Would You Sell Your McDonald’s Franchise?

During weeks like we’ve recently experienced, when market corrections occur and the value of your strategically allocated Retirement Bucket of investments declines, it’s extremely useful to put investing in perspective. 

Think about this for a moment…

Assume that thirty years ago, you took the carefully thought-out leap of faith to borrow the necessary funds to buy and operate a McDonald’s franchise (certainly a business we’re all familiar with).

Quite a leap of faith as all of your friends and co-workers thought you were crazy.  Not to mention your spouse!

After attending Hamburger University, and then suffering through a lot of bumps and bruises over the next 18 years, you reached the point where profits were good enough, and you had the confidence to purchase a second McDonald’s franchise.

Throughout the years, you’ve run your stores exactly as McDonalds suggests. You’ve carefully studied your marketplace. You’ve come to really understand and develop a level of confidence with each store’s cash flow during good and challenging economic cycles.  And your profits, while not explosive or in a straight line, have continued to rise over the years.

While it’s been anything but easy, you’re happy with the decision you made thirty years ago as owning these two McDonald’s franchises has provided a very nice income and lifestyle for you and your family.  And, it certainly appears to be able to do so in the future.

Your Big Question

What if the person I just described who owns these two McDonald’s franchises was really you?

Imagine surfing the news on-line today and reading these current headlines from Yahoo Finance and Wall Street’s MarketWatch:

  • ”If You Weren’t Yet Worried About the Stock Market, You Should Be Now”, or
  • “Monday’s Nasty Stock Market Reversal is Evidence That the Worst is Far from Over for Wall Street”, or
  • “Here’s Where Investors Are Taking Shelter from Stock Market Turmoil and Fed Hikes”

Here’s your BIG Question: Would you scramble and search for the phone number of a business broker so you could put your two McDonald’s franchises on the market to sell immediately?

After all, the market has been pushing higher and higher to all-time highs, and it certainly looks and sounds like the “bubble” is about to burst.   

Aren’t we due for a big market correction?

What if the Fed changes course and begins to raise interest rates?

What if inflation finally kicks into high gear like the late 1970s after all the Covid relief stimulus money poured into the economy?

What if the new strand of the virus all the experts keep talking about takes hold and we have to go into lockdown again?

What if the gridlock in Washington continues and they can’t get a balanced budget passed?

What then??

Would your McDonald’s franchises survive? 

With a full-blown market crash and recession all but looming on the horizon, wouldn’t it be smarter to just sell your franchises and wait this thing out?  Then, when everything settles down and gets back to “normal”, you can buy another one.

Your Likely Answer

Given everything I’ve shared with you about the owner of these two McDonald’s franchises, I’m confident that you’re laughing right now and shouting out a resounding No Way!

If that’s true for you, why not?  Why wouldn’t you sell your franchises?

Well, to start with, you’re an owner!  You didn’t buy your McDonald’s franchises so you could buy and sell in and out of them in order to gain some sort of short term profit.

Second, you’ve lived through a lot over the last thirty years.  You know what you own.  You’ve seen how they perform during up and down market cycles, and your experience tells you that the long term impact on your McDonald’s businesses from any and all of these reported “crises” is highly likely to be next to nothing.

What’s the Difference?

So, what is the difference between you owning a McDonald’s franchise as I’ve described vs. you owning any investment you currently own?

Please take a moment to pause and really give some thought to this.

The only difference is if you choose to “operate” the McDonald’s franchise, i.e. “work in the business” on a day to day business.  However, many franchise owners own multiple units and don’t work “in” the business at all.

Aside from that, it’s exactly the same. 

When we all invest, what are we doing?  We’re all buying ownership shares of various companies.  That’s what investing is…ownership

And, we own and accumulate shares in many companies because we need to own assets that have the ability to rise in value over time and generate increasing levels of income (dividends) in order for us to maintain our lifestyle in a continuously rising-cost world. 

This is such a critical distinction for your future. 

When we listen to and watch the financial media on a day to day basis, and we listen to friends, family members, and co-workers talk about investing, this is not what we hear.

We hear them talk about “the stock market” as if it’s this mysterious and scary thing. 

The “stock market” is simply a mechanism to buy and sell ownership shares in thousands of companies throughout the world. 

That’s it. 

It’s a collection of thousands of enterprises whose current value and dividend levels will each rise and/or fall over time based on their ability to generate profit and income for their “owners.”

So, when you invest, you’re not “buying” the stock market, per se.  You’re buying an “ownership” stake in one, or hopefully in your case, thousands of companies just like buying a McDonald’s franchise.

And, buying and owning shares of well-run companies is a lifelong venture for everyone who has a goal of generating income that can keep pace with the rising cost of your lifestyle.

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But I Don’t Have Time to Make it Back

Most Americans walk proudly and carefree when market prices are climbing. 

Risk becomes irrelevant.  Strategic asset allocation looks boring, and disciplined diversification gets called into question because some asset classes outpace others.  Many begin to lament not having all of their money in the winning asset class over the last year.

The fact that markets correct all the time and have experienced many ugly stretches during their historic long-term climb is a distant memory.

And, then………the market hiccups!

We experience a normal, garden variety correction, like the 14.3% intra-year market price drop we’ve experienced each year on average over the last 41 years.

The financial media jumps at the golden opportunity to increase viewership ratings by stirring the pot and perpetuating the myth that “this time is different.”

Microphones are placed in front of innocent retirees who claim, “I’m worried.  At my age, I don’t have time to make it back.”

Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 60 years old.  I don’t have time to make up for any losses.”  

Does this sound familiar?  Have you ever had a similar thought?

If you have, I can assure you that you’re not alone.  I can also tell you that it is unnecessarily in the way of you enjoying the Relaxing Retirement you deserve.   

Whenever markets experience sharp corrections during their retirement years, the investment time horizon for too many Americans quickly shrinks. 

While increases in market prices are typically met with apathy as I mentioned above, or reservation, i.e. “it can’t or won’t last”, sharp declines in market prices are greeted with the gut feeling of permanence, i.e. “it sounds really bad this time.  I don’t think it will ever come back in my lifetime!

