Not Your Mother’s Retirement…

The concept of the orderly, low-stress retirement, while not that distant a memory for some, is not much present anymore these days.  [A quick aside to save time for some of you - if you are a high net worth type, a scion of a multi-generational fortune that is still intact, or a member of the <1% who have no retirement worries, then what follows is less germane to your needs…we will consider your circumstances and investment strategies in another post.}  In the era before 401-K’s, a person often had a pension, some life savings that had mostly been steadily converted from stocks and corporate bonds to municipal and US government bonds, and you lived in a house that no longer had a mortgage or in an apartment where the rent was nominal since you had lived there for many, many years.  You ‘clipped the coupons’ from the bonds, and added those interest payments to your husband’s pension payments and his monthly social security checks.  Savings were not the largest contributor of retirement income. You lived out the ten to fifteen years together that you had after he retired at the age of 65, and then you lived on by yourself for a few years beyond (women on average still live about 7 years longer.) 
 
Life was comfortable…you visited the children and grandchildren, golfed or tennised, did a little traveling, went to the movies, had a hobby or two, maybe some volunteer work.  It was not that hard to organize and it was not that complicated.  For many in the large middle class, money was a concern but not an overriding one…there was enough to live comfortably until you died.  In the worst of circumstances, you used some of your savings.  As it is, retirement income sources were not the basis of the primary inheritance for the children.   That often came from pensions and Social Security payments which mostly did not transfer to the next generation…and frequently, the biggest part of the estate was the fully paid off homestead.  There were no IRA’s.
 
So what’s changed?  Most everything.  Pensions are a thing of the past…now if you work for a medium to large sized corporation, you have a 401K into which your company may contribute a small matching amount whose percentage is not guaranteed (and, in a corporate pinch, is often being reduced these days) and it is  up to you to oversee its management.  On the positive side, average life expectancy has increased dramatically – if you die in your 70’s today, people shake their heads at your misfortune.  But that is a double-edged sword; now you have to consider the likelihood of funding a much longer retirement period.  Yes, you can still expect Social Security payments if you are eligible, but who really knows for how much longer.  Even if they continue longer than the doomsday preachers predict, it is almost certain that the terms will be changed. 
 
And we are much more mobile, either out of desire or need, so homes are more often still encumbered with mortgages…we move long before the mortgage is fully paid off and enter into a new debt agreement with the next home purchase.  So the equity in the homestead is more limited.  Of course, you can still loan the US government your money by buying government bonds but you cannot count on them as a viable source of sufficient retirement income.  Just like the salary that the current minimum wage provides is ridiculously insufficient (do the math…40hours x $7.25/hour x 52 weeks = $15,080…even a single person would be challenged to live any kind of a reasonable life on that, much less a family) so too what government bonds provide today in the way of current income cannot underwrite a particularly comfortable retirement. 
 
Moreover, US government debt at least used to have the benefit of being viewed as completely secure, risk-free as it were.  Now, be honest, do you really think it seems as risk free as it used to be?  If you say yes, apparently because you are willing to ignore the ballooning size of the US government’s total debt, how did you feel about your cash and your money in the bank during the last financial crisis?  Don’t you remember when a couple of large money market funds ‘broke the buck’ – meaning that their seemingly risk free posture was not so risk free and their NAV (net asset value) per share fell below the once supposedly invincible $1/share value. I took some cash out of the bank and put it in a safe place just in case.  That thought, much less acting on it had never ever even remotely occurred to me previously.  
 
In addition to the fact that US government bonds are at least a slightly riskier proposition than when your parents bought them for you or your children, they pay so much less now despite the increased risk.  Bonds that used to yield 5,6,7% and more – in the 80’s the average annual coupon on the 30 yr. ranged from almost 8% at the low to more than 13% at the high.  In the 90’s the annual average yield never got as low as 5.5% and was mostly well above 6 and 7%.    These days, the highest rate for US government debt is just above 3%.  Would you loan anyone your money, even the US government, for 30 years and only get 3% per year…I wouldn’t.  Kind of like those long-term contracts in baseball…other than Jeter who proved worth $190 million for ten years, can you think of another good long term deal – Joey Votto? A-Rod? Pujols, Kevin Brown?  I think the 30-yr. bond paying 3% a year falls into that same category.  Not to mention that with rates so low, the best you can hope for is that they remain stable…you do not want to be holding those bonds as rates rise – if that happens, the interest income will be quickly overshadowed by the decline in the bond’s principal value.
 
But suppose, like most of us, you are not really worried about the US government defaulting on its debt and you are willing to buy the 30-yr. bond because it had the highest rate…could you live happily with 3% interest income…remember this is not, and will not be, adjusted for inflation.  How much money would you need to have so that a 3% coupon would generate sufficient interest income to fuel a modest retirement?  $2 million? $3 million?  $10 million?  You get, as of today, 3.26% a year for 30 years, then you get your money back.  Now if you have millions and millions of investable assets, maybe you make it work…3% on $10 million gives you $300,000 a year…of course, if you have $10 million in investable assets, your life style may require more than $300,000, particularly after a tax bite reduces the total.  But how many have that much discretionary investible money anyway…not many. 
 
Countless studies have shown that, over the long term, investing in stocks has provided the best returns.  If you want the data, or are just curious, go to Google and ask the question and you will be given numerous confirmatory reports.  That being the case, why isn’t everyone, including even conservatively inclined investors, and investment advisors, making stocks the consistent and constant linchpin of their investment strategy?  I do not know…I do not have a good answer to that question.  I have been asking other investors and advisors and none of them have given me a satisfactory explanation either.   
 
So, if stocks should be/could be the mainstay of even retirement fund investments, why aren’t they?  The stock answer (no pun intended) is that stocks are too risky to rely on for a retirement…that is the received wisdom.  But what does that mean if it has been shown repeatedly that, over the long term, they provide the best overall returns.  What investors need to be asking themselves is how should I/can I deal with the perceived increased risks inherent in a stock heavy portfolio?  Can I manage the anxiety that frequently accompanies the increased volatility that characterizes the price action of equities vs. fixed income investments?  Can I manage my expenses sufficiently with my current income and any mandated retirement account withdrawals so that I am not forced to liquidate positions at a suboptimal moment?  This is the crux of the matter - effective cash management and adequate planning can go a long way to alleviating anxiety and allowing even more risk-averse people to participate in the markets in a way that will produce more effective long-term outcomes.