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What Are You Waiting For?

September 16, 2018

By Stephen Kelley

This is the question going through my mind as I watch the FEMA director, the president, and the local governors begging people to leave the areas most apt to be hit by Florence. With 110 mph winds. Nearly four feet of rain. Floods. Mudslides. Flying cars. Cats and dogs living together. Yet people refuse to go.

No doubt some of those same people will end up on rooftops, waiting for someone who had the sense to leave to come rescue them. Won’t they ever learn?

You can apply the same reasoning to people preparing (or not) for retirement. The average 401K in this country is less (far less) than $100,000. The average for people 55 to 64 is $177,000 and change. The vast majority of that money is in stocks and bonds. If you read the average financial column, you will probably find it bemoaning the fact that too much is in bonds. Why? Because the long-term rate of return is lower. The answer? Put more money at risk in the market.

I’m sorry, but this advice is, to me, tantamount to people listening to a local sporting goods store recommending they outfit their living rooms with rowboats and rafts instead of vacating them altogether.

The thing people miss about retirement planning is that rates of return simply don’t matter once you have retired, unless you have way more money than you actually need. The reason is simple. The worse thing that can happen once you retire is to lose the money you are supposed to be retiring on. Here’s what I mean.

The average rate of return in the stock market is around 8 percent. The accepted rule of thumb for the maximum amount of income a person should plan to spend in retirement? Two-point eight percent. How can this be? It’s because losing money is much more impactful than making money, once you have started to spend it.

Think of it this way. Assume you have $300,000 saved for retirement. You and your spouse will receive somewhere around $35,000 a year in Social Security, and you need around $24,000 from your savings to provide enough to live. That seems reasonable, as you know you can receive around 8 percent a year in the market. So, year one the market goes up by 8 percent. Great! You take $24k out of your savings and you still have $300,000. Next year it goes up 4 percent. Not quite as good, but certainly doable. You make $12,000 in interest, take out $24,000, and still have $288,000. The following year, the market declines by 20 percent. That means you now have $230,000. After taking your $24,000, you are down to $206,000. Three years in and you are down almost one third. With an average rate of return of -2.67 percent! Now, imagine another loss of 10 percent. That brings you to $161,000. Nearly 50 percent down in just four years.

The point I am making is losses hurt much more than gains help. Withdrawals make it worse. That $24,000, which was just 8 percent of $300,000 is now nearly 15 percent of the $161,000 you have left. How long will your money last if you are drawing 15 percent per year? An 8 percent average rate of return from this point on is going to guarantee only one thing, that you will run out of money before you die.

Now according to Wall Street, the answer is just taking more risk (after all, that is what more in stocks and less in bonds translates to, right?) But more risk doesn’t get you where you want. Further, with Wall Street, you never start from ground zero. You always have to look at what has gone before. Today’s market is sitting at very close to an all-time high.

There is a thing called the Buffett Indicator, named for, you guessed it, Warren Buffett. The Buffett Indicator compares the total market capitalization (TMC) of the United States to the total Gross Domestic Product (GNP). In other words, it compares the value of our economy to the amount of productivity it produces each year.

Since 1970, the TMC, as represented by the Wilshire 5000, has exceeded the value of the GNP only three times. In 2000, 2008, and now. In 2000, it sat at 148.5, just before the market crashed by about 48 percent. In 2008, it sat at 110, just before the market crashed again, this time by over 50 percent. Today, the Buffett Indicator sits at 147.5. What does that tell you?

Obviously, we look at more than just the Buffett Indicator. We have several metrics, including the Relative Strength Index, the simple moving averages, the MAC-D, and others. All of them are pointing to the same thing, a market that is overheated and ready to correct.

You know how this story ends. You’ve seen it happen again and again. The question is, where do you want to be when the inevitable occurs? On your roof, or on good, solid, dry ground?

What are you waiting for?

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, he serves Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die,” which deals with the problem unknown lifespans create for retirement planning. It and his other books are available on Amazon.com . He can be heard every weekend on the “Free to Retire” radio show on WCAP and WGIR, and he conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com .

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