If you study financial news reporting, you will find a version of this story during every market correction.   So much so that the we don’t have time to make it backmantra is treated as an indisputable fact, one which governs investment decisions for the majority of Americans during their retirement years.

However, this dominant sentiment is not supported by facts.

Long-Term Purchasing Power

We invest to solve a long-term problem, not a short term one.  And, that problem is purchasing power

Take a look at what you spend money on.  If history is any guide, outside of a few items, prices will be significantly higher in the future if for no other reason than the stated goal of the Federal Reserve is an inflation target 2% per year.

Given this, in order for us to maintain our desired lifestyle, our income must increase substantially over our lifetime.  This is not a want.  This is a need

Our income must increase.  And, in order for our income to increase, our Retirement Bucket™ of investments must increase in value over time in order to generate that lifestyle sustaining income.

In short, our shared problem is a long-term problem, not a short term one.  If our lifespan truly is that short as the quote suggests, stock market corrections would have no significance. 

First, we wouldn’t own stock index funds because stocks solve a long-term problem.  

And second, although potentially uncomfortable to think about, if we did own stocks and market prices temporarily dropped right before our demise, our beneficiaries would inherit and maintain ownership of them while prices corrected back.

How Long is Long Term?

With all of this talk about time, i.e. “I don’t have time to make it back”, let’s examine the facts about just how long is “long term” using Average Life Expectancy information from mortality tables used by life insurance companies and social security:  

  • Life expectancy for a 60-year old individual is 25.2 years.  However, the joint life expectancy of a 60-year old couple, i.e. the average life expectancy for the survivor in a 60-year old couple is 30.9 years, i.e. just shy of 91 years of age.
  • For a 70-year old couple, their joint life expectancy is 21.8 years (age 91.8)

Take a moment to let these numbers sink in. 

Assuming for a moment that you are just “average” (chances are very good that if you’re reading this you’re well above average), where are you in these numbers?

For example, if you’re a 60-year old couple, your number is 30.9 years, so your personal investment time horizon is 31 years!  If you’re a 70-year old couple, your investment time horizon is still 22 years, i.e. the length of time your Retirement Bucket™ of investments must last!

Stock Market Corrections

With your investment time horizon firmly in your mind, now let’s examine historical market corrections and the amount of time it took to “make it back.”   

** For simplicity, we will use the S&P 500 Index as a proxy for the market as it provides a long history to track and encompasses a large portion of the market value.  

From 1945 through 2019 (74 years after World War II ended), there have been 93 market pullbacks of significance (5% or more):

  • 59 of them were between -5% and -9.99% with the average drop of 7%. 
  • 22 of the pullbacks were between -10% and -19.99%, with an average of price drop of 14%.  It took an average of 5 months to reach the bottom, and 4 months to recover back to the original price before the drop.
  • Of the remaining 12 pullbacks, 9 of them were between -20% and -39.99%, with an average of price drop of 26%.  It took an average of 11 months to reach the bottom, and 14 months to recover back to the original price before the drop.
    • Adding those three together illustrates that 90 of the 93 pullbacks over the last 74 years have fully recovered in 14 months or less, with 81 of them (87%) recovering in 4 months or less. 

Investment Time Horizon

With these historical facts, let’s now return to those Average Life Expectancy facts and your investment time horizon to determine if the often-heard quote, “Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 60 years old.  I don’t have time to make up for any losses” is valid for you.  

Let’s assume for a moment that you have followed The Relaxing Retirement Formula™, i.e. you have determined precisely what it costs to support your desired lifestyle, and how much of that must be withdrawn each year from your Retirement Bucket™. 

You have set aside multiple years’ worth (5 is a very safe number to start with) of your anticipated withdrawals held outside of your broadly diversified stock index funds, in money markets and short-term fixed income instruments which do not experience volatility levels like stocks. 

You then strategically and broadly diversified the remaining balance of your Retirement Bucket™ of investments across a spectrum of stock asset classes using cost-effective index funds weighted toward areas of higher expected return, and you allowed all dividends you receive to accumulate in your money market to support your anticipated withdrawals instead of being reinvested.  (**a very important distinction**)

If you are that 60-year old couple, your investment time horizon 30.9 years, is the I don’t have time to make it back mantra factually valid? 

No!

Even if we experienced what has happened only three times in the last 74 years and it took 58 months (just shy of five years) for market prices to return, you still would not have had to sell any of your broadly diversified stock index funds at a loss to free up funds to support your needed withdrawals because, in addition to allowing your dividends to build up in your money market, you already had those funds set aside outside of your stocks funds.

The reality is that your investment time horizon is a lot longer than you may think, and if you adhere to The Relaxing Retirement Formula™, you do have time! Knowing this should give you enormous confidence to spend what you have planned to spend no matter what the current market conditions are at the moment. 

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Protect Your Purchasing Power

Have you ever stopped to think about why you invest your hard-earned money and put up with volatility every day? 

Seriously…why do you do it?

The answer to that ties into the next step in The Relaxing Retirement Formula™.

While getting back to the Fundamentals over the last few weeks, we’ve outlined the first few steps and you’ve gotten crystal clear on just how dependent you are on your Retirement Bucket™ today.

If you’ve come this far, and you’ve diligently discovered this critical number for yourself, you’re in an exclusive minority because the overwhelming majority of Americans are too unfocused and lazy to perform this vital task.

However, as much as I’d like to applaud your actions up until now, there’s a key missing factor to your number. 

That missing factor is what your level of Retirement Bucket Dependence will be next year!

In 5 years?

In 10 years?

In 20 years?

Why?

Inflation!!

Many so-called financial “experts” have been lulled to sleep over the years with inflation’s enormous negative long-term impact.  I continue to read articles and see websites of large financial institutions suggesting that you use 2% as an inflation rate in your forecasting.

This has been a big pet peeve of mine for years as I believe it’s a grave mistake to assume that the low inflation rates we’ve experienced over the last 20 years will continue forever.  That would be like assuming that the double-digit inflation we experienced from 1979 to 1982 would continue forever. 

Why Do We All Invest in the First Place?

Investing is often described as the process of laying out money now with the expectation of receiving more money in the future. 

