“How much money do I need to retire?” is a very common question I am asked. When I turn it back on the client I get varied responses but my favorite is, “I want just enough so that my last check bounces, and hopefully it’s made out to the IRS.” Sadly, some retirees spend money as if this is really their goal.
How much you need to retire is very personal and has a lot to do with how you live before retirement. Some do just fine on a few thousand a month. Others live extravagant lives they would have difficulty giving up. So looking at today’s expenses is a great place to start.
A rule of thumb says you need 70% of your “working years” living expenses, but that is often a poor guideline. This rule assumes you won’t have kids or a house payment. The problem is that just because your kids become adults doesn’t mean they stop costing you money. Some of you readers know exactly what I mean.
Though many retirees don’t have a house payment, they often replace it with higher travel costs, medical needs, eating out, and grandkids. The truth is, retirees often spend as much, or even more than they spent when they were raising a family. So, the best rule of thumb is to ask what you want your retirement to look like and create an honest budget for it. When you come up with an annual amount, subtract your planned fixed income such as social security and pensions, and what’s left over is what you will have to save for.
If you can assemble a nest egg about 25 times bigger than the amount you need annually, you will be well on your way to a successful retirement. So, if your shortfall is $24,000 a year, then I would suggest $600,000 as a starting figure. The biggest unknown in retirement is how long you will live, otherwise bouncing your last check would be much easier.
Retirement is like planning a flight to a distant city. Planes are weight-limited, so you rarely fill up the tank like you do with a car. You only carry as much fuel as you need. My rule of thumb is to figure the amount to get to my destination, include a safety margin for winds and ATC diversions, and then add enough extra to stay in the air for at least another hour, just in case. Launa has never complained at seeing 30 gallons in the tank upon landing. Unfortunately, countless pilots have died from running out of fuel, with many of those accidents happening within sight of the runway.
The “bounced check” planning model is terrible in aviation and just as dangerous in retirement. When you plan your life’s financial journey, make sure you build in a generous safety margin for the unexpected, and if you get to your destination with some fuel left in the tanks, I promise your heirs will not complain.
Most people are defensive by nature. They are primarily interested in protecting against risk. An example of this was my daughter’s recent visit to the rim of the Grand Canyon. Her two small boys, who are still too young to properly understand danger, were anxious to run over to the unprotected edge to see the exciting view below. Despite the unparalleled beauty of the canyon, our daughter struggled to enjoy it as she focused all her attention on keeping the boys safe. Rather than linger and enjoy the moment I think she was relieved to be safely back in the car with the boys comfortably in their seat belts.
Her experience is very similar to the way many view the investing world. They stand at the edge of endless opportunity, but have a difficult time enjoying it as their minds worry so much about falling.
At a recent business conference, we discussed the state of the economy and, as usual, considered the risks we face going forward. Few times in my career do I remember a more positive outlook. It is difficult right now to find any area of real concern in our economy or the investment markets. And yet there is a major risk to investors that we discussed and, ironically, it has nothing to do with the economy. This risk, which could pose serious problems for our economy, is political.
Politics have always played an important role for investors, but never before can I remember a time when the long-term risk has been so great. For most of my life, both political parties argued and debated openly but then sat down behind closed doors and worked out compromises to keep the country moving forward. Unfortunately, in our current environment, it appears that compromise is no longer possible. If you take time to examine the votes coming from both sides of the aisle over the past 10 years, you see a growing gap between the two parties that shows no sign of narrowing.
One of the biggest current issues is the national budget and debt ceilings. These matters must be addressed and under the current hostile environment it is very possible that no agreements will be reached. If that happens we could be looking at a government shutdown that could dwarf the ones of the past. Now some may joke that we should just let it shutdown, and certainly some areas of government are more critical than others, but if it lasts for an extended period it could do long term damage to parts of our economy. I don’t sound many alarms in my practice, but I am sounding one now. I remain fully invested and optimistic but if our government freezes again due to the stubborn attitudes in Washington, there are some specific areas of the investing markets that I will be moving my clients out of. Politicians, in pursuing their own interests, keep selfishly pushing us closer to the edge, which could change a beautiful view into a terrible fall.
