A new kind of slum dog millionaire …

KC points me to an article in Yahoo Finance:

A new AP-CNBC poll finds nearly one-third (31 percent) of U.S. residents believe they would need a minimum savings of $100,000 to $500,000 if retiring this year in order to be confident of living comfortably in retirement, and 22 percent believe the minimum is $1 million or more to retire comfortably.

I’ve just conducted my own survey and I’ve found:

- Nearly one-third (31 percent) of U.S. residents are totally deluded if they think that they can retire on $100,000 to $500,000 today.

- 22% are only slightly less blinded to the obvious to think that even $1 million will be enough to sustain them in retirement.

Let’s say that you can withdraw 4% of your portfolio ‘safely’ each year (a figure commonly promoted by the financial planning industry): then, you can give yourself a salary of:

- $4,000 per year if you retire today on $100,000

- $20,000 per year if you retire today on $500,000

- a whopping $40,000 per year if you retire on $1 million

Now, there’s be a whole bunch of people reading this who’ll say: “$40k a year, indexed for inflation … for life … without working. Now I can live with that!”

So, let’s see what it will take to get to $1 million in retirement savings; the same article says:

If you start with an initial $10,000 investment and your portfolio grows by 5 percent every year, here’s how much you need to save each month to reach your $1 million goal by age 70, according to Bankrate.com’s calculator.

• 25-year-olds have to save $450 a month. That’s just $15 a day for the rest of your working years.

• 35-year-olds have to save $850 a month.

• 45-year-olds have to save $1,700 a month.

• 55-year-olds have to save $4,000 a month. (Of course, with an average inflation rate of 3 percent, that $1,000,000 nest egg will only be worth $642,000 in today’s dollars. So that means you’ll likely wind up having to save even more.)

Did you check out that last point? Even if you could save these amounts, your $1 million is whittled down by inflation by the time you get there, so $40k expected retirement salary is only worth (in today’s dollars):

- $30,000 p.a., if you’re 55 and have 10 years to retirement

- $20,000 p.a., if you’re 45 and have 20 years to retirement

- $10,000 p.a. if you’re 35 and have 30 years to retirement

… or, to put it another way – because of inflation (even at only 3%), if you want to retire at age 65 on the equivalent of today’s $40,000 salary, you need to:

- Quadruple the above suggested monthly savings rates if you’re 25

- Double the above suggested monthly savings rates if you’re 45

- Add 50% to the above suggested monthly savings rates if you’re 55

… Oh, and did I mention that these numbers are after tax?

And, just when you were kidding yourself that you really can save yourself to a decent retirement: current CD rates are 1% and inflation is still running close to 0.5%, meaning that even a 4% withdrawal rate – previously described as ‘safe’ according to the financial planning industry – is committing financial suicide.

On current returns, to safely pay yourself $40,000 p.a. (indexed for just 0.5% inflation) you would need to retire with a nest egg of not just $1,000,000 …

… but, $8,000,000.

Or, you could just keep reading this blog and find a whole new way to look at your financial future

[AJC: Try and find consensus on inflation; it's hard! One article that I saw in researching this post suggested that inflation is currently running at just 0.5%, another says 4%, as suggested by Steve in the comments below - http://www.bls.gov/news.release/pdf/cpi.pdf. Since nobody really knows what inflation will be over a long enough period, I always use 3% - 4% just because it makes forward planning easy: just double your estimate for how much money you need to retire with for every 20 years until retirement]

The problem with financial advice – Part II

Why do you see a financial advisor?

ONE reason that people go, is because they expect that the financial advisor has great modeling tools, so they should be able to calculate your financial position and future needs with great accuracy.

What if I told you that doing your own financial planning using the simplest possible online tools and financial spreadsheets would get you closer – much closer – to your real financial needs than any ‘typical’ financial advisor can? What if I told you that is exactly the reason why I do my own financial planning using those exact same simple online tools and financial spreadsheets?

But, what if I told you that most financial advisors routinely underestimate your retirement needs by ~80%?

Would you even pay for such ‘professional’ financial advice again?

Need proof?

Well, a week ago I covered the first of best selling author, Dan Ariely’s comments about financial advisors, but he then goes on to say:

In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. When we … asked where they got this advice, we found that most people heard this from the financial industry. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement.

This is a really important point; let’s say that your expected final salary is $100,000 in today’s dollars.

