Compounding the Two Fatal Flaws in Retirement Investing

Five Things You Should Know

1. Equity Markets – finished mixed this week with U.S. stocks (S&P 500) up 1.47% while international stocks (EAFE) fell –0.01%

2. Fixed Income Markets – finished mixed as well with investment-grade bonds (AGG) up 0.32% and high yield bonds (JNK) down -0.59%

3. Fed Minutes – In their latest meeting the Federal Reserve announced a willingness to discuss future rate cuts but not to expect any moves in March, with Jerome Powell emphasizing that the central bank needs to see “more” data confirming progress. Officials also dropped potential rate hikes from the discussion, signaling the bank’s confidence that the worst may be behind us.

4. U.S. Jobs Report – A day after the Fed’s comments the U.S. economy saw a surprisingly strong jobs report that saw payrolls boosted by 353,000 new jobs in January, the most in over a year. December data also saw an upward revision, while unemployment remained unchanged at 3.7% and average hourly earnings rose 4.5% year-over-year.

5. Key Insight: [VIDEO & ARTICLE] This week, Dave addresses a couple of potential retirement plan pitfalls to be mindful of.

INSIGHTS FOR INVESTORS

Over the course of a nearly 20-year career and hundreds if not thousands of retirement plans it’s almost impossible not to recognize patterns. Many of these patterns are wonderful. For example, most people are generous, love hard and care deeply about those close to them. But something that never fails is what happens at the cross-section of one’s money and the things that are important to them. It elicits an emotive response, as for better or for worse, their money is tied at the hip to their financial goals. It’s no wonder this leads us to make decisions when sometimes doing nothing is what’s best. When we see our account balances fluctuate with the market (both up and down) over years of saving, investing, and eventually spending these dollars in retirement it’s not a bucket of money that’s moving with the markets. It’s quite literally our hopes, dreams, and fears.

To this I want to focus on two major fatal flaws I see in retiree investment outcomes, some good news, and a few conclusions:

“The key to investing in stocks is not to get scared out of them” – Peter Lynch.

Much easier said than done and that is exactly why it’s Peter Lynch’s first rule of investing. I could show you all sorts of fancy charts showing the S&P 500 performing an average ofnearly 9.5% annually over time. I could also show you some of the market crashes one would have had to live through to get the full upside of the market. The key here is understanding how much exposure you not just should have based on what your retirement plan says, but how much you can handle from an emotive standpoint. Risk tolerance has multiple layers to it.

The second pattern I see is people underestimating how long they will live. I’ve got a wonderful client who recently had to stop skiing at age 85. I’ve got another client who swore he’d pass away from heart disease at age 72, and he’s now north of 80 doing well. Two quick examples with dozens more for you.

The bad news with the above compounds the rising cost of goods over time. I spoke with a client yesterday and they’re looking at the idea of passive income. “How do we create this? And we don’t want to fix pipes for a rental we own”. The good news, if you can wrap your head around it, is in the chart below:

Nick Murray, whom I reference often, lays out maybe one of the most simplified and compelling visuals to demonstrate the answer here. He calls it the 62-year scorecard.

Please see below (excerpt from Nick Murray piece Nick Murray Interactive 2.1.2024 below):

Each year at this time, we consider the performance of the mainstream equity market—absolutely, and relative to consumer inflation—in the lifetime of a person reaching average retirement age (62) during the coming year.

Clients turning 62 in 2024 were born in 1962—the year the Beatles auditioned for Decca Records and were rejected, John Glenn became the first American to orbit the earth, Marilyn Monroe died, the New York Yankees won the World Series for the twentieth time, and—in the Cuban Missile Crisis—the world came closer to thermonuclear oblivion than at any time before or since.

So we ask three questions:

• Where did the S&P 500 close out the year just past, relative to where it ended in 1962?

• Critically important to our clients on the cusp of retirement: how much did the Index pay in cash dividends last year versus 1962?

• And how did both price performance and the trend of dividend payments compare to consumer inflation—which, in a two-person, three-decade retirement, will be what matters most.

And the answers:

• The S&P 500 closed out 1962 at 63. It ended this past year at 4,770.

• The cash dividend paid out during 1962 was $2.15. Last year it was $70.30.

• The Consumer Price Index ended 1962 at 30. It closed out 2023 at 307.

Thus the 62-year scorecard, in round numbers:

Conclusions-

If you save well and eventually make work optional, the battle is keeping up with the rising cost of your life over time (CPI). Based on the above, it’s tough to argue against the ability for a dividend-focused investor to maintain their lifestyle over a 30-year retirement.

2023 was a wonderful reminder to me that nobody knows anything about the sequence of returns, or in other terms, the randomness of stock returns. Stocks go up over time, we simply can’t easily predict when and why. All I know is that it works over time, and I don’t have to fix any leaky pipes along the way.

And finally, a long-term investment plan anchored in your values, a relationship with an advisor who genuinely cares about you and communicates with you regularly (and comes alongside you when things get choppy) is the pattern that I see creating the most successful outcomes over time. But hey, it’s just one person’s perspective.

To your health and living richly,

Dave and the team at TEN