown Ladies i believe. They included additions into their results.
Anonymous 11:18, if you are talking to me...I'll answer as follows:
1) I'm up about 3% for '08.
2) I don't calculate alpha or beta and don't really believe all that much in capm. My beta would be pretty high in periods where I'm not mostly in cash, but I don't use any direct leverage.
3) A lot of my biggest gains always come from small stocks that wouldn't provide enough liquidity for a normal sized hedge or mutual fund taking a significant position. I've posted about some of these stocks from time to time on this blog. I don't think I would be able to beat the market by very much, if at all, using the portfolio constraints of a typical mutual fund.
4) I'm completely neutral about what you choose to believe.
I heard recently advice you should have your age as a % invested in bonds, but having over half your pot in bonds for the next 12 years sounds over-cautious to me. Maybe look to have less in bonds and some in an absolute return fund, although I've not really examined those closely yet. They've been doing ok in Q1 for 2008 though.
Saying that if he's careful he only needs 4% in 12 years, 4% in 13, 4% in 14, 4% in 15, 4% in 16, 4% in 17, 4% in 18, 4% in 19, 4% in 20, 4% in ... hang on, is this guy George Burns? Does he need to budget for 40 years of retirement? Couldn't he blow it all in 20 and have enough at the end for a bullet and a box?
Also will he still need his large home and car when he's in his eighties? He could downsize when his retirement pot runs out for his '2nd innings'.
A bit carefree? I guess so.
My investment returns last year were around 30%. Of course, with a decent market for most of the year plus lots of cash thrown off from rental real estate I have held in many instances for years and decades, this return is not anything to brag about. It is realistic.
T
Talk about a timely column, Roger. The Economic Benefits Research Institute recently released its latest poll on retirement expectations. Directionally, alot of folks are lacking $$; I recall the numbers change was from more than 25% to 18% -- on ability to cover future expenses. The writer referenced med. inflation as cause; I imagine the report which I haven't read mentioned house price depreciation. B
People who are active traders and actually good at it can substantially beat the market. From an economic point of view it's a return for effort rather than a market return. The other alternative is hiring those good managers. They do exist though likewise they are small in number. Look at Berkshire or Leucadia or the CGM funds. Or Man/AHL managed futures. Even funds such as Fidelity's Contrafund get good alphas. So it is definitely possible to beat the market long-term. Though not too many people logically can.
OTOH I think it is a good idea to plan for retirement on the basis of only getting market returns.
Just to balance the discussion a bit, I am one of the Wall Street "casualties", and for the past 4 months I've been an "active" - approaching "day" trader. (My old job was not trading, but I enjoy it and wanted to "give it a go" and see just how "hard" or "easy" it is to beat the market and/or bring in that imaginary 15%.)
Let me say this: if you are an investor in your spare time (meaning you already have gainful employment that ensures you are making your mortgage, and can pay for the kids schooling), you really don't know whether or not you can "beat the market" - and you'll never know until you take the plunge.
First, there's the surprisingly difficult question of MEASURING your performance.
But more importantly, assuming you actually have a realistic way to measure performance (meaning, as a professional trader, you are accounting for taxes, and you are actually making DRAWS from your investment accounts to pay for those things that so far have been otherwise paid by your employer, and you are looking at returns on a capital account AFTER paying yourself a salary, and reserving for taxes), you have to consider whether or not you are comfortable sleeping at night with open positions.
If not, then that means every single day you are starting at zero.
If you do run open positions, your performance must also account for the negative carry on your uninvested assets. (And if you're 100% invested today, you'll have to explain to the world how the heck you manage to walk with those things banging between your legs...)
Suddenly, that "15%" looks a whole lot more like 25%.
And trust me, when the market whipsaws and you see $15,000 - $20,000 go "Poof" in a day, that ol' day job don't look quite as horrible as you thought.
Not impossible, but darn near. (It's no coincidence that the big trading houses have floors filled with DOZENS of 20-30 somethings all intently focused on their screens, each steadily burning themself out. The game is simple: with 50 traders, and adequate risk controls, the 10-15 current period outliers pay for the stopped out losers. Those 10-15 are not always the same traders, but with sufficient competition, and enough numbers, the edge goes to the house. But you generally don't see many 40+ traders on the floor. The weak ones are gone, and the great ones are retired, and the "above average" traders are simply burned out.