Then at 75%, you would need a nest-egg of $75,000 x 20 = $1,500,000

But at 135%, you would need a nest-egg of $135,000 x 20 = $2,700,000

[AJC: the '20' in the above calculations comes from my Rule of 20; see this early post]

That’s a shortfall in your retirement of $1,200,000 … more, if your expected ending salary is over $100k.

Now, what if I told you that I think your shortfall is not likely to be $1.2 million, but closer to $2mill – $3mill or even more?

I’ll let you know how I think you should calculate your true retirement needs in the next – and, final – post in this short series, because knowing what you’re aiming for now will stop a LOT of disappointment later

Premature Retireration …

Don’t get me wrong, early retirement is great …

… not for everybody, mind you.

Many go back to ‘work’ because post-retirement life can become pretty boring, if you haven’t properly planned your time and your money.

I don’t include in ‘work’ anything where you are earning money because you want to, except where the commitment / stress / boredom rises to sustained uncomfortable levels and you feel that you can’t just walk away, in which case it’s probably ‘work’ just the same.

No, the real problem is that people don’t know when ‘retirement’ really begins:

They think it begins when they receive the huge card signed by 50 people they have hated for 40+ hours a week, or when the gold watch that they expected to receive turns into a Parker pen (in a nice box!), or when they get a nice speech from the boss who says: “Gee, we’ll really miss you, Bob” when your name’s John.

But, it really begins much, much later.

Ashton Fourie puts it best when he says:

This reminds me of a conversation I had with a friend after we sold our first business.

His comment then was, that having a pile of money, is not useful, because expenses continue to be a regular occurence. So we realized that one can only really “retire” when you have enough secure, passive income. Many people make the mistake to think you can retire on a pile of money.

Until you’ve figured out how to turn the pile of money into secure, long term passive income, you’re going to have to keep “working” – even if that “work” is the process of moving that money into income generating, secure, instruments.

This is really a very important observation and realization!

I remember being insanely jealous [AJC: slight exaggeration] of my friends who cashed out while I was still trying to earn a quid. Now, I am insanely jealous [AJC: this one is probably a huge exaggeration for dramatic effect] of those who still have a job or a business because they can spend pretty much whatever that want, knowing that next week the magic pot of honey will be refilled.

You see, it really is all about cashflow …

… when you have a pile of cash, you can only deplete it. Sooner of later it has to run out, no matter how much you started with, right?

Just ask [Insert big spending celebrity who's financially crashed at least once in their lives: Elton John; MC Hammer; Willie Nelson; etc; etc]

So, think about the early days of your retirement as a “transition phase” while you busily reassign your financial jackpot into income-producing investments then think about how much income those investments produce (after tax, various buffers for contingency, and reinvestment to keep up with inflation) and retire on that!

Brick Wall Retirement

[pro-player width='530' height='253' type='video']http://www.youtube.com/watch?v=MdmbkeJe6zo[/pro-player]

Late last year we had some discussion about so-called “safe withdrawal rates” i.e. what is the ‘magic percentage’ that you can withdraw from your bank account (or other investments) each year, once you are retired, so that you don’t risk running out of money?

Jacob from Early Retirement Extreme said:

It’s fairly well-established (by the original Monte Carlo paper) that the 4% rule is only good for 30 years. Also it only pertains to a broad market total return portfolio. For shorter periods I’ve seen people quoting up to 7%. For longer periods, 3% or less seems to be in order.

He also suggested for a “more extensive discussions see Bob Clyatt’s book”, which we started discussing last week.

Bob undertakes a reasonably good strawman-analysis of some of the existing thinking on Safe Withdrawal Rates then uses some of his own analysis to come up with three rules:

1. It’s OK to withdraw between 4% and 4.5% of your portfolio each year, but

2. You only need reduce the $ figure of the previous year by 5% to cushion the effects of a down-market, as long as you

3. Follow his recommendations for a highly diversified portfolio of stocks, bonds, bicycles, and sausages.

[AJC: OK, I made up the bicycles and sausages bit ]

If you follow these rules, here’s your chances of NOT running out of money, depending on your time horizon:

Now, a few things bother me about this, indeed most discussions on this and other so-called Safe Withdrawal Strategies:

1. Here’s a bunch of people who generally advocate NOT to try and time the stock market, yet, in most cases (including Bob’s strategy, if you take the 5% option) you are trying to TIME the worst possible market of all: how long you expect to live!

2. There’s always a chance that your money will run out before you do – including  in 7 of Bob’s 8 (recommended as ‘safe’ and ‘sustainable’) categories; and, in the one ‘safe’category, you still have to run the gauntlet of a nearly 20% chance of perhaps losing your money for 2 whole decades.

