Concerns regarding the ability to retire comfortably after age 65

[Vanadium 50]

The past is the best guide to the future

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth! On a log chart no less. For 35 years (and long before it), it was growing at ~8% per year, returning a bit more than half as dividends. And then it wasn't.

 

[Michael Price]

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth! On a log chart no less. For 35 years (and long before it), it was growing at ~8% per year, returning a bit more than half as dividends. And then it wasn't.

View attachment 248796

Except that they got caught out by technology!

 

[HankDorsett]

I realize there is another issue to think about, standard of living during retirement. It's not how much do I need to just survive during retirement but rather how much do I need to enjoy retirement.

 

[Klystron]

I realize there is another issue to think about, standard of living during retirement. It's not how much do I need to just survive during retirement but rather how much do I need to enjoy retirement.

Maintaining standards can be important, but I value happiness and contentment more; not that they are exclusive. For instance, participation in these forums (fora) requires a certain investment in technology, time and connectivity. Membership costs a little more. The contentment and satisfaction of participation, perhaps helping a member of a younger generation, far outweigh the cost, as a matter of opinion.

True hustlers never seem to retire or, at least, manage to derive income from old age activities. Old O.J. hustles golfers eager to lose money to a notorious celebrity. Old Bob Ross could not even draw his pet squirrel but lived comfortably hawking questionable oil paints while donating the majority of his paintings. O.J. sells access. Bob sold Happiness.

 

[bhobba]

You can see a professional if you like, but the only professional I personally trust is an Actuary. There are a few personal financial actuaries around, but even now they are rare. Still if you can find one and they charge a reasonable price they will help you figure out the approach best suited to your retirement goals. They have a specific specialisation that only does that - long gone are the days they just do insurance:
https://www.actuaries.asn.au/education-program/fellowship/subjects-and-syllabus
One way to meet the first module is to have a PhD - talk about rigorous standards.

I have read a lot of books on investing, and even traded for a while. For building a portfolio the best book I have read is:
https://www.amazon.com/dp/1260026647/?tag=pfamazon01-20

Out here in Australia THE guru on share investing, also president of the investors club and well known debunker of scam's is Austin Donnerly. Unfortunately he is dead now, but his book, unfortunately also out of print, described exactly how and when to buy and sell. Fortunately, his method, called the Zone system, is explained here:
https://p8s8a2t3.stackpathcdn.com/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf

What I did, was have 50% of my money in a safe bonds (like bank debentures. Banks are government guaranteed here in Aus), and 50% in the zone system using a geared share fund. When it comes time to use your money in retirement have a look at what zone the market is in and sell your fund when its in zone one - not that you would have that much invested under the zone system. Live on the Bond fund until then. If the market is down do not worry, eventually it will rise

Thanks
Bill

 

[bhobba]

So Eastman Kodak would have been a good buy in 1999? After all, look at that growth!

For funds one study showed a parcel of the worst performing funds performed better than a parcel of the best performing funds the following year. It's called regression to the mean, and is almost (but not quite) a universal law of investing - there are a few superstars like Simons that defy it. That's how the Zone System I mentioned above works.

Thanks
Bill

 

[Vanadium 50]

For funds one study showed a parcel of the worst performing funds performed better than a parcel of the best performing funds the following year. It's called regression to the mean

There is a similar plan in the US called "Dogs of the Dow", where every year one invests in the DJ30 stocks with the highest dividends. The rationale is that DJ30 companies are at low risk for a total implosion (caveat: see Eastman Kodak above) so that high yield implies undervaluation, so regression to the mean will bring the price up.

Does it work? On average yes, in every year, no.

My view on this is that the argument is sound, but the risk in going to 10 stocks is not compensated for by the increased yield. Value stock index funds do almost as well (after fees) but with less variability.

Your Zone System is trying to, at some level, time the market. There are times when it is going up, times when it is going down, times when a value strategy works better, and times when a growth strategy works better. Experience says that these are very difficult to predict, and the shorter the period one wants to make a prediction, the more difficult it becomes.