My goal? 8 percent, gross - Absolute Return. I'll work at this for 6 months. And I'll reassess. 15 years, at 15%?
Hmmm, I know of this bridge in Brooklyn...
Jack Schwager's _Stock Market Wizards_ is a good book about people who beat the market by a lot for at least several years in a row. They all had different methods, but the common theme was that they all had to work really hard at it and it took a while to each to find and develop approaches that worked for them.
I am not a good trader or stock picker IMO. My out performance comes from investments in asia or energy and avoiding the 2000 - 2002 bear market along with getting out of the market last year.
I think out performance is possible but not with good diversification. I also think large returns will get rather difficult for all of us in the future.
Roger,
I find your blog one of the most insightful and useful blogs posted right now. I read through this guys comment and it really hit a hot button with me.
Little background on myself is that I am 27, attended the Air Force Academy where I double majored in Econ/Management, am a Capt in the Air Force, and am currently deployed to the US Embassy in Baghdad. I have been actively investing my own savings since I was 15 and consider myself a value investor. I have trouble finding an accurate method of determining my overall return because of the fact that I sell uncovered puts on a few select stocks at times that I pick through a value approach. Without my options positions included my annual return according to MSN money is 13% a year since I started entering all my trades in 1999. The rock in my portfolio is BRK.b which accounts for about 30% of my portfolio and gives me confidence to take a small amount of extra risk with options due to the fact that in a tough market Berkshire usually is up when everything else is down. I currently save over 30% of my monthly income in tax deferred or exempt accounts because I like the thought of saving more now so I have more freedom in the future. My goal is 10% return annually on my overall investment portfolio which luckily I have been able to beat most years but fully realize will be a challenge over the next few years. I hedge and use a small amount of very low cost leverage when I believe the market is either under or over valued. I am an avid reader of all different financial perspectives and theories and go through dozens of books a year not to mention about a 10 financial magazine and newspaper subscriptions. I invest because I like the intellectual challenge of it. I already have saved and made enough in the market to guarantee a comfortable retirement as long as I avoid/acknowledge and plan for a black swan.
The reason this guys comment hit such a hot button with me is that it is typical of the babyboomer generation. I would love it if some of today’s bloggers or journalist’s sac up and point out that the babyboomers as a whole are the most selfish generation this country has ever seen. I don’t know why the boomers are incapable of accepting fault but my generation and every other will be paying a price long after they are gone. The way I see it they are incredibly spoiled in so many ways that they expect the best of everything without accepting the consequences of their lack of planning/poor judgment. Over the past 30 years the boomers have truly shown what giving the keys to the prisoners can mean. As they are the executives in charge or the largest voting block available, they have done a huge disservice to this country.
A few injustices they have levied on following generations
-Entitlements
- Social security-The boomers have not stepped up to the plate to fix a known broken system. We all know this system will not work as planned over the next 50 years. Cut the benefits now so hopefully people will realize they need to plan to work longer and save more. Not my fault the boomers didn’t have as many kids as their parents did. A pyramid scheme is still a pyramid scheme even if it’s run by the government.
-Medicare is, depending on the assumptions, 5 times as big a problem as social security. We need to explain to our country that healthcare is not an unlimited good. It has to be rationed in some way. Spending $100,000 on an experimental treatment for lung cancer for a 65 year old who has been smoking for 50 years is not a proper use of my tax dollars. We all know there are massive flaws and inefficiencies in our system but promising to pick up the tab without setting aside money to pay for it is a joke.
-Corporate Pension Plans-Most of these plans are under funded which has multiple consequences. Many are under funded today even with the high return expectations that are built into the funds. This allows the execs to take as more pay while kicking the burden down the line. In the future the company will either declare bankruptcy thereby ridding themselves of the burden and putting it on the taxpayer or they will fully fund the pension plan reducing the money available for further investment or return to shareholders. Since most of these pensions are not inflation adjusted the easiest way to reduce this problem is let inflation run higher thereby hurting everyone.
-Municipal Pension Plans-I’m not saying whether our teachers and police are overpaid or underpaid because in large part that depends on where you are. In general though this will be the next huge problem for this country and its another problem caused in large part by the babyboomers. They have used their positions in government and union power to exponentially increase their pension benefits. This problem is not in every area but is much more widespread than most realize. Many people retire with pensions of 60% plus of their salary that goes up with inflation and who can retire while still in their 40’s. The plans are either massively under funded or completely unfunded. From my knowledge in many cases there is no money set aside for healthcare benefits promised. In my home state of IL the teachers pension plan is over $30B under funded by itself. This is a bigger problem than even corporate plans because we can’t use higher inflation or bankruptcy to bail the country out of the problem. We will continue to pay the prices in our countries crumbling schools, bridges and roads as all the financial resources are directed fulfill the promises made in the past.