3. Even if you wind down your % to Jacob’s suggested 3% withdrawal strategy, Bob’s numbers [AJC: you'll have to see the book for this one] still show an almost 15% chance of losing your money in the first decade.

Now, there are other Monte Carlo studies that show that withdrawal rates on 3% to 3.5% are pretty damn ‘safe’ … BUT:

a) Personally, I expect to live forever and expect my money to do the same, and

b) How close to ZERO (but never quite reaching it, according to the statistical analysis of 3% – 3.5% withdrawal rates) do I allow myself to get before I panic?

I can’t help thinking that you need to substitute the words “safe withdrawal %” for “the right length and strength of vines” in the video, above, to really understand what it would mean to suffer a prolonged market downturn in retirement

I’ve said it before, and I’ll say it again: unless you have a perpetual money machine set up, there ain’t no safety in withdrawal rates!

My retirement hypothesis …

I’ve said it before, and I’ll say it again, I think that personal finance in America is broken.

I say it’s broken because advice is being doled out without any qualification: work hard, be frugal, save hard and …

… and, what?

If you start after college, you’ll work 20+ (probably, 40+) years, and you will aim to retire on what kind of income?

Let’s take a quick look at Bristol’s case again; he is 23 years old yet: he already has a stable job; he invests in his 401k up to his company’s match%; he has $20k (split evenly between a savings account and some blue chip stocks).

He has run a few numbers through the CNN retirement calculator and realizes that, by age 55, he would need $5.9 mill. ($2.2 mill. in todays dollars) to “spend retirement happily”.

After some discussion, and more analysis, Bristol came to the conclusion that this is impossible on an 8% assumed after tax return.

Now, one of Bristol’s assumptions – and, one that I am guilty of supporting – is that he would need a minimum of $90k annual salary (today’s dollars) in retirement.

But, is that the case?

I can’t speak for Bristol – I don’t know how he came up with the $90k p.a. figure (hence, the $2.2 mill. today’s dollars nest egg requirement). And, maybe my view is skewed because we – and almost everybody that we know – need a LOT more than $90k a year in retirement (we’re budgeting for our current run rate of $250k – $350k per year to continue)?

So, do you think it’s acceptable to work for 20 to 40 years, be frugal, save hard, yet aim for less (keeping in mind the need to help support an adult family, partner, lifestyle, health … without any guarantees of government handouts and safety nets still being in place by then)?

The myth of semi-retirement …

We were driving through Sedona and stopped into some sort of Big Box Store to pick up some rubber beach shoes so that we could take the kids to Slide Rock.

We met a nice, older lady at the checkout and – as I tend to do with anybody and everybody – we got chatting.

Then she said something that took me totally by surprise:

She said that she moved to Sedona now that she is retired!

Retired?! Hang about, I thought, isn’t she standing at the cash register swiping my credit card?

Perhaps, reading my mind (more likely, the expression on my face), she clarified: she moved to Sedona when she retired from full-time work, and now that she is ‘retired’ (there it is again!) she only works part-time.

Why is that when you are studying – or perhaps slowly returning to the workforce post-parenthood – you are happy to tell your friends that you are “working part-time”.

But, when you reach 65 and suddenly find that you still need to work (perhaps with reduced hours, or in some sort of micro-business that you set up for yourself) you are “retired” or you are in that even less definable state of “semi-retirement”?

In fact, there are whole websites and books devoted to the subject of semi-retirement. One of those books is “Work Less, Live More” by Bob Clyatt; I bought it on the recommendation of Jacob from Early Retirement Extreme (he left a comment on this post) … I’ll be commenting on one specific aspect of this book (in fact, the very aspect that prompted Jacob to recommend it to me ) in an upcoming post.

In the meantime, Bob did confirm that I am not retired … I am semi-retired.

According to Bob, I am semi-retired because I do various income-earning activities: I still own a business; I own two development sites (and, am going though the process of having development plans approved by council); I have started an angel investing incubator (or, at least, started to put the foundations in place); have a web 2.0 startup and a book well under development.

But, if I am doing these things because I am a hobbyist, am I any different from the guy who is game fishing every other day as a hobby?

But, if I am game fishing every other day because I need the income (e.g. I take some paying clients out on my boat, or I sell the fish), am I any different to the guy who needs to have a part-time business – or blogs – because he needs the money?

In other words, isn’t the difference between working part-time and being semi-retired the need to bring in income from the activities that you undertake?

Doesn’t that change the dynamic just a little?