On our current trip to Monaco we had the opportunity to drive a 1946 MG through the hillsides of France. The car had no doors, windows or even seatbelts. When the kind Frenchman gave me instructions on driving it and Launa asked about seatbelts he just laughed and said, “Ah, you don’t need seatbelts.” This car didn’t’ even have a radio, but boy it was fun to drive.
This car was significantly different from the one I rented at the John Wayne airport on a recent trip. That car was a mobile communication center. As I left the airport and was trying to negotiate through busy traffic to make a turn onto the freeway, a big red warning sign flashed across the computer screen. I struggled to read and drive at the same time so I asked Launa to read it to me.
She then read the following: “WARNING. Distracted driving can be very dangerous. Do not let this system distract you.” I was dumbfounded. So the system distracted my driving to warn me not to let the system distract my driving. I just knew there had to be an article in there somewhere.
In the 80’s we started hearing about the coming age of information and we were excited for all the benefits it would bring. Now, well into the 21st century, we have automobiles, cell phones, and talking boxes in our kitchens controlling our lives and sometimes making things worse. We even wonder perhaps, if maybe we weren’t a little better off back before we were being constantly bombarded by all this endless information.
It may not actually be the information that is the problem, but how we respond to it. The warning message on my rental car would not be a problem if I could learn to ignore it until a more convenient and safer time. The problem with information is that it has a way of making us feel like we need to stop what we are doing and act upon it. I wish I could get modern information-overloaded investors to understand this principle that just because you get a piece of information doesn’t mean you need to act on it, and in most cases you shouldn’t.
Let’s take the trade war as a current example. It has driven stocks for months and people keep asking what they should do about it. Here is how I see this tariff “distraction.” President Trump believes the trade war is hurting China more than the U.S.. Our current strong economic numbers seem to support that belief. Trump believes our economic strength puts him in a position to negotiate for a better deal. Long term investors should see that as a positive. So why all the fuss?
In my opinion, the trade war, as big as it seems, is another distraction that needs to be kept in perspective. It blares its warnings while our economy powers on. Resist the temptation to feel you need to act on this distraction.
Launa and I have a company conference in Monaco this month and decided to come a bit early and enjoy some time in our beloved Italy. I lived in Italy for two years when I was younger and love returning whenever possible. Our version of tourism is a bit different than most. Rather than racing from one big “gotta see it” tourist attraction to the next, Launa and I prefer to take our time and enjoy the local culture in a way most hurried tourists miss. This form of travel can be deeply rewarding. As we do so we focus on the little things that make a country and its people special. Launa is our family photo expert and she has taught me that rather than shoot a bunch or wide-angle shots, she focuses on the little things that stand out as being special and unique.
When we recently visited a world-famous cathedral, I watched as she closed in and took a picture of a very small, inconspicuous stature of an old man holding a small baptismal font on his back. In the midst of the imposing art that filled this building, Launa was interested in who this little man might be. We learned that this little statue represented the thousands of unknown workers who spent years doing the difficult manual labor on this magnificent structure. The great names of the day were proudly displayed throughout the building, but it’s very structure rested on the backs of these unknown laborers.
As I pondered the message of this little statue I remembered an industry I follow for investment purposes. Like many others today, this industry is beginning to struggle to attract and retain good talent. On its face, it is strong and powerful with a huge public presence, but underneath, the human resource shortage is threatening its future.
There are many others in our economy beginning to suffer a similar shortage of qualified workers. Some businesses focus extensive advertising resources on maintaining a strong public image, while overlooking the critical need of developing and retaining a strong employee pool; those countless unnamed individuals upon whose backs the future of the business rests.
I suggest that people who are considering their investments keep a careful eye on the pipeline an industry or a company has for future laborers. The same applies to entire nations who are facing severe labor shortages in the coming years. Having a great product is not enough if you have no qualified workers to produce it.
Capitalism works, but wise capitalists know how very important their employees are and upon whose backs their future rests. If you are invested in a company that does not dedicate significant resources to developing and retaining a qualified and satisfied employee pool, the coming years might put that investment in jeopardy. I will now add Launa’s new photo to my office wall as a reminder that analyzing how a company attracts, retains and cares for its employees, is critical to its future success.