My own strategy has been to determine the level of risk I am willing to accept, design a portfolio that attempts to maximize yield for this risk, rebalance every 6 months or so to a) keep the risk level constant and b) capture the diversification return, and every few years reassess whether my goals have changed and whether my tolerance for risk has changed.

Much of the advice here is a good example of why you should not get financial advice on an internet forum. The implicit goal is "make as much money as you can". That's not my goal. Mine is to be able to retire comfortably. An investment option that gave me a 10% chance to live like Scrooge McDuck but also a 10% chance that I'd be living under a bridge eating dog food has no appeal to me. Goals are absolutely critical and much of the advice is directed towards goals other than StatGuy's.

 

[bhobba]

There is a similar plan in the US called "Dogs of the Dow", where every year one invests in the DJ30 stocks with the highest dividends. The rationale is that DJ30 companies are at low risk for a total implosion (caveat: see Eastman Kodak above) so that high yield implies undervaluation, so regression to the mean will bring the price up.

Does it work? On average yes, in every year, no.

There is a similar well known one that has the same characteristic:
https://www.amazon.com/dp/0470624159/?tag=pfamazon01-20

The author details the strategy and shows it does work like Dogs of the Dow. But believe it or not - he does not use it and many people start using it but stop even though they are making money. Why? It involved work and after a while you get sick of it. Most just want something to set and forget which is a quite interesting human foible. I will tell you when I traded and actively managed my retirement account using the Zone strategy it was exactly the same - you got sick and tired of it after a while. When I reached retirement age nearly 10 years ago now I had stopped the trading and zone system (I was lucky it was about 2008 or so and in Zone 1) and simply had some safe high yielding shares. Now I am even simpler, I just leave it in a high yielding bank account a couple of which exist here in AUS eg ING direct - you get a few percent more if you get your pay put directly in the account - they counted my pension as pay. Also I figured with all my health problems why not spend it - I doubt I will live into my 90's etc.

My own strategy has been to determine the level of risk I am willing to accept, design a portfolio that attempts to maximize yield for this risk, rebalance every 6 months or so to a) keep the risk level constant and b) capture the diversification return, and every few years reassess whether my goals have changed and whether my tolerance for risk has changed.

Much of the advice here is a good example of why you should not get financial advice on an internet forum. The implicit goal is "make as much money as you can". That's not my goal. Mine is to be able to retire comfortably. An investment option that gave me a 10% chance to live like Scrooge McDuck but also a 10% chance that I'd be living under a bridge eating dog food has no appeal to me. Goals are absolutely critical and much of the advice is directed towards goals other than StatGuy's.

I could not have said it better. Some years ago now it was predicted the rise of a new professional - The Personal Actuary:
https://www.soa.org/library/newslet...ew-star-in-the-universe-of-financial-advisors
They are the experts at managing financial risk which for retirement should of course be your aim. But it never eventuated. Instead we had the rise of the Financial Planner. They had a recent royal commission into the financial sector here in Aus and the stories of the disgusting things some financial planners did was unbelievable - and the consequences for their clients - just so sad. They were of course crooks.

Experienced Financial planners here in Aus make about $140k, experienced Actuaries about $180k. So they are somewhat, but not greatly so, more expensive that financial planners, but the rigor of their training puts them in an entirely different class IMHO. The outcome of the Royal Commission was certain minimum qualifications to be a financial planner, but nothing close to an Actuary. Just my view, but I would like to see the minimum qualification as passing part 2 of the actuarial exams - you can then legally call yourself an Actuary. An amusing story related to this is during the Royal Commission it was pointed out with derision some financial planners didn't even have degrees in business, but rather all sorts of stuff including science which made the commentators chuckle. It seems they never heard of the degree Actuarial Science often in the math department - sad really.

I do hope personal Actuaries take off, but I doubt it - you would need both a financial planning qualification and an actuarial one with the new changes in rules here in Aus.

As an aside its interesting what an experienced Actuary gets paid - I thought it would be more - even as an experienced programmer in the government, which generally has pay lower than private enterprise, at the level I was gets about $130k. The training to be an Actuary is far more rigorous. One of my math professors said it was well above a Masters, but not quite at Doctorate level to be a fellow, (called part 3 here in Aus - but you just need part 2 to be legally an Actuary - part 2 is about Masters level), although if you have a doctorate it meets some of the fellowship requirements.