Even though he may enjoy the core activity, isn’t the part-time game fisherman who needs the money a little bit more upset when a trip is canceled due to bad weather (or customer cancelation) than the guy who is doing it purely because of his love of the sport?

Whether you agree or not, let’s at least agree on something … at least for the purposes of this blog:

1. If you are retired, you don’t need the money – you just do stuff for fun.

2. If you need the money, you aren’t retired, you are [insert activity of choice: writing a book; blogging; game fishing; real-estate developing; etc.] part-time.

The day that I need to consult to top up the income from my investments is the day that I am no longer just having fun: I’m working part-time.

Maybe we can coin a new term: flexi-working? Semi-working? Whatever you call it, there ain’t no retirement happening …

How about you? Where do you draw the line between work and retirement? And, does it even matter?

Copying the magician …

Have you seen those acts where the magician calls a volunteer up from the floor, hands them a rope then says to “do exactly as I do”.

The magician walks the volunteer, step by step, through the process of knotting his rope, while the volunteer tries to copy him exactly.

Of course, at the end, the magician’s rope is neatly knotted and the volunteer has rope all over the place and looks a little foolish.

You see, the magician has some extra steps that the volunteer doesn’t pick up, or performs in mirror image, so the trick is doomed to failure for him.

Of course, it’s all good-natured fun …

… but, it’s not so much fun when it happens in real life

For example, in my last post, I outlined some steps that retirees can take to create a “zero withdrawal rate” strategy for their retirement to virtually guarantee that their money will last as long as they do:

Now, 0% does not mean withdrawal nothing, but it does mean having a sustainable, self-regenerating supply of income; this is not as hard to achieve as you might think.

For example, you can create an ongoing stream of income from:

1. Inflation protected annuities (albeit expensive)

2. TIPS (albeit a low return)

3. 100% owned real-estate (albeit, needs management)

4. Dividend stocks (my least preferred as they are sometimes a sub-par investment that tends to rise-fall with the markets).

Remember, when you retire, you want not only ZERO chance that your money runs out, but you don’t even want to get anywhere near to zero by a wide margin.

A great feat … if you can pull it off.

But, you have to copy my strategies exactly … and, to do that you need to use your powers of observation to do exactly as I do. No deviation.

So, let’s take a ‘volunteer’ from the audience, Evan, who commented:

My goal is to have a little bit of all those buckets…right now I am trying to build the dividend portfolio.

Right strategy, but it seems that Evan missed the magician’s “secret step”:

You only implement these steps AFTER you have retired (at least, after you have reached Your Number).

Your goal should be to:

1. Have a large enough nest-egg (i.e. Your Number) to provide enough to retire with, and

2. To then ensure that it (i) keeps up with inflation and (ii) never runs out.

These strategies (dividend stocks, TIPS, 100%-owned real-estate, etc.) only work for Step 2.

They typically don’t provide enough return (including growth of capital and income) to build up the nest-egg that you need, in the first place!

So, if you implement them too early, your nest-egg will be too small to begin with …

Instead, you need to find a class of investment where both your capital and your income grow (at least) with inflation.

Here’s an example using real-estate:

a) BEFORE retirement, build up a large real-estate portfolio with 20% down, and refinancing at regular intervals to build up a large portfolio over time. Reinvest all excess profits into buying more real-estate. Use a mixture of residential and commercial to provide higher growth. Add value by building, rehabbing, etc. etc.

b) AFTER retirement (or, as retirement approaches) sell down your portfolio (particularly the lower-return residential component) until you have sufficient cash to pay out the prime commercial properties in your portfolio. Your aim is to own the best rental properties 100%, with a buffer for vacancies, repairs and maintenance, etc.

c) WHEN you get too old or ill to manage the portfolio (even with the help of qualified Realtors and property managers), sell out (or, leave instructions to your attorneys to sell out) and purchase TIPS (or bonds, if TIPS aren’t available).

Three radically different investment approaches … one for each critical stage of your life.

The 0% ‘safe’ withdrawal rate …

What % of your retirement ‘nest egg’ can you safely withdraw each year, to make sure that you money lasts as long as you do?

Many would say that this is a question best answered by highly educated practitioners of the highly specialized field of Retirement Economics, who will give you an answer – or, more likely, a range of answers – accurate to many decimal places.

But, I can give you a single answer …

… one that is accurate to at least 17 decimal places, yet I am not an economist of any kind.

You see, Retirement Economics is an oxymoron.

Why?

