Christopher and Cathy Lucas have successfully sold two businesses netting the couple about $5MM. They are so conscious of their funds they have an annual vacation budget of $21,500. They know that they need $200,000 to meet their retirement expectations. They also know that the last thing they can afford is another market loss of 50% or more. If their accounts drop to $2.5MM they will need to double annual withdrawals from 4% to 8% to meet spending needs. They do not believe that hope is a strategy nor do they want to leave their life savings to chance. As John McAffe likes to say, "Making money is easy. It is. The difficult thing in life is not making it, it's keeping it." Here's a man who takes responsibility for his actions and his net worth. It may be that for those of us who are working on making work optional and those of us who have achieved financial independence, can learn something here.
First we will look at the situation for those who have money. Then we will review a 51 year old female client who would like to retire in 4 years. I will close with what investors can learn from Malaysian Airlines flight 370.
History doesn't always repeat itself, but it can rhyme. Instead of paying investors paying close attention to the stock market's track record over the past 70 years in the belief that average is good enough, let's look at an investor with $1MM in equities in 1929. Rather than simply hope for the best, it may be of more value to look at the worse financial scenario this country has ever seen so that we all might be better prepared for the ugly unexpected. Prior to 1928-29 there was a good run for stocks. It appears to this observer that in the mid 1920s a $500,000 investment in equities peaked at about $1MM, between 1928-29. Then the wheels fell off the wagon in the Great Depression. For a visual description, please visit:
An 80 year cycle
In 3 short years the market dropped about 90% which means that $1MM experienced a serious reversal of fortune dropping to a low of approximately $108,000 in 1932-33. For the buy and hold crowd equity investors needed a gain of 1000% to get back to even. Those who stayed in and didn't take out any money did get back to even around 22 years later. That would be an exceptional investor, as most investors may have sold out or took money out, which means it is unlikely that they ever got back to their starting values. Let's suppose that equity investors today are in for a similar scenario like 80 years ago. With the stock market at or near record highs, suppose it's a cycle that can't be avoided. What goes up must come down. The question that savvy investors need to ask is how can we reduce downside participation? Further, is it possible to keep losses at say 20-25% rather than go down in an accident you don't see coming with losses in excess of 50%? Could greater diversification help? Can investors see the evidence that active management strategies might have helped avoid needing to swing for the fences in recovery over the past 12 years? These might be good questions for investors to ask now who don't want to kiss their assets goodbye.
There is a homeless man that is often on the corner of Westlake and Thousand Oaks Blvd. What makes this particular person most interesting is that he holds a sign declaring that his goal for the day is $199.00. Sometimes the goal is $240 for the day, but what impresses me is that he has a goal. Too many intelligent people don't have any plan for when they intend to achieve financial independence. The American Dream of retirement at age 65 has been pushed off to age 80 by many Americans according to a study prepared by UBS Wealth Management. The truth is that we don't like math and we allow ourselves to believe that investing is a random walk on Wall Street that we can never figure out.
Stay in the game; do the math
Rather than believe the job is impossible, let's do the math. Virginia Woods is 51 and would like to retire in 4 years at age 55. She is earning $55,000 and is contributing $15,000 a year for her retirement. To achieve her goal assuming zero inflation, but a 7% annual return, she will need to increase her monthly contributions by more than $11,300. Not a likely scenario. If on the other hand she were to make her goal age 65, she will need to increase her contributions about $600/month, again assuming no inflation but a 7% annual return. Now she has moved from what was impossible to what is possible. In fact, if she were to have her daughter pay her own student loan Virginia would free up $500 per month to help her reach her financial independence goal. Parents are smarter to remember their own goals are priority number one. After all, 36% of workers have only $1,000 for retirement according to the 2014 Retirement Confidence Survey from Employee Benefit Research Institute.
In looking at Malaysian Airlines flight 370, one of the things we can all learn is trust, but verify. Governments know far more than is being told the families. No government wants to reveal how much we all spy on each other. So what that means for investors is, do your homework. Check and double check that you set realistic goals, see that your assumptions are in line with reality, and review your data at least once a year. Running out of money before you run out of time is not fun.
Opinions voiced in this article are not intended to provide specific advice and should not be construed as recommendations for any individual. To determine which investments may appropriate for you, consult with your financial, tax or legal professional. All investments involve risk including the potential for loss of principal.