I believe legendary investor Warren Buffet has a better take.  He defines investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.  More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

Take a moment to go back and read that paragraph again.  It’s THAT important of a distinction.

If you stop and think about what investing is, and why we invest, one of the major reasons is INFLATION.

We invest our carefully earned savings in order to have funds available for “future” expenses, i.e. college for our children, retirement when we no longer have the desire or good health to work to support our desired lifestyle, etc.

What we choose to invest in, however, is largely driven by the historical fact that prices on everything we consume rise over time.

As I recently revealed in another post, even if inflation only rises by the Federal Reserve’s target rate of 2% per year, your $10,000 per month lifestyle today will require $14,568 per month in year 20 to pay for the exact same lifestyle!  If it’s more like the long-term historical average of 3% per year, it would require $17,535 per month!

Purchasing Power

So, at its core, investing is about owning carefully selected assets that you believe will be able to help you maintain your purchasing power (i.e. keep pace with rising costs).

If you simply set money aside in your mattress, that would be better than not saving at all because, at the very least, you’d have the money later. 

However, it wouldn’t be worth enough to pay for what it is that you set the money aside for because prices continued to rise while your money remained under the mattress.

This simple principle is why it’s so critically important to establish investing principles and guidelines for yourself. 

The reason you invest, and why you’re investing in what you’ve chosen, will remain clear in your mind so you maintain investment discipline in ever-changing markets like what we’re experiencing right now.

Cost of Living Adjustments (COLA) on Income

With that clarification on inflation and its detrimental effect on your Relaxing Retirement fresh in our minds, let’s get back to your 3 potential fixed income sources that we evaluated last week and see how they stand up to inflation:

  • Social Security has a cost of living factor (COLA) built in, so, in theory, it keeps pace with inflation.  If your benefit is $2,500 per month right now, it will likely be approximately $3,200 per month in 10 years. (For scorekeeping purposes, you received a 1.30% COLA increase in January 2021)
  • Most pensions do not have a cost of living adjustment.  So, if your monthly pension is $5,000 per month, your check in 10 years will still be $5,000 per month while the price of everything has gone up!
  • Rental property income should, in theory, keep pace with inflation.  However, local rental market forces, and most people’s lack of tenacity in “raising the rent” each year, may have an impact on what income increases you can count on in the future.  Be careful and conservative with what you expect.

Now that you know all of this, take a look out at what your fixed income sources will look like, not just today, but in 10 years, 20 years, and 30 years. 

Create your own personal timeline.

How does your fixed income match up with your desired lifestyle costs that you’ve calculated?

Is there a deficit right now?  How about in 10 years (due to inflation)?

If there is, don’t sweat just yet.  That’s why you’ve saved all of that money all your life…to supplement your fixed income and fill in the gaps when you stop working.

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Beware of The Fatigue Factor And Magic Pill Pushers

Confronting something that requires a greater level of focus can be physically, mentally, and psychologically taxing.  The longer that required focus persists, the more taxing it can become.

With each passing day during this Covid-19 crisis, navigating the scary health concerns, the market’s heightened volatility, and all the lifestyle changes that come with the stay-at-home / wear-your-mask advisory can begin to wear on anyone.   

A potential negative byproduct of this can be a “fatigue” factor kicking in, and the common and costly mistakes that can follow as a result.

On the health side, this fatigue factor can potentially lead to carelessness, i.e. “I know I’m classified as “at risk”, but I’m tired of all this social distancing, mask and glove wearing, and hand washing.  At my age, I’m going to do what I want.”

For obvious reasons, we want to avoid this kind of thinking at all costs.

On the financial side, this fatigue factor has definitely been known to kick in during times like these when markets correct, especially if a) you were not prepared and properly positioned with a long-term system to begin with, or b) you still “check out the market” several times each day. 

Those who fall into one or both of these camps are a perfect target for the Magic Pill Pushers who always emerge during heightened stock market volatility environments. 

Magic Pill Pushers

You can set your watch to it.  Each time stock market prices temporarily plunge, the marketing departments of two industries kick into high gear with Magic Pill solutions:

  1. Gold and other Precious Metals
  2. Annuities

Each of these is marketed as the solution to the “problem” of the volatile and “risky” stock market.  Before digging a little deeper into gold and annuities, the first principle to always keep at the forefront of our minds is that any attempt to suppress short term volatility correspondingly suppresses long term returns. (You may want to take a second to read that again)

We discussed this at greater length over the last couple of weeks when highlighting the range of short-term outcomes we can experience along the way to earning higher long-term expected returns, but this may be a shorter and more succinct way of understanding it. 

Gold and Annuities

The popularity of any non-currency-based asset like Gold always rises during turbulent markets and ensuing government spending as the fear of rising inflation enters the equation.  While a strong case can be made for the fear of inflation, gold has been a terrible investment for those looking to outpace inflation.  Fortunately, a fairly simple Google search can demonstrate this. 

The same can’t be said for the history of annuities.  If you have been a steady reader of Retirement Game Plan over the years, you know my feeling about annuities.  While they do provide a tool in your planning toolbox, for the most part, the overwhelming majority of annuities marketed today are very complicated, expensive, restrictive, and they are grossly oversold.  (One of the reasons they are oversold is they pay very large commissions to agents and advisors who sell them.)

Here’s an example of language used in a Jackson National Life annuity advertisement on page one of the Wall Street Journal during a recent market correction acknowledging this reality:

“Sound too good to be true?  It’s important to remember that unlike any other investment product, annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect us against outliving our savings or having to drastically change our lifestyle in retirement.”

And, then:

“Annuities have been available for a long time, and it’s true that they can be complicated to understand and even challenging for advisors to sell in today’s regulatory environment. But that should never be a reason for investors or advisors to forgo consideration of something so critical as guaranteed lifetime income.”  (I have taken the liberty of bolding this last sentence)

Doesn’t the phrase “guaranteed lifetime income” sound so attractive?  Who wouldn’t want that???

What is omitted in this advertisement is the cost to you for providing this “guaranteed lifetime income.” 