Coming home from a Salt Lake visit we flew the whole way under Instrument Flight Rules, or IFR, which means we were in the clouds. An IFR rating is very valuable, evidenced by a couple of younger pilots sitting in the airport lobby watching me take off, while they waited for the skies to clear. An IFR rating also adds a higher level of safety since sometimes non-IFR pilots find themselves unexpectedly in deteriorating weather conditions.
When I was studying for my IFR certification my instructor spent a lot of time reminding me that when you are flying in the clouds, or on a dark night without a horizon, it is very easy for the body’s senses to be fooled. The clouds flying past your windshield have a way of distorting those senses. This is why an instrument pilot is taught to focus on the instruments and trust them, regardless of what the physical senses are saying.
This point was made clear on one training event when my instructor took me into the clouds and told me to hold the plane straight and level without looking at the instruments. It was a challenging experience. At one point I sensed the plane pitching up so I gently lowered the nose to keep it in a proper level flight. My instructor asked how I felt and I told him I was pretty confident in my orientation. He then directed my attention at the instruments which showed I was actually rolling pretty hard to the right and headed downward. I was stunned and remember feeling very strongly that the instruments were wrong.
He then taught me a great lesson. He told me that if I am in darkness and I dwell on the darkness, then the darkness will disorient me and my life will be in danger. He pointed to my brightly lit array of computer instruments and said, “When you are flying in darkness, this is your light – stay focused on the light.” It was an impactful lesson.
Investors spend significant effort worrying about the endless negative news and considering all the things that could possibly go wrong. Dwelling on the “darkness” they become financially disoriented and fail to see the wonderful world of possibilities ahead of them.
As I have continued my study of our nation’s greatest investors I am continually impressed that none I have found so far made their fortunes being pessimistic. In fact, the only really successful pessimists I am aware of made their fortunes selling negativity, not investing in it.
It is good to be aware of the risks we face, but American history teaches that optimism has always won out, sometimes against some very high odds. I advise investors to not be ignorant of the darkness, but in seeking good investing ideas, they should do as the greatest investors before them and always look for the light.
As the saying goes, “A fool and his money are soon parted.” The sad reality is that most of the people I have dealt with who have lost money in fraudulent investment schemes have not been fools at all. They have been intelligent investors who are honorable in their business dealings. In most cases their downfall has been that, as good people themselves, they are naturally trusting of others. It is that wonderful quality of trust that is taken advantage of by unscrupulous individuals. In investing, it is wise to follow Ronald Reagans sage advice to “Trust, but verify.”
An investment scam that never seems to die is the foreign currency scam. To give an example of how this works let’s take the Iraqi Dinar scam. After the fall of Sadam Hussein, the Iraqi Dinar, which previously had been trading for three U.S. dollars (a price set by Saddam) fell to an almost worthless level. At this point scammers stepped in and started touting the Dinar in blogs and radio shows, explaining quite convincingly that when the government of Iraq stabilized, the Dinar would regain its former glory and investors could become overnight millionaires. These bloggers would then direct their trusting followers to companies that sold dinars (often secretly affiliated with the scammer themselves) where they could purchase huge quantities at fractions of a penny each. The scam resulted in massive amounts of Iraqi dinars printed to satisfy demand.
The scam played on greed since a person might be able to buy 10 million dinar for a “mere” $10,000. The scammer claimed that even if the dinar regained a fraction of its former value, the investor would become rich. Rather than go into a long explanation of why this can’t happen, let me boil it down to simple math. It is estimated that there are currently 40 Trillion Iraqi dinars in circulation. That’s Trillion with a “T.” For comparison, the total U.S. currency in circulation is only 1.5 Trillion, according to the Federal Reserve.
Currency scams usually focus on obscure currencies whose true value Americans would not commonly know. They tout currencies like the Vietnamese Dong which trade at a fraction of a U.S. dollar, making them seem cheap. They promote the “how can I lose at this price?” mentality. Some of these currency sites charge many times what you would pay for the same currency at your local bank.
Though not illegal, it is dishonest to sell foreign currencies at grossly inflated prices. If you want to invest in currencies, which is generally a high risk proposition, find a legitimate firm to trade with and do an internet search or call your banker to make sure the price you are paying is the current market rate. Or better yet, don’t invest in things you know nothing about. The willingness to do so, coupled with a generally trusting attitude, places a huge target on your life savings.