First, let me give you an excellent example of what retirement economics is …

In his blog dedicated to pensions, retirement plans, and economics, Wade Pfau provides the following chart:

It superimposes two charts:

- one shows descending survival rates for men, women and couples who retire at age 65.

For example, if you retire at 65, there’s only a roughly 18% chance that at least one of you will live past the age of 95. Reduce that to 90, and there’s a 40% chance that one of you will survive.

- The other is an increasing probability that your money will run out before you do the larger the % you withdraw from your retirement portfolio.

For example, if you only withdraw 3% from your portfolio (if invested in the exact 40%/60% mix of stocks and bonds assumed by Wade) then there’s almost 0% chance that you’ll run out of money by the time you reach 95 (and a small chance thereafter).

But, there’s a 30% chance that you’ll run out of money by age 95 if you increase that ‘safe’ withdrawal rate to just 5%.

You’re supposed to use these ‘retirement economics’ to make decisions like:

“Well it’s very likely that either my wife or I will live to 95 and we don’t want our money to run out, so we’ll invest all of our savings in a 40% stocks / 60% bonds portfolio, and we’ll only withdraw 3% of it each year just to be sure that our money won’t run out.”

That seems like sound economical judgement for the average person …

… BUT, you are not average!

For better or worse, you are … well … you.

Besides the obvious [AJC: who says you want to wait until you're 65 to retire?!], when YOU are 95 (albeit in the 10th percentile), how happy will you be if your money has either either already run out or there’s a reasonable chance that you will soon be out of money, hence out of care?

I would argue that only a 100% chance of your money outliving you is acceptable.

Even then, only with a LARGE buffer, so you never need to worry about even the possibility of your money running out!

In my opinion:

Only a 0.00000000000000000% withdrawal rate is acceptable.

Now, 0% does not mean withdrawal nothing, but it does mean having a sustainable, self-regenerating supply of income; this is not as hard to achieve as you might think.

For example, you can create an ongoing stream of income from:

1. Inflation protected annuities (albeit expensive)

2. TIPS (albeit a low return)

3. 100% owned real-estate (albeit, needs management)

4. Dividend stocks (my least preferred as they are sometimes a sub-par investment that tends to rise-fall with the markets).

Remember, when you retire, you want not only ZERO chance that your money runs out, but you don’t even want to get anywhere near to zero by a wide margin.

Don’t you?

Fitting another square peg into a round hole …

I need your help on a small project that I am working on! I have a new FaceBook Page for Top Secret Startup Project # 4 and need 25 people to “like” the page in order to get a proper URL. Would you PLEASE take exactly 10 seconds to visit that page by CLICKING HERE and click the “like” button.

I might even send one of you (by random selection) a surprise gift (HINT: think ‘apple’ and think ‘card’) AND you will be amongst the first to know what I’m up to over the next few weeks! Now, back to today’s post …
________________________
Philip Brewer is the first to break ranks … that makes him a pioneer!

He’s the first personal finance writer to question the validity of the 4% Rule; I’ll let him do what he does best … explain:

There’s a rule of thumb that’s pretty well known to retirement planners: the 4% rule. It states that if you spend 4% of your capital in your first year of retirement, you can go on spending that much — and even adjust it for inflation — and you won’t run out of money before you die. That rule is starting to look kind of iffy.

The rule is just an observation: Over the past hundred years you could have followed the 4% rule starting in any year and you wouldn’t have run out of money. That’s been true because the return to capital has been pretty high, and because downturns have been pretty short.

So, that’s the genesis of the 4% Rule … basically an assumption that if inflation runs at 3%, you can get at least 7% return on your investment (the difference being the amount you can spend: 4%). But, most investments haven’t ‘returned’ 7% – or anywhere near that – for quite some time, as Philip explains:

Stock investors saw some price appreciation in the 1990s, but there’s been no appreciation since then. In fact, your stock portfolio is probably down over the past decade, even with reinvested dividends.

… and bonds and cash haven’t fared much better, certainly not enough to keep up with inflation and provide spending money for a retiree!

The problem is we’re trying to fit a square peg into a round hole:

Square Peg

Bonds, cash, and stocks are all capital investments (my term); they are designed to hold (preferably, appreciate) the capital that you put in.

You create ‘income’ from these investments: (a) from their (relatively speaking) meager dividends, and/or (b) by selling down your portfolio as needed. The 4% Rule says that the amount that you need to selll down SHOULD be offset by the increase in value of what you have left even after accounting for inflation.