Finally:

“There are numerous annuity options you can choose that can be customized to meet your needs.  For example, some annuities start paying a lifetime income stream immediately, while others allow that income stream to be deferred to a time in the future.  And with the purchase of a lifetime income benefit, an annuity is the only investment that can provide a steady stream of lifetime income unaffected by market downturns.  In fact, that income even has the potential to keep growing.”

As all insurance companies do when they market annuities, they are preying on the average American’s fear of market corrections and volatility which is a very effective marketing strategy on their part. 

You simply don’t want to fall prey to it!

As we have discussed in great detail, market volatility and corrections are nothing to fear for the rational, long-term investor if you employ a strategic plan.  Not only are they not something to fear, but intelligent investors welcome them!

Jackson National Life recognizes these realities, so the ad attempts to deal with them. 

The bottom line is to always have your eyes wide open when reading advertisements like this, and to beware of “magic pill” offers especially during times like these when the “fatigue factor” can easily kick in! As much as we would all love a “magic pill” as this Jackson advertisement attempts to imply, there is no such thing.

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Market Principles and Timing

I have some thoughts to share with you today to help you continue to be a better investor so you can live the life you’ve earned. 

An unfortunate but true outcome during sharp stock market corrections is the transfer of ownership of a finite and fixed number of shares from those who were not prepared, and thus panic-sell out of fear, to those who were prepared and confidently buy shares at a significant discount. 

You may want to pause and read that paragraph again.

Despite what the financial media and large brokerage firms convey, investing is not a reactive “market-oriented” activity, but a strategic and proactive “goal-oriented” process. 

And, that goal-oriented process is based on market principles that we all have to keep at the forefront of our minds in order to avoid the common mistakes that occur during challenging market conditions. 

  1. Markets work and they are working.  Although we may not like the direction they take at times, the great news for all of us is that markets work even during crises, and information is incorporated into stock prices.  We always have to remember that for every share of stock that is sold on a given day, there is a willing buyer on the other side making that purchase. 
  2. Stock prices adjust to the point where a buyer believes they can earn a positive expected return from that point forward.  Nobody buys a stock with the expectation of losing money.

Think of it this way as an example.  At $100 per share, a buyer may not be interested because he or she may not believe the expected return from $100 per share going forward justifies paying that price.  However, if the price drops 20% to $80 per share, there is a greater likelihood of the buyer earning the expected return they want to justify the purchase price. 

  • Stock prices are forward looking, i.e. expectations about the future have already been incorporated into the price.  In today’s day and age, what are the chances that you know something that millions of other market participants don’t know about a company?
  • Volatility is brought on by uncertainty.  If there was no uncertainty, there would be little or no return, i.e. treasury bills.  Your ability to deal with short-term uncertainty, and thus volatility, is precisely what allows you to earn higher expected long-term returns.

With those principles firmly in our minds, let’s now discuss one of the most common mistakes investors fall prey to during sharp market corrections.

Market Timing

“Why would anyone just sit there through a downturn in market prices and ‘lose’ money?  Wouldn’t it make sense to just sell everything, wait for the dust to settle, and then buy back in after?”

Although nobody with this thought likes it to be labeled as such, this is classic Market Timing: the strategy of attempting to sell in and out of markets on a timely basis in order to avoid short-term losses and capture all upside gains.  This stems from the commonly held belief, which is perpetuated by the financial media, that investment success is achieved by the few who are “in the know” who are able to successfully “navigate” in and out of markets at just the right time.

It’s sounds 100% logical in theory.  Unfortunately, however, it doesn’t work in practice.

History is littered with proof that this belief is false.  Noted Dartmouth Professor Kenneth French’s extensive research concluded that you would have had to be precisely correct on the sell and buy points 74% of the time in order to equal returns earned by continuously holding shares through all market cycles. 

And, that a survey of famous market timers revealed that only a handful were correct more than 50% of the time, and the best was still at only 66%!

October 2007 to March 2009

History and distance from traumatic times have a way of providing clarity for future action.  However, at first glance, that’s not always true with investing.

Now that more than a decade has passed, the massive market downturn we experienced over 18 months during “The Great Recession” from October, 2007 to March, 2009 appears to be a period that anyone and everyone should have been able to navigate in and out of successfully.

What we all forget with time, though, is that we didn’t experience that 18-month period of time in one instance.  We experienced it one day, and in some instances, one hour at a time. 

From October 10, 2007 to March 9, 2009, broad stock market prices fell almost 57% from peak to trough.    

However, it was not a straight line down that was obvious to interpret and act on.

Experiencing Markets on a Daily Basis

Similar to what we’ve experienced over the last two months, during that 18-month timeframe, if you recorded market results on a daily basis, here’s what you would have experienced:

  • Market prices closed up 46% of the days, and
  • Market prices closed down 54% of the days

Isn’t that incredible!  During the 18-month period of time when market prices fell over 50%, market prices closed up about 173 days (46%) and down about 202 days (54%).  

I’m sure you expected it to be much worse than that with a much larger percentage of down days.  (For reference, from 1973 through 2015, market prices were up 53% of days, and down 47% of days.) 

So, as we experience markets on a day-to-day basis, that 18-month period wasn’t that different than the average.

What this demonstrates is that, when dealing with markets, our experience is never a straight line up or down. 

Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets, and that’s what makes market timing impossible as a long-term strategy. 

Why Market Timing is So Hard

You not only have to make the correct call to sell out, and then to buy in on the correct days, but you have to make those calls at precisely the correct time during each day because prices change all day long.  (And, because all asset classes behave and perform differently, you have to make those split-second decisions on each asset class you own.)

Just think of markets during the early stages of the COVID-19 pandemic where prices moved as much as 12% in one day!

Although it feels as if there was throughout time, there is never a clear and unquestioned signal in the moment when a decision must be made to sell or buy.  Never!

That’s why buying into the belief that you can successfully time when to get out and when to get back in is so destructive to your financial independence.

Put It in a Drawer

After you have set aside five years’ worth of your anticipated withdrawals outside of the short-term volatility of stocks, i.e. in money markets and short-term fixed income holdings, and directed all dividends you earn to flow into your money market fund to support your lifestyle cashflow needs, the long-term solution with the rest of your Retirement Bucket™ is to remain globally diversified and strategically weighted across multiple asset classes during all market cycles with a goal of capturing the long-term higher expected returns each asset class offers.     

