Today's Market
by Dr Invest

Tonight I enjoyed the PBS, Frontline production called: The Retirement Gamble. Go the to following link:    FRONTLINE This is one of the BEST programs I have seen on the investment racket, a documentary that is honest and raises tremendous questions regarding your investment strategies.

I know that I have covered this topic before, but by paying 2% to your financial adviser, another 2% in management fees, and another 3% for annual inflation, you would need 7% return just to break even each year.

A study by Morningstar Inc. Investment Management Division, recently showed that the tried-and-true 4% initial retirement withdrawal rate over 30 years, with a 40% allocation to stocks, will only lead to a 48.2% success rate, the researchers found.

David Blanchet with Morningstar, sets the withdrawal rate at 2.8% for a 30 year draw-down of one's retirement with a 90% reliability. The assumption is that the economy will improve within the next five-years. Now let me interpret what that means in a few portfolios. 

The truth is shocking. Even with 2 million in your portfolio, you would only be able to draw-down $4,666 monthly. It is hardly the life of luxury you had wished for. 

Some 30 percent of Americans say they will need to work into their 80s to be comfortable in retirement.

Where is the delusion? The reality is that many people won’t be physically able to work into their 80s. According to the U.S. Administration on Aging’s Aging Integrated Database (AGID), 22.5 percent of Americans aged 60-84 reported employment disability—they were physically unable to work and receive disability payments because of that disability.

Some 34 percent of Americans think they’ll need less than 50 percent of their retirement income; yet, median household income is approximately $50,000.

Where is the delusion? One-third of middle-class Americans think that they will need $25,000 annually in retirement. For a family of two, since we can assume that the kids will have left the nest by then, this puts them less than $10,000 above the federal poverty line. 

Middle-class Americans believe, on average, their retirement healthcare costs will be $47,000.

Where is the delusion? Medicare out-of-pocket costs are expected to be between $240,000 and $430,000 for a 65 year old couple retiring today.

Middle-class Americans say they will need a median of $300,000 to retire. The same respondents said that, to date, they have saved a median of $25,000.

Where is the delusion? The average age of the interviewee was 50 years old—the ages ranged from 25 to 75 in the interview. This means that, assuming a retirement age of 66 years, they have 16 years to save $275,000. If you assume that the stock market goes up 5 percent per year—perhaps not the safest assumption one could make—then to hit that savings number, they need to save $11,070.69 per year, or 22.1 percent of the median income. However, 68 percent of middle-class Americans who have a 401(k) plan contribute 10 percent or less of their income to retirement.

Middle-class Americans think that a median safe withdrawal rate in retirement is 10 percent.

Where is the delusion? Dr. Wade Pfau, CFA, ran historical simulations for retirees from 1926 to 2000 to see how long retirement savings would last at a 10 percent withdrawal rate. 

Through 2009, only one year group would still have money—those who retired in 1982. Everyone else ran out of money, with their retirement funds lasting between 8 and 25 years. In more than two-thirds of the cases, retirees ran out of money before reaching the average life expectancy. Most financial planners recommend a 4 percent withdrawal rate, and some, like Dr. Pfau, indicate that 4 percent may be too aggressive.

MY CONCLUSION

I have already shown you the recent statistics. 2.8% is the best draw-down. My table shows that a $300,000 portfolio will give you $700 monthly or $8,400 annually. This is a far-cry from the $50,000 you will need annually in your retirement years. The average retirement benefit is $1,237 monthly or $14,844 annually.  $23,244 of annual income, truly leaves seniors in a financial crisis even if they happen to have a $300,000 portfolio. I have not subtracted inflation, financial management fees, school taxes, healthcare costs,  or the replacement costs for a vehicle or home repair. 

Without LARGE SUMS OF MONEY, your chances of lasting income is unlikely. 12% returns on stocks, even 5% returns on stocks seem fleeting. Some kind of alternative strategy will be needed beyond your investment portfolio to bring the returns needed to fund a reliable retirement. 

I am implementing some strategies presently, but can't cover all the strategies in this single venue.  

CREATIVE THINKING & INVESTING

If you have ten to fifteen years before retirement, good credit, are willing to handle some contracts and do some maintenance in a geographic area that is growing, rental property can be viable investment. If you purchase a duplex for $160,000 (and I do suggest duplexes), you rent should be 1% monthly of the value of the property or $1,600 monthly. So $800 per rental. This gives you what you need to pay school taxes, the mortgage, and still make a profit. You can super charge this investment, if you have equity in your home, by taking the equity and paying for the duplex OUTRIGHT. Then take the profit from the duplex and pay-down your home mortgage. You will be shocked at how quickly you can pay-off your mortgage on your home while paying against the principle at $13,200 annually; a thirty-year loan will be paid off in nine years if you keep to this plan. 

The gain is the depreciation of the duplex against your income taxes, plus $13,200 in rental income. Go back to the above chart an look at how much money you need to return $14,000 annually....yeah, $500,000 in an investment portfolio. The advantage is that if inflation grows 20% per year, the inflation is passed on to the tenants. Not very ideal for them, but better than a 20% loss in your rental income that year. By adding $14,844, the average social security retirement benefit to the $13,200 of rental income, your total retirement income just went up to $28,044. Add to that $8,400 for the $300,000 you still have in your investment portfolio and you are getting $36,444 as your retirement package. One last benefit is that you have your home loan paid off and the asset of a rental property worth $160,000 or more. DON'T CARRY DEBT into retirement! Under the right conditions you can create positive cash flow, but debt can create a negative cash flow when you need the retirement. STAY OUT OF DEBT!

Recently, I was speaking with a friend. He told me how his dad had taught him the benefit of initiative and work. In his college years, while other students were playing pool and partying, he was making money. He had purchased a bucket, a squeegee, some towels, and glass cleaner. Going from business to business, he offered to wash their windows. In a few weeks, he had gained a clientele of regular paying customers. He said, dad never paid for my college, I got no loans, and I even sent money home. For $12, he earned a degree and had money as well. He later became a key executive for a major corporation. 

Don't tell me that there are not opportunities for someone with a creative mind and the willingness to work.

More later.

(The above information is for entertainment purposes only and not to be used as investment advice.)