The problem is in the ‘SHOULD’ word: this should all work, but as Philip points out, there are times when it doesn’t …

Round Hole

When you are retired you shouldn’t spend capital unless you print the stuff … or, at least, have an unlimited supply.

You don’t want capital, when you are retired, you really want income.

Specifically, you want a certain amount of income – and, you want regular pay increases (at least enough to keep up with inflation) – just like when you were working.

But, you want it:

a. without needing to work, and

b. without running the risk of being ‘fired’ (i.e. having your retirement income run out).

Other than some nebulous (perhaps, for you, well-defined) need to leave some of your hard-earned, precious, irreplaceable, capital behind for charity, your cat, and/or the next generation, you really don’t – shouldn’t – care very much about it, except for its ability to provide that much needed income.

So, why try and cajole capital-appreciating assets to do the work of your former employer, when there are perfectly good investments out there specifically manufactured for the sole purpose of:

1. At least maintaining their own value (ideally, after inflation), and

2. Providing you with an income, indexed for inflation, for your life or the life of the asset (whichever comes first).

A few such assets immediately spring to mind … each with their own pros/cons (which we can explore in the comments and/or future posts):

1. Real-estate: it tends to increase in value according to inflation; it tends to provide semi-reliable income that increases (again) with inflation,

2. Inflation-indexed annuities: you give up claim on the capital in return for a guaranteed (well, as long as AIG or its like stays in business) income that increases with inflation,

3. Treasury Inflation-Protected Bonds (some Municipal MUNI’s also do much the same): These guarantee that your capital will increase with inflation, and you can ladder them cleverly to provide some semblance of a (albeit low) income stream that increases with inflation.

Of all of these – and, in retirement – I like 100%-owned (i.e. paid for by cash) real-estate the best; what do you recommend?

Avoid wiggly-line investments!

UPDATE: We have a winner in my $700 in 7 Days Giveaway … yep, ‘barbaramontgom’ (with 6 points) was chosen by random drawing (see below) and wins the entire $700 Cash!!!!!! Barbara just needs to send me an e-mail ajc [at] 7million7years [dot] com to claim her $700 cash prize (less any PayPal fees)!

Bet you wished that you had entered

Special thanks to Steve and Trisha who tied at the top of the leader board … if you send me an e-mail with your name/mailing address I will send each of you a $60 Apple Gift Card! Thanks to all of the others who entered and promoted the contest like crazy!

LAST CHANCE to enter my free contest: CONTEST OVER: in just ONE more today, I am giving away $700 cash to one lucky reader (drawn at random) as part of my $700 in 7 Days No Strings Attached promotion. It’s free to enter simply by clicking here.

________________

CNNMoney fields a question from a reader who’s scared that her money will run out before she does:

Question: I recently had to take early retirement at age 57 because of back problems. I’m now looking for a safe place to invest my retirement money where I’ll have no risk losing it. Any suggestions? — Donald H., Morris, Alabama

Yes, I have a suggestion: don’t post your questions to a financial ‘expert’ who still works for a living!

If you do, you’ll get answers like:

Answer: If the threat of losing principal were the only financial risk you had to protect yourself against in retirement, then finding a safe haven for your money would be pretty simple. You could plow your entire nest egg into Treasury bills or spread it among FDIC-insured savings accounts and CDs (taking care to stay within the FDIC coverage limits).

But while doing this would insure that you would never lose a cent of your money, it would also insure that your retirement stash earned a pretty measly return.

Good, so far … so, no cash. Got it!

What should she do instead (?):

If you want to have a decent shot at your retirement savings lasting as long as you do, you also want to invest in a way that has at least some potential for long-term growth.

[Keep some in cash and the] rest of your savings you want to keep in a diversified portfolio of stock and bond funds. Again, there’s no single correct mix. Typically, though, someone just entering retirement might have 50% or so of his or her portfolio in stocks and the rest in bonds.

Zowie!

Question: If you are aiming to retire, why do you want long-term growth?!

Answer: Because, you expect to lose some significant proportion of your capital to:

- Spending too much,

- Inflation,

- Market downturns.

In other words, the expert recommends to invest in a ‘wiggly line’ investment, hoping that the upswings outweigh all the downswings + spending after inflation is taken into account.

How well has that been working out for the past, oh, 20 years?

So, can you think of an investment that tends to grow with inflation, and provides income that also tends to grow with inflation?

Well those treasury-protected bonds certainly have principal that keeps up with inflation, but the returns are so low that income will become a real problem.

But, what about real-estate?

It’s where ‘the rich’ have kept the bulk of their retirement savings since time immemorial … I wonder why?