-Military Pensions-This is coming from an active duty Air Force Officer so I do have the right to say it. These are a huge benefit to a few, no use to the majority, and a disservice to the military. The thought that someone can retire at 38 and collect a pension for the next 60 year is disturbing to me. We are talking about paying someone for a lifetime for 20 years of service. Worse problem with this is that there is no money set aside to pay these benefits, not to even talk about the healthcare benefits. The men and women who serve this country do deserve compensation for the sacrifices they have made for this great country. Unfortunately this is an antiquated system made for times past that needs to be totally redone. The great majority of people who serve leave the military with no pension. Overall the military would be much better served by eliminating the pension completely and instead making contributions to people retirement accounts that they can take with them when they leave the military.
-Government pensions-Same deal, no money set aside, just dump the cost onto the next generation.
-Schools- Current generations face massive costs for college education that our parents generation did not. The Greatest Generation, my grandparents, built many of the schools of higher education and paid for the fees associated with that education for the babyboomers. Today those schools are crumbling and the professors are overpaid considering they are more concerned with how they can do more research rather than how they can help educated the next generation. While many parents do help or fully fund collage, the amount of debt that current generations take on to complete school will have a drag on this country long term.
-National debt-This is not the end of the world to have a slight deficit but it must be minimized and managed. This is another area where the current generation is dumping the cost onto the next generations for their benefit.
-Cheap gas-When I try to explain to people how high gas prices are the answer rather than the problem it goes right over there head. Cheap gas is not a right, it is not unlimited and just because it has enabled massive growth and standard of living increases over the past 50 year does not mean we need it. In my mind smaller government is good but there is one area where we should have more taxes. That is on oil use. If we instituted a higher gas tax, say 20 cents additional every year for 5 years, and eliminated the bottom tax bracket to make the overall change revenue neutral our country would be much better off. More of our income will stay in the country rather than being shipped overseas. Higher cost gives industry and people the right incentive to develop new technologies and reduce use.
-Housing-I fully realize that people have no real comprehension of how real estate is valued but in the past decade things got way out of whack. I don’t really know why people think real estate is the way to make the entire country wealthier when in the end its pretty much a zero sum game. If I buy a house from my parents for a lot more than its worth its their gain but my loss. Everyone is talking about falling housing prices like someone is reaching into the babyboomers back pockets and stealing part of their retirement savings. Guess what, falling housing prices are a good thing, especially for the younger generations. We don’t need a government bailout so we can artificially keep housing prices higher than they naturally should be. There is only so much of each paycheck that people can put towards housing. The more reasonable housing gets in this bust the better off all younger generations will be in the future.
-Higher stock prices-The supposed answer to what a stock is worth is the discounted value of all future cash flows. Stocks ebb and flow. 1980-2000 was one hell of a time to be invested, to bad I was just a kid. Boomers had the one of the best two decades to invest and prepare for their retirement. In many cases they didn’t. This is too bad but this country was build on the theory that people should be responsible for their actions. They chose to spend rather than save, now they must face the consequences of that choice.
The basic problem with all these issues is that the babyboom generation has used every trick in the book to ensure they have the highest standard of living possible while deferring the costs to other generations. They have not had to sacrifice like earlier generations and have had most things handed to them. I am not saying other generations including my own have not had it easy. We have in many cases had it easier than the babyboom generation. What concerns me is that looking forward my generations future has much bigger hurtles in front of us than the babyboom generation and we as a country must come together to fix them. Its going to be a sad day in 20 years when younger generations finally open their eyes and realizes how much was worse off we are thanks to the decisions made today.
Hello,
I'm interested in analysis of IBM 1Q. I'm hearing strong orders for the new mainframe and services signings are up. Key contacts are saying there will be strong guidance for full year '08. Anybody?
JJ
Hello,
I'm interested in analysis of IBM 1Q. I'm hearing strong orders for the new mainframe and services signings are up. Key contacts are saying there will be strong guidance for full year '08. Anybody?
JJ Stanton
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