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| Address The Retirement Income Crisis |
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| THE RETIREMENT INCOME CRISIS |
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If you're retiring right now, you're looking at one of two outcomes: either you will outlive your money, or your money will outlive you.
Your dignity and independence will depend on a rational strategy for retirement income and investment.
Will America SPEND its retirement away?
Over the next 20 years, an estimated 70 to 80 million Americans will retire. The good news is that about 40 million of these people will have (or will soon inherit) most of the financial net worth in this country. To put this in perspective, the financial net worth of American households far exceeds the combined financial net worth of all the other households on earth!
The bad news, however, is that most of these people have been programmed from early childhood to run completely through their retirement savings and die destitute. Affluent Americans are also in danger of outliving their money, because they are much more susceptible to the illusion that they have enough money.
Here's the heart of the problem: most Americans define risk and safety only in the present tense.
When most people retire, their primary goal is to protect their principal. But they don't think about preserving their purchasing power, which is just as important. They are focused on today, instead of tomorrow.
What will you FOCUS on financially?
The average retirement age in this country is 62. Assuming your spouse is also 62 and neither of you smoke, the age at which the survivor's death will occur is 92.
So if you retire today, you and your spouse are looking at the probability of a 30-year retirement.
Does this seem inconceivable? It might. Many of our parents and grandparents did not enjoy decades-long retirements. But we may. Many of us will need income 30 years after we retire.
The trouble is that people cannot invest successfully for a retirement they cannot imagine.
What NEEDS to be done?
The goal, then, is to produce a lifestyle-sustaining income out of a static pool of retirement savings - with the capacity to last an average of 30 years.
Are you absolutely certain that your income will sustain your lifestyle throughout your retirement? Or will your money eventually run out?
Your long-term financial fate depends on a lifestyle-sustaining income. And the dominant financial issue which governs whether you will have a lifestyle-sustaining income is the preservation of purchasing power!
Emotionally, this is difficult for many people to grasp. Our instincts tell us to protect our principal - but our life experience tells us why preserving purchasing power is so important.
Your income must RISE
It comes down to inflation. Inflation virtually never really stops rising. If 3% inflation continues for 30 years, consumer prices will increase roughly 2 ½ times. That's a 60% loss of purchasing power. In the 30th year of retirement, you will need $2.50 of income to purchase the goods and services which $1.00 of income will purchase today.
The price of a postage stamp tells the story vividly. In 1980, a first-class U.S. postage stamp cost 15 cents. Now, that same stamp costs 42 cents. Thus, the long-term investor is well advised not to worry about loss of principal, but instead to vigorously defend against loss of purchasing power. You must accept that risk is the erosion of purchasing power before you can truly make sound portfolio decisions.
Don't fight the wrong enemy. The real enemy to your long-term financial health is the erosion of purchasing power entering in from the back door.
INVEST to keep pace
The only rational goal of a long-term retirement portfolio is to produce a dollar income that outpaces or keeps pace with the rate of inflation. Owning a diversified equity portfolio is the surest way to accumulate and preserve wealth over the long term.
Bank deposits and bonds have their uses, but accumulating wealth over time certainly isn't one of them. Consider the absolute rates of return for the various asset classes from January 1, 1926 through December 31, 2006: Small-Cap Stocks, 12.7%: Large-Cap Stocks, 10.4%; Corporate Bonds, 5.9%; Government Bonds, 5.4%; and cash (as denominated by the short term Treasury Bill), 3.7%. During this period, inflation was 3% and the average tax rate was 28%. If you back out inflation and factor in taxes, the return on equities was five times greater than the return on bonds!
It is historically clear that you get much higher returns from investing in equities, but what about the risk of capital loss due to the inherent volatility of the securities market? On the surface this seems like a reasonable question, but it's the wrong question to ask.
There is a critical distinction between market volatility and loss. A volatile market doesn't mean you are going to lose your money. In fact, the reason equities have significantly higher returns is because they have much higher volatility. Volatility is the cause of the premium return.
Still, most people approaching retirement are afraid that they will lose their money if they invest in equities. They greatly overestimate the long-term risk of owning equities (which is historically nonexistent in this country) because they've been programmed to believe that equities are risky and bonds are safe.
So not only are they fighting the wrong enemy, but they are fighting an enemy that does not exist. You cannot preserve wealth, much less accumulate wealth, by investing in bonds or by keeping your money in the bank. A fixed-income investment strategy in a rising-cost world is financial suicide!
The DECISION that matters
At some point during your 30-year retirement when your living costs have doubled, your income will no longer be enough to sustain your lifestyle. As the gap continues to widen, you will start spending principal - and that's usually the beginning of a spiral into poverty.
At the end of the day, you have only one investment decision to make. It has nothing to do with the markets or the economy. It has everything to do with whether you run out of money or not.
Would you rather draw 6% a year from bonds whose total return has been 6%, or would you rather draw 6% from equities whose total return has exceeded 10%?
If sustaining your lifestyle throughout retirement is your goal, owning a well-diversified equity portfolio is the only answer, because only equities can so peerlessly defend your purchasing power!
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| Investment advice provided by John Zarcaro, Inc., a Registered Investment Advisor.
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