Our daughter Natali plans great vacations, so when she invited us on a future photo safari, we were thrilled at the chance. We have always wanted to see Africa and being able to do so with a travelling expert made it all the more exciting.
After checking all the cool travel sites, I decided to review some safety precautions. My first stop was the State Department website. Though the information there is designed to be helpful, I must say I suddenly felt my enthusiasm for the trip waning a bit after reading all their warnings.
I then looked up the CDC to learn about immunizations. I was initially pleased that my trip had only one “required” immunization, but then it went on to highly recommend four more, and encouraged the consideration of an additional eight. Each recommendation was accompanied by an unpleasant description of some potential disease.
I decided to put together a spreadsheet listing the pros and cons of each of the 13 possible inoculations, noting the likelihood of contracting each specific disease, as well as potential side effects of the shot itself. Like all travelers, I weighed the risks and benefits and came to a personal decision.
As I went through this process there were times when I considered giving up on the whole trip. In a way, it has given me more appreciation for people who come to me and sheepishly admit they haven’t invested since their market losses in the 2008 crash. They know they have missed out on a tremendous opportunity, and have wanted to invest, but fear of the risk has kept them away.
Fear is overcome by education, so I ask these individuals how they invested prior to 2008 that lead to their losses, and discuss what they might have done differently. We review their future goals and talk about what level of risk might be necessary to achieve them. We learn about risk and attempt to separate real and likely risks from perceived or unlikely risks. The process is similar to my immunization spreadsheet which showed that at least half of the diseases mentioned we had almost no chance of encountering.
I also help people understand that there is risk in not taking risk, known as the opportunity cost. If you aren’t willing to take investment risk, then you risk missing opportunities that could provide a better life for your family. In similar fashion, if I never travel because I get too worried about all the risks, then I will miss out on many wonderful experiences.
Ironically, those who try the hardest to avoid risk often face even greater risks for doing so. Consider a risk averse friend of mine who never leaves the U.S. because he considers international travel too dangerous, yet he loves to visit New York. Risk can be scary, but knowledge can help reduce that fear to an acceptable level and allow you to enjoy the benefits available only to those willing to take a little risk to obtain them.
Every week my dad organized a family chess tournament among the kids, offering one dollar to the winner and an additional dollar if that winner could go on to beat him. I never lost one of those tournaments which made them increasingly fun for me but decreasingly fun for the other siblings. Eventually he added a prize for second place to keep the other kids interested in competing.
Chess is regarded as a “zero sum” game because the number of winners and losers is exactly the same. For every winner, someone has to lose. In the investing world there are also many examples of zero sum investments. This would be an area where you win by someone else losing or lose when someone else wins. The buying and selling of options is an example of zero sum investing.
In other areas zero sum investing works a little differently. For example, let’s suppose in your town there is an intersection with gas stations on each corner. Each day a pretty stable flow of cars choose where to buy gas and as they do, some stations’ revenue increases while others decrease. The total gas sold at the intersection remains stable, but how much each station sells is constantly changing. If one of those stations went out of business, would the amount of gas sold on that intersection change? No, it would just shift to the others.
Unlike with chess, a zero sum game in investing can actually be played to your advantage to reduce risk and improve the likelihood of success. In fact, during the gas wars of the 60’s and 70’s some major oil companies played this game by effectively buying out all the gas stations at the intersection. This allowed them to focus on the total gas sales at the intersection, with no concern as to which station a car actually stopped at.
Surprisingly there is a similar option for regular investors. Rather than trying to pick which “station” or stock is likely to survive, they can buy pooled investments that hold large baskets of stocks. In this way they can reduce the risk of individual company failure and focus more on the economy as a whole or on a specific sector. These are sometimes known as index funds, or ETF’s (exchange traded funds) which essentially allow investors to buy the entire “intersection” rather than individual “stations.” There is still no guarantee of profits from index type investing, but you have at least eliminated or managed some of the risks.
As investing has become more transparent and in a world where news, and fake news, spreads uncontrollably at times, I believe investing in individual companies today carries more risk than it once did. It can be profitable for the “chess players” who are confident in their decisions and willing to take more risks, but for most investors I believe an approach that allows ownership of entire “intersections” might make more sense.
In a recent column Andrew Sorkin commented, “We have a financial literacy epidemic in America.” His was referring in part to some foolish fiscal Ideas being floated by elected officials. Many of these ideas are coming from the younger members of congress, those of the so-called millennial generation.