And, then “put it in a drawer” and go about living your life. 

Go ahead and pull it out of the drawer during pre-determined periods of time, i.e. once a quarter, half year, or yearly, and rebalance your holdings back to your originally prescribed mix. 

However, as we have just highlighted, do not delude yourself into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.   What this allows you to do is remain confidently invested for the rest of your life knowing you will not be forced to sell your long-term stock index funds during a temporary market correction in order to provide needed cashflow to support your desired and well-earned lifestyle.

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How Often Do You Experience Investing Pain?

Is it possible that two different individuals can have the exact same investment allocation over a 43-year period of time, yet one experiences almost three times more investment “pain” than the other?

At first glance, you might think this is impossible.  If two individuals have the exact same investment allocation and they don’t buy or sell anything for forty three years, shouldn’t they both experience the same amount of investment “pain?”

The answer will likely surprise you.

We recently examined stock market price movements during the “Great Recession” financial crisis between October, 2007 and March, 2009.  What this revealed was that during that 18-month stretch, if you “looked at” and experienced stock market prices on a daily basis, in addition to a lot of down days (54% of the days), there were also a lot of up days (46% of the days).

So, during that memorable 18-month market crash in which prices fell almost 57% from peak to trough (as measured by the S&P 500 Index), we also experienced prices closing up on 46% of the days!

Among other things, what that illustrates is that when dealing with markets, our experience is never a straight line up or down.  Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets.  But, only if we “experience” them on a daily basis.

How Often Do You “Look”?

How often do you “look” at “the market?”  Or, your investment portfolio?

Be honest!

With technology and the financial media today, it’s not uncommon for Americans to not only look every day, but multiple times during the day.

We have all been conditioned by the financial media to “look” so you don’t miss anything and get caught.

Unfortunately, this is leading to a lot more pain in your life!

During the 43 years from 1973 through 2015:

  • Daily: If you looked at and experienced “the market” on a daily basis, you experienced prices being up 53% of the time, and down 47% of the time.  If you add up all those days, you will have experienced “pain” (i.e. market prices closing down for the day) for 20.3 years out of those 43 years.
  • Monthly: If you were “busy” and only allowed yourself to look at “the market” on a monthly basis, the percentage of time you experienced “pain”, (i.e. market prices closing down for the month), fell to 14.5 years out of those 43 years.
  • Quarterly: If you had the discipline to only look at your Retirement Bucket of investments every three months, the percentage of time you experienced “pain”, (i.e. market prices closing down for the quarter), fell to 11.8 years out of those 43 years.
  • Annually: Finally, if you disconnected from all media for all but one day per year, the percentage of time you experienced “pain”, (i.e. market prices closing down for the year), fell to 7 years out of those 43 years vs. 36 years in which the value went up.

What this demonstrates is that two different individuals could have had the exact same investment mix over 43 years of their lives, yet the one who “looked” at it daily experienced almost three times more pain than the one who looked at it once a year (20.3 years’ worth of the pain of market prices being down vs. 7 years).

There are a few conclusions we can draw from this data.

First, if we choose to follow the financial media the overwhelming majority of Americans and look at market prices and our investment holdings every day (or throughout the day), we’re setting ourselves up for a lot of completely unnecessary pain.

As the statistics and our experiences confirm, if measured on a daily basis, market prices move up and down a ton.  However, if measured over the long-term (which is what you invest for in the first place), market prices and dividends have increased substantially over time averaging 7% per year greater than the rate of inflation.

Second, we can’t delude ourselves into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.  

In fact, as Dalbar’s 2020 Annual Quantitative Analysis of Investor Behavior illustrates, the average investor’s real-life results are significantly lower than markets have performed (while the S&P 500 index returned 9.96% annually over the last 20 years, the average equity mutual fund investor earned only 5.04%.)

How much of that awful investor performance do you think is attributable to and exacerbated by poor investment decisions brought on by “looking” at market price movements on a daily basis?

I would suggest a lot!

Finally, this does not mean that you should never look at market prices or your investment holdings.  As I suggested last week, go ahead and do so but during pre-determined periods of time, i.e. once a quarter, half year, or yearly so you can assess and rebalance your holdings back to your originally prescribed mix if necessary.

However, once you do so, go ahead and put it all back “in a drawer” and go about living your life.  Not only has history demonstrated that you will have better investment results, but you will also live a more enjoyable life!

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The Importance of Weathering Market Storms

As much as any time in history, having a workable strategy in place to weather temporary market storms like the Covid-19 crash we experienced earlier this year is critical to your financial future. 

Take a moment to think about this:  The yield on the 30-year U.S. Treasury bond is 1.564% as I write this.  By contrast, according to Bloomberg estimates, total dividend payments from companies in the S&P 500 Index will be $59.41 per share in 2020, up from $58.69 in 2019.  With the current price of the S&P 500 hovering around 3,500 right now, that means the dividend yield on the S&P 500 Index is 1.7%.

In short, the dividend yield of the five hundred largest businesses in the United States is currently greater than the yield on the 30-year U.S. Treasury.  That is remarkable!

Takeaways

There are several key takeaways from this for those confronted with battling rising lifestyle costs for the duration of their lives without depending on a paycheck from work, i.e. our Relaxing Retirement members!  For quick reference, at only 3% historical inflation, a $10,000 per month lifestyle today will require $17,500 per month in 20 years (the average joint life expectancy of a 72 year old couple) to support the same lifestyle, and $23,500 per month in 30 years (the joint life expectancy of a 62 year old couple).

As we examine the current landscape for solutions to this problem, think about the long-term prospects for purchasing a 30-year treasury bond today for $100,000 as a potential option.  You would receive the 1.564% yield each year you held it (or $1,564).  Assuming you held it until maturity, you would receive your $100,000 in return in 30 years.  That is the promise the U.S. government makes (or any entity issuing a bond).  You will not receive anything less than your $100,000 you loaned them, but you won’t receive any more either. 

