It is fascinating to me that everyone who works for a living knows exactly how much money we earn a year. According to the US Census Bureau, the average household income in Thousand Oaks, for example, is about $100,000. We all also know the value of the homes we love so much. It could well be that your house is worth $1,000,000. But here is where it gets more interesting. We don’t have any idea what it takes to have the same income 24/7 when we want to make work optional. Instead of living off our work earnings we often suddenly have to live off of our retirement income. We all know that it is dangerous to text while driving, but most of us text anyway. So before you get busy texting again, let’s get things in order. If you would like to see this work on YouTube, please watch:
One of the real reasons Americans aren’t saving enough for retirement is, “When it comes to saving for retirement, most American workers are not only falling short, they don’t even know how behind they are,” says Penelope Wang at Money on August 20, 2015. A 2015 study from Transamerica Center for Retirement Studies surveyed 4,550 full and part time workers between the ages of 18 to over 65. 59% reported they were “somewhat” or “very” confident that they will be able to achieve financial independence. Money says to maintain a comfortable life style in retirement, about half think they will need at least $1 million saved by retirement, 29% they will need $2 million. The question that each investor needs to ask themselves is, what’s your number for you to make work optional?
If you don’t see a target, it’s nearly impossible to hit that target. This is an example for illustration only, is not indicative of any particular investment, and actual results will vary. Many factors determine the actual return on your investment and your actual investment return may vary greatly from the results offered by this calculation. This calculation is meant only to provide an approximation. Please consult your investment professional for additional help with your investment. If you want to make work optional today and receive the same income without working in a year to spend $100,000 next year, when you set your withdrawal speed limit at 4%, you may need to invest $2,500,000 this year I know that’s a tall order. But if the average person looking for a hotel room visits 7 sites before booking a room for the night, that suggests to me that when one is sufficiently inspired to have a good time, one takes the time to do the job. This job is no different in that it is one you can do too. Only your results can last a lot longer than a week or two.
If you don’t know where you are going, you might wind up somewhere else. - Yogi Berra
A TIAA-CREF survey published February 3, 2015 found that only four out of ten Americans had taken the time to see how to convert their savings into post-career income. If one of your children or grandchildren came home with a grade ofF, can you imagine you would be so busy texting that you put that situation on ignore? I bet you would put that phone down and develop a plan of action. Take the time now to determine how much money you might need to make work optional. After all, you can’t hit a target you don’t see. Once you see clearly what you need to do there is a great deal of personal satisfaction you will enjoy once you know where you are going. Advantage 1: What’s Your Number to make work optional?
So the first advantage would be to diversify differently than you may have ever diversified before. Investors often think they are diversified when they own ten different mutual funds. But when we dig deeper it is often the case that the asset classes are some combination of cash, bonds, and stocks. Such a composition means a portfolio stool is resting on 3 asset class legs, whereas other portfolio stools may rest on 6 or more different asset classes. What’s more, when investors own equity mutual funds, no matter what the name of the fund might be, stock mutual funds may mirror the overall stock market in performance. So you may have cried in 2008 and cheered in 2009. Ask your financial professional to discuss with you other asset classes. Or what else might you own in addition to cash, bonds, and stocks? Take the 2008 financial crisis. “If you got in at the peak, it would have taken 5.5 years to recoup your money,” according to CNN Money, June 21, 2015. The assumption here is that no income was needed at that time. Advantage 2: How well is your portfolio diversified?
The market volatility probably got your attention twice since 1999 and again in the last 30 days. Rather than buy and hold or hold and hope or hold a brain-dead portfolio again, savvy investors are motivated to see what might be done to manage volatility. As Adam O’Dell with Dent Research observed on July 28. 2015, “Our culture tends to reward alpha-male behavior. Not unlike as it was in caveman days, he who beats his chest the hardest succeeds…at fending off predators, at becoming the tribe’s leader and at getting the girl.” We agree that the art of playing defense is a valuable, but underappreciated trait that investors may be smart to embrace. Now, being defensive doesn’t mean you can’t win, in fact, you may win by losing less. O’Dell goes on to say, “Boxing champ Floyd Mayweather is known to employ a defensive style of fighting. And, ironically or not, that’s allowed him to win every single match he’s ever fought – his undefeated record currently sits at 48-0.” Here’s the math. In a bad year like 2008, if your losses were -25%, you need 33.3% to get back to even. An aggressive investor that loses 50% will need 100% to make it back to even. You see, when the aggressive investor suffers a drop that is twice as large, it requires a recovery that’s three times as strong just to get back to break even. That’s not putting the odds in your favor.
Part of the job includes being willing to learn. Learning is just as important for investment advisors as it is for investors. According to Investopedia, “The use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a portfolio. Active managers rely on analytical research, forecasts, and their own judgment and experience in making investment decisions on what securities to buy, hold, and sell. The opposite of active management is called passive management, better known as “indexing,” when it comes to equities. Let me put it this way. When it comes to risk assets (bonds & stocks) when markets drop viciously you want to be ready to pull your money off the tracks in a bad year. When the calamity is over you want someone to be ready daily to put your money back on the tracks when the market environment might be worth taking the risk. Look for examples of when the volatility increased and the ride got more uncomfortable, where you might see how you could have reduced exposure in bad markets, and increased cash balances. An adjustment to your portfolio’s allocation may be necessary to meet your risk tolerance. Advantage 3: Identify active management strategies (while you can). Please notice the theme here. It’s never about who is right. It’s all about who is ready.
Securities and advisory services offered through National Planning Corporation (NPC), Member
FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
There are no guarantees that any managed portfolio will meet its intended objective. Neither asset allocation nor diversification can ensure a profit or prevention of loss in times of declining values. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results.