Millenials are often ridiculed by other generations for their self-centered, internet addicted lifestyles. They are mocked for acquiring massive student debt while blaming their elders for that debt. Yet, ironically the new political leaders of this much maligned age group seem to believe there exists unlimited piles of money sitting around waiting to be spent on their idealistic causes.
The current debate may lead one to believe that somehow our financial literacy problem is a new thing. Millenials are commonly maligned while the world heaps praise on the greatest generation, those depression era children, for being the wise old sages who lived frugally and responsibly. But the facts tell a different story. Among retirees today, none of whom are millennials, 38% of their retirement income comes from social security payments while only 29% comes from their personal savings. I have had the opportunity to work with many of the great savers from the greatest generation, but I am fully aware that many others in that age group were woefully unprepared for retirement. Baby Boomers may be even less prepared.
As we struggle with our national financial illiteracy problem, we must accept that it spans all generations. The problem is not limited to millennials, boomers, Gen X, Gen Y, or the greatest generation. It has been a group effort of them all. Our nation is drowning in unimaginable debt and while the Millenial leaders blame their elders for the problem, they too are showing by their words and deeds they have every intention of continuing to add to it. There is plenty of financial illiteracy to go around.
I do not need a crystal ball to see that somewhere in the future the greatest threat to our economy, and to investors, may by our out of control growing national and personal debt. Though sometimes necessary, it would seem that during these times of record economic growth, adding trillions more to that debt represents the height of financial illiteracy. Sadly, and quite unfairly, the ones who will suffer the most under all that debt have likely not even been born yet.
Current investors may dodge the bullet but future investors face a very real risk from a rising national debt if something is not done. Like a family, a nation can borrow against the future and get away with it for quite a while, but not forever. It is simple math and investors need to keep a watchful eye as the economic threat of this math grows.
The great frustration with this very real problem is that the solution for both families and governments is so very simple that even a child can understand it. Spend less than you make - Financial illiteracy problem solved.
In training, flight instructors often give challenges far beyond what you are likely to experience in a real flight by artificially simulating multiple system failures at the same time. On one challenging maneuver I missed an action to which my instructor replied, “Make sure you never forget to hit that switch in this situation.” Exhausted, I replied, “OK, but what is the worst thing that could happen?” He didn’t respond but just gave me that “We are 25,000 feet above the earth” look.
I receive regular emails asking what I consider to be the greatest current risks to investors, or what the worst case scenario might be. So I thought I would list some of the items I think we should keep an eye on. I do this as a training exercise while I continue to be generally positive about our economy in the near term, 12-18 months.
Unresolved Trade Wars – We need trade with other countries to remain a vibrant economy, and they need trade with us. In a localized economy the big player on the block usually has the advantage, but on the world stage the biggest player is often taken advantage of. The current administration is in a trade battle mostly with China that is hurting the economies of both countries. The numbers show China to be suffering more but their non-elected lifetime leaders have staying power. Both sides have ample motivation to resolve this sooner rather than later, which I expect, but as it drags on it will continue to hurt both sides.
Interest Rates – We need low rates for growth but high enough rates to temper inflation. It is a delicate balance. When rates were going up in the fall, the market panicked. Now that rates have levelled and may even go down this year, investors fear it may be a sign the Federal Reserve sees economic weakness. The best hope is for very small interest rate changes, which I expect.
Deficit Spending – As I mentioned last week, the math of debt is very simple. Either you control it or it will control you.
Healthcare – In 2018 Americans spent $3.65 trillion on healthcare making it the biggest portion of our economy. More people are employed in healthcare than any other industry. Interestingly, that amount was about ½ the total world spending on healthcare, despite our relatively small population. The cost of healthcare is sucking a lot of money out of other growth areas of the economy, which will suffer long term without a more efficient healthcare solution.
Political infighting and extreme ideas – The highly polarized environment in Washington has made it difficult to deal with our national challenges. Some solutions being floated are in direct opposition to the free flow of ideas and capital that have built our nation and its world leading economy. Somehow, common sense and common ground must be found to resolve these and other issues. For investors and our economy in general, if we don’t find a way to solve problems together, this may actually be the worst thing that could happen.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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