Good Morning Relaxing Retirement Subscriber,
Last week, I shared the story of John and Barbara and the good and bad news I had to share with them.
After analyzing and crafting their custom designed Retirement Blueprint™, taking into account all of their priorities and all their resources, the good news we shared was they had built up enough money to make it all work!
Enough money and income to continue living exactly the way they wanted without running out of money over their expected lifetime.
What an accomplishment!
But, before the party balloons were set free, I had to throw a little bit of cold water on the situation and share some bad news with them as well.
That bad news was that if they continued to invest the same way they had, their financial resources would run out in 8 to 9 years.
Now, that may seem like a contradiction, but it’s not.
They do have the financial resources to make it work, but their Retirement Resource Forecasters™ that we use to design their Retirement Blueprint™ have some assumptions built into them, as all forecasts do.
One of those assumptions was that their investments had to earn 1.0% above the rate of inflation over the rest of their lives.
Historically, this has been accomplished without significant effort or risk. Long term inflation and market performance statistics spell that out clearly.
However, given John and Barbara’s actions (as illustrated by their investment spreadsheets that they shared with me), it’s extremely unlikely that they will be able to accomplish this.
The reason I had to reveal this piece of bad news with John and Barbara was the 2015 Dalbar, Inc. research that I shared with you last week.
To refresh your memory, here’s what their study on the results for the 20 year period ending in December, 2015 revealed
- The Average annual return of the broad market S&P 500 Stock Index from 1996 – 2015 was 8.19% (including dividends reinvested)
- However, over the same 20 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 4.67%
Take a moment to stop and re-read those two numbers for a moment and let them sink in.
What these numbers tell us is that, while the standard barometer for broad stock market performance, otherwise known as the S&P 500 Index delivered a very respectable average annual return over those 20 years of 8.19%, the average stock mutual fund investor (a person, not an investment) only achieved 4.67%!
That means that the average stock mutual fund investor’s return was 43% less than the market barometer of “average” returns, not above average, each and every year!
As I also revealed, the news is even worse if we extend the numbers over the average 30 year retirement. While the S&P 500 Index earned an average annual return over the last 30 years of 10.35%, the average stock mutual fund investor (a person, not an investment) earned only 3.66%!
What Can We Learn From This?
What you can’t help but take away from those statistics is that, while it makes all the news, markets (or bad investments) are not our biggest problem.
The BIG problem is the average retiree’s investment behavior, which is driven by their “strategy” or lack thereof.
Forget for a moment about trying to “beat the market” which is what financial and market related talk shows are built on.
The average stock mutual fund investor earned 43% less each and every year than the broad based S&P 500 market index. Again, the market barometer of “average” returns, not above average!
Think about that for a moment. Something that we all can control is what our biggest problem is.
I recognize that I’m repeating myself, but I’m doing so to emphasize this critical point.
It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the results of this research report. What else could possibly explain the massive difference in real life returns that people receive?
What Can You and I Do To Close This Performance Gap?
The first piece of news to share is that there is no one reason or one strategy you can use to close this gap.
However, over the last 28 years, there are several “strategic behavioral mistakes” that I’ve personally witnessed that I’d like to share with you.
And, these are the biggest reasons why I believe the average investor earned 43% less than the market averages each and every year over the last 20 years.
Let’s start today with Reason #1 why I believe this massive performance gap exists: The WRONG “INVESTMENT GOVERNING” ISSUE.
Let me clarify what I mean by “Investment Governing Issue” because it has many important points that I suggest you make a note of.
First, a few statistics for you that you may have heard me share with you before:
To begin, the average retirement age today in America is age 62.
Next, if you are a 62 year old couple (and each of you does NOT smoke), insurance company mortality tables tell us that at least one of you will live to be 92 years of age!
If you are a 70 year old couple, one of you is going to live 22.6 years (age 92.6). And, if you are an 80 year old couple, one of you is going to live 14.5 years (age 94.5)!
Please take a moment to go back and read those mortality statistics before going on.
What they suggest is that, if you’re age 62, you’ve got 30 years with which to provide life sustaining income.
Not even just twenty.
But, Jack, I’m not 62 anymore. Well, if you’re a 70 year old couple, your time horizon is still 22.6 years. If you’re 80, it’s still 14.5 years.
And, these are “averages”. I could make a very strong case that our Relaxing Retirement members are not average.
The Goal: Lifestyle Sustaining Income
Lifestyle sustaining income means income that keeps your standard of living the same even when prices rise.
Let me put that into perspective.
In 1932, a first class stamp cost 3 cents.
In 1971, it was 8 cents.
In 1980, it was 15 cents.
Today, it’s 47 cents!
This is not to send a “better” letter, but the same letter.
While there are very few guarantees in life, one that I believe we can prudently count on is the fact that life will continue to get more and more and more expensive.
As I just illustrated, the price to mail the exact same letter costs you three times what it did just 30 years ago.
That’s extremely instructive given the 30 year lifespan of a 62 year old retiring couple.
Protecting Principal vs. Protecting Purchasing Power
Now, here’s the problem from an investment standpoint…what is the dominant governing issue among the overwhelming majority of retirees?
You hear this stated over and over and over again.
Whenever you hear the overwhelming majority of retirees talk about “risk”, this is what they’re focused on. Above all else, “we have to protect our principal.”
And, this governs their investment decisions.
In reality, the biggest financial issue, as I’ve just illustrated with your long life expectancy, is the protection of your “purchasing power”, or your ability to sustain the same standard of living.
This has nothing to do with wanting “more” for yourself. Not that there is anything wrong with that.
This is simply the necessary requirement to sustain the same lifestyle.
Even if inflation is only 3% over the next 30 years, and I would strenuously caution you against using that low of a number, but even if it is only 3%, you’ll need $2.44 (2 dollars and 44 cents) to pay for the same goods and services that the dollar in your pocket pays for right now.
That means that if groceries currently cost you $200 per week, they’ll cost $488 for the exact same groceries.
Again, this is not a bonus to protect your purchasing power.
It’s a bare necessity! Yet, the overwhelming majority of retirees have as their #1 goal to protect their principal, when in fact it must be the protection of their lifestyle sustaining income.
I can’t stress enough how important it is to clearly distinguish between those two goals if you want your hard earned money to be there for you for the rest of your life.
Stay tuned next week as I’ll reveal the 2nd biggest reason for the horrific performance gap of the average retiree, and what you can do about it.
Committed to Your Relaxing Retirement,
The Retirement Coach
P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.
I appreciate the trust you place in me. Thank you! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)