There are multiple headwinds to solving your long-term purchasing power problem with the “fixed” treasury bond solution:

  • The Fed has a stated policy target of 2% inflation per year.  After paying taxes on the 1.564% yield on a “safe” treasury bill, your after-tax return of a little over 1% would be half of the rate of inflation.  In other words, if your desired lifestyle costs $100,000 this year, you will need $102,000 next year to pay for the exact same lifestyle.  However, you would only have about $101,000 to support it.
  • Assuming inflation only creeps up by the Fed’s stated target of 2% per year, you would need $104,040 in year two to support the same lifestyle.  However, unless your other income sources had a cost of living raise built into them, your income would remain at about $101,000 because the interest on your treasury bond is fixed. 
  • Taking this out only 10 years, you would need $119,509 of income to pay for the same lifestyle as today with about $101,000 to support it.  Remember that this assumes inflation is only 2% per year!
  • If inflation mirrors the last 30 years over the next 30, i.e. 2.9% per year according to Ibbotson, the purchasing power of the $100,000 treasury bond you bought would be about $40,000 in year 30, or a loss of purchasing power of 60%!

While the past is no guarantee of the future, as an alternative solution to this purchasing power dilemma, let’s now look at simply owning a S&P 500 Index fund with the same $100,000 over the last 30 years, not as an endorsement of owning just the Index, but to illustrate broad market forces.  For this exercise, we won’t even consider the drivers of higher expected returns.  

In 1990, the Index closed at 330.22 and paid dividends of $12.09 per share.  At the end of this past year (30 years later), the index closed at 3,230.78, up just shy of ten times in value.  Without taking dividends into account, this means the $100,000 investment grew in value to just shy of $1 million. 

With the dividend of $58.69 per share in 2019, that means the dividend also increased almost five times, far outpacing the rate of inflation which went up slightly less than two times over the same 30 years.

What’s critically important to note is that, during this same 30 year period, we all experienced two of the worst bear markets in history with a 49% drop in market prices during the dot.com crash in 2000-2002, and a whopping 57% drop during the great recession in 2007-2009.  The substantial, inflation-fighting growth in value and dividends noted above occurred in spite of these historic market crashes. 

All of this highlights how vital it is to your financial independence to have a workable strategy in place to weather all normal and temporary market storms, and maintain ownership of strategically diversified stock index funds with a sizable percentage of your Retirement Bucket™.      

This is why we strongly recommend holding about five years’ worth of your anticipated withdrawals away from the short-term volatility of stocks in money markets and short term fixed income instruments, and allowing all dividends to flow into your money market to buy you even more time.  This allows you to remain confident and maintain ownership during all cycles knowing that you won’t have to sell in a down market and realize a loss to support your cash flow needs.

We’re all in a battle to maintain purchasing power in a rising cost world so we can continue to live the lives we’ve earned.  The question to ponder is what will be your primary weapon to win this battle?

I think you already know what vote I’d cast!  

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Can You Now Just “Set it and Forget it?”

Let’s assume you’ve taken each step in The Relaxing Retirement Formula™ so far. 

You’ve determined just how dependent you are on your Retirement Bucket™ each year going forward (at least the next five years).

You’ve calculated investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life despite your rising, inflation adjusted withdrawals.

And, you have strategically allocated your Retirement Bucket™ of investments to capture the higher expected long-term returns of a broadly diversified mix of index funds while exposing yourself to an appropriate level of risk and volatility.

Can you now do what Ron Popeil used to say when pitching his latest cooking gadget on television, i.e. “just set it and forget it?”  

You would be better off than most investors during Phase One of your financial life, but not in Phase Two when you have no more paycheck from work to fall back on.   

There are too many other considerations at play in Stage Two including:

  • Minimizing taxes with your:
    • withdrawal strategy, and
    • asset positioning strategy
  • Making sure your Retirement Bucket remains intact!

To ensure a consistent level of risk exposure and generate sufficient liquidity for your cash flow needs, the fourth D of investing is needed: Retirement Bucket Rebalancing.

Long-term academic research of markets has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures. 

And, your cash flow needs constantly change over time.

Given this, on a very strict timetable, objectively evaluate your current vs. your target Retirement Bucket™ allocation to determine if there is a need for strategic and disciplined Retirement Bucket Rebalancing.

Objective vs. Subjective Evaluation

The key word to focus on is objective.   The reason for this is that we have to remove our subjective emotions when investing. It’s challenging to do, but it’s imperative if you want to be successful.

You can’t leave it up to how you feel on a given day.

For an example, let’s contrast how you felt on two different days over a four month stretch:

  • December 24, 2018: broad market prices had just fallen between 20% and 26% from their prior peak only a few months earlier
  • March 29, 2019: broad market prices grew between 13% and 16% in the first quarter of 2019

If December 24, 2018 was your pre-scheduled day to rebalance your Retirement Bucket™, how committed would you have been to rebalance into more stock-based index funds if you subjectively evaluated everything vs. objectively?

If you are like most Americans, you would have said, “you want me to buy more stock funds when we’re in the middle of a bear market? Are you crazy!” 

Most Americans would not only take a pass, but they would do what far too many did, i.e. sell their stock funds of our fear.  And, of course, those who did missed the best first quarter in a decade.

How about right after the best first quarter stock market performance in a decade?

Again, if viewed subjectively like most Americans, you would likely take a pass on trimming back some of your stock fund positions which had grown beyond your targeted risk range because the consensus “feeling” is that there is more growth to come!

This is why it is so critical to objectively rebalance on pre-determined dates in both scenarios.

Retirement Bucket Rebalancing Example

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated  investment mix is to allocate 30% to fixed income and 70% to stock-based investments. (We don’t even need to get into specific investments yet to understand the principle.  Let’s simply stick with a basic 30%/70% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in three months or so, it’s highly likely that if you took a snapshot of your allocation on Christmas Eve(see above), your mix likely would have shifted to look more like 34% fixed income and 66% stock-based investments because market prices had just fallen sharply across the board. 

If December 24th was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The objective answer is to rebalance back to your target allocation of 30%/70%, which requires you to trim back and sell some of your fixed income positions and strategically buy more stock-based asset classes to hit your target exposure.

