The primary goal of investing is accumulating financial assets for some future need. For most of us, the ultimate goal is retiring and maintaining our current lifestyle for as long as we live, with a little extra reserved for unexpected emergencies along the way. Of course, knowing with some degree of certainty how much weâ€™ll need when that time comes is a valuable piece of knowledge. We need to know where weâ€™re going and how to get there. The big question is: how much will be enough?
Discerning the answer to that question is harder than most investors realize. The longer you have to work before collecting the last paycheck from work, the more your situation can change. Assumptions made today regarding the cost of living, your ability to save regularly and possible investment returns are all rather fluid. Anticipating the rate of inflation adds even more complexity.
Most brokers and mutual fund companies offer retirement calculators that provide some help with estimating how much youâ€™ll need for retirement. And while flawed, they at least help to narrow the range of possibilities, such as how much will be too little or more than enough. Within those parameters, an investor can at least embark on a savings and investing plan, knowing that annual reviews can estimate not only your progress but also potential changes to previous assumptions.
When establishing the possible boundaries for those parameters, you have two obvious choices â€“ the best and worst cases. You can simulate the best-case scenario by assuming that your plan will work if you make at least some minimal effort to save on a steady basis, invest as successfully as possible, stay healthy, and expect inflation to behave and stay close to its historical averages.
Then consider a worst-case scenario where your savings may be interrupted from time to time due to unforeseen expenses, job loss, lower than expected investment returns or rapidly rising inflation. And all of these apply in todayâ€™s environment!
Of course, to play safe, you should assume that the worst-case scenario is the most likely to occur. If you follow this major assumption, live below your means on the bare essentials and save aggressively, invest wisely and prove to have been too conservative, you may retire with too much money. If you assume the best case, and the end result doesnâ€™t play out as expected, you can plan to live out your days with only those bare essentials!
Consider this one little piece of anecdotal evidence to validate this assumption for yourself. In my past experience as a comprehensive financial planner, I have had occasion to speak with numerous people on the cusp of retirement and read about others in the same situation. No matter how much retirees have saved leading up to their last day of working, they all worry that it is not enough. All seem to believe that having more savings would help them feel more secure, and this includes even those with seven-figure savings!
Of course, operating as a â€œBear,â€ not only with domestic stock markets but also with the domestic economy over the long term, I tend to assume the worst for all variables involved. I prefer to advise saving more, assuming tepid investment returns and presuming much higher prices in coming years. When I suggest assuming that investment returns will be muted in coming years, I am not predicting that too few opportunities will exist for profiting from investments in the right markets. There will always be a bull market somewhere. Itâ€™s just that Wall Street has done a great job of embedding in our minds that returns of about 10% per year are the norm. They are not, as you know if youâ€™ve read articles on that topic that Iâ€™ve written previously for this column.
But secular, structural changes happening now appear to portend enduring consequences. If you live in the Detroit area, you already see how this economic situation is manifesting itself in your local economy. Other enduring changes are already well advanced and should also become part of all saversâ€™ planning and accumulation goals.
Consider the following viewpoint which offers help in formulating your own set of worst-case assumptions. It comes from the Amazon.com web page, which describes the book, Americaâ€™s Financial Apocalypse: How to Profit from the Next Great Depression.
â€˜â€™For nearly three decades, America has been gradually losing ground to the developed world in many critical areas. The result is that the American standard of living has been in decline for over two decades, with the middle class having been affected the most. Meanwhile, the rich have gotten wealthier and now America is a nation controlled by corporate America.
â€˜â€™Hidden by two-income households and open access to credit, declining living standards have gone unnoticed by most Americans. Spending beyond oneâ€™s means has become the American way of life and is encouraged by the government. In contrast, saving is almost unheard of in America.
â€˜â€™As a result, this once powerful nation has changed from the worldâ€™s largest creditor to the worldâ€™s largest debtor. Decades of over-consumption by Americans can only last so long before a day of reckoning occurs. The deflation of the Internet Bubble resulted in the paper loss of over $7 trillion dollars, yet most people seem to have already forgotten the most scandalous charades in U.S. history by Wall Street and corporate America.
â€˜â€™And now, as the retirement assets of tens of millions of Americans are in question, an even larger number are caught up in the largest real estate bubble in our history. As we enter the two next decades, 76 million baby boomers will retire, most of them in poverty.
â€˜â€™Thus, the generation that was responsible for creating the greatest bull market in U.S. history may, through no choice of its own, also be the same group that causes an economic meltdown due to decades of government mismanagement, inadequate planning, and over-consumption. During this same time frame, many expect the global oil production to gradually decline due to what is known as the peak oil theory. Obviously, this has enormous consequences of its own.
â€˜â€™Today, America is in the final preparatory stages that will lead to a massive economic meltdown resulting in the Next Great Depression, as over 46 million Americans already have no healthcare insurance, Social Security will be inadequate for the 76 million baby boomers who will retire over the next several years, energy prices will remain high for some time, and for the first time ever, Americans can no longer live with the comfort knowing that they are safe on their own soil.
â€˜â€™These issues will only get worse and when the appropriate triggers are set off, a domino effect will commence, sending the stock and bond markets into a downward spiral. This book claims to represent the most detailed and exhaustive analysis of Americaâ€™s current and future economic plight, as well as that of its capital markets.
â€˜â€™Rather than making bold claims supported by scant data, this book makes use of several hundred figures, tables, and charts, as well as over 700 references to support the premise that a depression is inevitable for America. Finally, the final three chapters address economic and market risks and provide investment guidance and strategy for investors to position themselves to profit before and during Americaâ€™s next great depression.â€™â€™
Of course, the book presents the views of one writer, referred to only as â€˜â€™Stathis.â€™â€™ But reading the book would add depth, explaining why the author sees the future as she/he does. But on the surface, do these assumptions seem very far off to you?
Keep in mind todayâ€™s situation with many retires living on much less than they need to feel secure. They are part of the same generation that retired after living and working through the strongest period of economic growth this country has known in its history. As workers, they enjoyed wages and benefits that todayâ€™s workers could only hope for! Their pension plans and 401(k) and IRA accounts have been growing for 20 years — or longer in some cases.
Yet, many find themselves with so little! Imagine how the future may play out for todayâ€™s workers, who have been living through more difficult times. Therefore, my one best piece of advice on this subject is to assume the worst. Live within — or below — your means, save as much as you possibly can, invest conservatively with a strict aversion to losing money in stocks, and assume that much higher prices will greet you at retirement.
The worst that can happen is thatâ€™s you will have deprived yourself of some of lifeâ€™s little luxuries. But those luxuries are much more transitory than your retirement years may prove to be.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.