On the flip side, if your scheduled rebalance date was March 29th, after prices had just risen 13-16%, your objective evaluation would likely have told you to trim back your appreciated stock-based funds (i.e. sell high) and add more to your short-term fixed income positions to bring your targeted mix back into balance.

The bottom line is two-fold:

First, remain objective during good times and bad, as hard as that is during heightened market volatility.  Emotional investors never win.

And, second, successful investing during Phase II of your financial life, when you’re dependent on your Retirement Bucket™ to provide you with monthly cash flow to cover your spending needs, is very different than investing during your “working” years when you had a paycheck to fall back on.

It requires a carefully thought out and disciplined evidence-based “system.”  Random movement for the sake of movement is a recipe for disaster.

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Evidence-Based Investing: The 4 Ds

As we’ve discussed many times, investing during Phase II of your financial life, when your cash-flow “faucet” turns off from work, the stakes go up, and your entire investing mindset and process has to drastically change.

This is where the next set of strategies in your evidence-based investment system are so critical.

After you have set aside what not to invest, i.e. five years’ worth of your anticipated withdrawals to support your cash flow needs in money markets and short-term fixed income instruments, and away from the volatility of your broadly diversified stock funds, implement The 4 Ds:

  1. Determine: What percentage of your Retirement Bucket™ will you dedicate to the higher expected returns a broadly diversified mix of stock index funds have offered vs. bonds and money markets? Historically, the higher the percentage, the higher the probability of capturing higher expected long-term returns and protecting your purchasing power.
  2. Diversify: It can be tempting to invest in a single company (Amazon) or sector (high tech), but your risk increases dramatically. Instead of searching for a needle in a haystack, buy the haystack.  Your chances of outsmarting millions of other buyers and sellers for very long is close to zero.
  3. Delegate: Avoid expensive actively managed mutual funds and hedge funds. Each has a horrible track record of beating their respective asset class index.
  • Only 17% of actively managed funds have outperformed their index over the last 20 years, and it’s a different 17% each year.
  • Instead, use low cost index funds which are a much more disciplined and cost-effective way to own a broadly diversified mix.
  1. De-Escalate: At pre-determined dates during the year, maintain the discipline and strategically rebalance your holdings back to your target exposure so your risk levels remain in check.

The most common question we all hear asked is what’s THE ideal investment mix at this stage in my life?

  1. Is it 100 minus your age?
  2. Is it 60%/40%

The best answer to that question is the mix you can hold through all market conditions so you can capture the higher expected long-term returns markets offer. 

It can be that simple.

All the statistics and sales pitches in the world are of no value to you unless you have the confidence, strategy and system in place to hold your carefully selected Retirement Bucket of Investments through all market conditions, including normal and temporary market downturns like the most recent Covid-19 crash or the 2008-2009 financial crisis.

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Know What NOT to Invest

Unlike investing during your working years when you had a paycheck to fall back on, investing during Phase II of your financial life begins with knowing what portion of your Retirement Bucket™ NOT to invest.

This may sound rather odd, but this is a key strategy in your evidence-based investment system to capturing the higher expected long-term returns markets have earned.  And, it has both practical and psychological benefits:

  • Psychological: it removes your fear associated with market volatility
  • Practical: You don’t want to be forced to sell investments in a down market when you need money to support your cash flow needs.

As legendary Berkshire Hathaway investor Warren Buffett said, “Investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.  More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

However, as we all know, stock markets don’t always move in the direction we want in the short-term, and prices have temporarily fallen 29% of the time historically.

One of the biggest reasons why the overwhelming majority of investors have such awful results, as illustrated by DALBAR, is their increased queasiness with short-term market volatility, especially when they have to withdraw funds to support their lifestyle. 

If prices fall right before you need to withdraw funds, you’ve just suffered investing sin: you’ve sold low!  Or, stated more accurately: you put yourself in a position where you were forced to “sell low” to free up funds for your needed withdrawals.

The Strategy

  1. Hold five years’ worth of your anticipated withdrawals in money markets and short-term fixed income instruments (away from the volatility of your broadly diversified stock funds.)
  2. Direct all dividends you earn on all investments to your money market instead of reinvesting. On average, this will buy you two more years of your scheduled withdrawals.

Knowing you have your cash flow covered for 5-7 years provides you with the confidence to remain fully invested with the rest of your Retirement Bucket of Investments through normal and temporary market downturns. 

Having this strategy in place has drastically increased your odds of capturing the higher expected long-term returns markets have provided. 

Psychologically, this strategy can be difficult for some folks to implement who have never been in a position of “living” on the money they’ve accumulated.  They feel as though they need to squeeze out every ounce of investment return they can on every dollar they have.  This is especially true when market prices have recently climbed.

That’s admirable and correct when you are not dependent on your Retirement Bucket™ to support your cash flow, but dangerous and foolish during Phase II of your financial life.

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Evidence-Based Investing: 3 Facts and 3 Principles

Investing during Phase 2 of your financial life, when you’re no longer dependent on a paycheck from work, is much more challenging.

During Phase 1, your focus is simple: earn a solid rate of return.

In Phase 2, in addition to that, you have a lot more responsibilities to consider:

  1. Withdrawals: You now have to strategize where you will withdraw the cash flow you need.
  2. Tax consequences: You have many more tax consequences to consider and plan for: Required Minimum Distributions from your IRA (RMD), capital gains, and dividends.
  3. Increased Stakes: Without that paycheck from work, your Retirement Bucket of Investments has to last because you have nothing else to fall back on.
    When you’ve reached this stage in your life when you’re now depending on your Retirement Bucket of investments to support you as opposed to your paycheck from work, earning market returns is no longer a luxury. It’s a necessity.
    If you don’t have an evidence-based investment “system” in place which governs your decisions, the odds of earning market returns, and thus running out of money, increase.
    Unfortunately, as the results show, the overwhelming majority of Americans don’t have a system.

Dalbar QAIB

Every year, financial research firm DALBAR performs a Quantitative Analysis of Investor Behavior (QAIB). Here’s what the 2020 DALBAR QAIB Report reveals:

  • 9.96%: The average annual return of the S&P 500 broad stock market Index over the last 30 years from 1990 through 2019 was 9.96% per year (including dividends reinvested)
  • 5.04%: Over the exact same 30 year period, the average annual return of the “average” stock fund investor (i.e. a person) was only 5.04% per year.

Stop and think about all of this for a moment. Over the last 30 years, the actual returns received by investors was only half of what “the market” provided. That’s truly sad.

The obvious question is why has the average investor earned only half of what markets generate?

Given these statistics, we know that markets are not the problem because these figures demonstrate that markets have performed very well. It must be something else:

  • Fees: The fees they paid account for part of the problem.
  • Strategy: The biggest contributor is a lack of strategy, and this is the direct result of not having an evidence-based investment systems grounded in 3 Facts and 3 Principles.

3 Facts

1. Markets Work: Since the end of World War II, 1945-2019, the S&P 500 Stock Market Index has earned:

  • 11.2% per year (with dividends reinvested),
  • 7.3% per year greater than inflation

Bottom Line: Stocks have generated inflation fighting long-term returns.

2. Markets are Volatile: Over the same timeframe from 1945-2019, there have been 93 market pullbacks of 5% or more:

  • 59 of the 93 were between -5% and -10% with an average drop of 7%.
  • 22 of the 93 pullbacks were between -10% and -20%, with an average of price drop of 14%.
  • 9 of 93 were between -20% and -40%, with an average of price drop of 26%.
  • 3 of the pullbacks were over -40% (including the dot.com crash in 2000-2002 and the Great Recession Financial Crisis between 2008-2009),

Bottom Line: the market’s long-term climb has included many falls.

3. Markets Recover:

  • Of the 59 pullbacks between -5% and -10%, it took an average of only two months to recover back to the original price before the drop.
  • Of the 22 between -10% and -20%, it took an average of only 4 months to recover back to the original price before the drop.
  • Of the 9 between -20% and -40%, it took an average of 14 months to recover back to the original price before the drop.
  • In 90 of the 93 market pullbacks since World War II, 87% have recovered in 4 months or less and 97% have recovered in 14 months or less.

Bottom Line: All stock market drops have been temporary, and most have been brief.

Principles

1. Time Matters

  • Investing is a long-term solution to a long-term problem which is keeping your purchasing power well above inflation.
  • In the short term, stock market prices fluctuate a ton. They always have and they always will.

Bottom Line: Have workable strategy to deal with short-term volatility so you can capture the higher expected returns markets have earned.

2. Costs Matter

  • Just 1% in additional fees costs a $1million Retirement Bucket of Investments earning 8% per year a staggering $2.2 Million in extra fees over 30 years (your joint life expectancy).

Bottom Line: Pay careful attention to fees, especially in annuities, actively managed mutual funds, and hedge funds.

3. Allocation Matters

  • To justify high fees, many Wall Street firms sell superior research and market-beating returns.
  • The evidence, however, paints a very different picture. According to extensive research by Nobel prize winning economist Eugene Fama and Dartmouth Professor Ken French, 95% of historical stock returns dating all the way back to 1928 can be attributed to only 3 factors:
    • Exposure to stocks in general vs. treasuries and other fixed income instruments
    • Exp to smaller vs. larger companies
    • Exposure to value vs. growth stocks

Only 5% of historical returns can be attributed to something outside of these three factors like superior selection and/or market timing.

Bottom Line: Allocation matters much more than superior stock selection.

In order to earn the market returns you need in order to make your Retirement Bucket™ last while it supports your desired lifestyle, employ an evidence-based investment system grounded in these three facts and three principles.

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What You Must Know Before Investing

Every “retirement calculator” I’ve come across from any financial firm always begins with you assuming an investment rate of return you either want to earn or think you can earn.

This completely puts the cart before the horse. It’s what gets so many people into trouble at this critical stage in their lives, and what causes so much confusion and anxiety.

Once you’re past the first steps in The Relaxing Retirement Formula™ and you know just how dependent you are on your Retirement Bucket™ and how long it must last, the next question is, “what investment rate of return do I need to earn to make my Retirement Bucket of investments last?”

I’m now in my 32nd year of coaching individuals and couples through this challenging transition, and I have yet to meet one couple who knew the investment rate of return they must earn in order to make their Retirement Bucket of Investments last before we met. Not one!

This is not chosen arbitrarily. It’s the investment rate of return that allows your Retirement Bucket™ to keep pace with inflation and remain intact year after year while you to continue to spend what you want.
And, it’s different for everybody so there are no accurate “rules of thumb.”

Why This Rate Is Different for Everybody

To illustrate, let’s revisit our two couples, Mike and Mary, and Ron and Rose, both age 62. To keep it simple using round numbers, assume each couple has:

  • $2,000,000 built up in their Retirement Bucket™,
  • the same social security retirement income of $3,000, and
  • the same monthly pensions of $3,000

Beyond that, here’s what else we know about them:

Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years.

Ron and Rose still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions, weddings, cars, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.

Ron and Rose are clearly more dependent on their Retirement Bucket™ than Mike and Mary, meaning they need to withdraw a lot more money each month to support their more expensive lifestyle, i.e. $9,500 per month vs. $6,500 per month.

In order for Ron and Rose’s Retirement Bucket to remain intact for the rest of their lives, it needs to grow faster just to remain full so they don’t run out of money.

  • 4.0% per year: Mike and Mary’s minimum investment rate of return needed
  • 7.2% per year: Ron and Rose’s minimum investment rate of return needed

There is a significant difference between having to earn 4.0% per year vs. 7.2% per year! And, this is why generic “rules of thumb” like 100 minus your age are so dangerous at this stage in your life. It’s impossible for that to be the correct formula for Mike and Mary and Ron and Rose.

Given this, Ron and Rose’s Retirement Bucket Strategy has to be very different than Mike and Mary’s!

When you’ve reached the stage where the money you’ve saved must now support you for the rest of your life, when you’re dependent on your Retirement Bucket™ to “live” as opposed to receiving a paycheck from the work you do, you have to think very differently about how you invest.

Investing without knowing the real rate of return you must earn first is like having invasive surgery without being thoroughly diagnosed first.

It doesn’t make any sense.

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