Thanks
Bill

 

[OCR]

Thanks Bill, and here's some more about what Actuaries do, and are. . .

Actuary - Wikipedia If anyone wonders about the citation style, read the Talk Page.

Talk:Actuary - Wikipedia

.

 

[Vanadium 50]

A scenario where a prudent person would lose all their money due to prudent stock market exposure, would be an extreme one.

Well, if they would have lost all their money, it's hard to describe it as prudent. It's hard to do this on a cash basis anyway (but with margin and leverage it gets easier). But that's not the risk.

The risk is not waking up one morning to find the stock market is at zero. The risk is overspending your savings.

Suppose you need $50,000/year for 15 years, and stocks went up 10% per year. Then you need $370,000 in savings. This number is low, because $37K of the needed $50K comes from growth, so you only need to spend $13K of principal.

Instead, suppose in the first year stocks are down 30%, then down 10%, then up 10%, then eight years at up 20% before returning to 10% per year. Over 15 years, this is more favorable than the straight 10%. So what happens?

You go broke in Year 7.

In that first year you lose almost half your money - the one-two punch of falling valuations plus having to spend a (proportionately) large chunk of principal. You never recover from this. If you want to make it through this scenario, you need to start with $540,000, not $370,000.

Suppose instead we had half our money in stocks and half in cash (0% change every year), and every year adjust so that this remains true. At $370,000, our nest egg lasts until Year 11 in both scenarios. This is more predictable - e.g. lower risk. If you want to make it to Year 15, you need to start with $490,000 in the flat 10% scenario and $450,000 in the market crash scenario. (Yes, they have reversed positions) This is why diversification reduces risk.

You could also have a pure cash solution, which would of course have zero stock market risk. That would take $750,000; at $370,000 you go broke in Year 9.

A final argument for diversification. A $450,000 portfolio would not make it through the market crash scenario if it were invested either in all stocks or all cash. But it does make it through on a 50-50 mix.

 

[StatGuy2000]

Well, this thread certainly has expanded far beyond my original question about investment strategies!

For the moment, my focus is on building my savings. Thank you all for the advice.

 

[Vanadium 50]

For the moment, my focus is on building my savings.

That's the important thing anyway. There's no point in discussing what to do with what you didn't save.

 

[bhobba]

That's the important thing anyway. There's no point in discussing what to do with what you didn't save.

Very true. Here in Australia we have compulsory superannuation of at least 8% (there is a push for it to be 12% which I think would be better) of your wage must go into it - of course you can put more in, and some employers are kind enough to match the extra dollar for dollar. If you work for the government its a whopping 16% - that's one reason government jobs pay less. We have discussed getting financial advice in this thread. The ASX (the Australian Stock Exchange) and other bodies not associated with the Financial Planning Association, who obviously will say get it from the start, have looked at it and its not really a paying proposition until you have at least $200,000 - some say as high as $500,000. Before that just leave it in a low fee fund according to your risk profile - they usually come in 3 types - conservative, balanced and growth. To start out (ie in your 20's so you will not retire for years) its only logical to go for growth. Then as you head to for the bigger amounts get the advice which can include things like setting up your own super fund. It's wise to remember starting work in your early 20's by the time you retire at 65 you will likely be a multimillionaire - although I would be looking to like me retire at more like 50-55 - so putting 16% like government workers do is a good idea. Reaching that figure where seeking professional advice will probably occur sometime in your 30's.

Thanks
Bill

 

[bhobba]

Just out of curiosity I did manage to locate a firm here in Australia that has actuaries who are also qualified financial planners. They produced a paper describing there process:
https://www.berryplan.com.au/images/stories/file/markiaa2009.pdf

Yikes - this is more detailed than other financial planning books/papers I have read. I always take more seriously papers like this that have been peer reviewed. Also like me the author believes: 'Consideration could be given to the development of a specialized financial planning course for actuaries which would be recognized by both ASIC and the Australian Taxation Office.'. At the moment you have to get something like Certified Financial Planner Qualification which takes 5 years experience and pass 5 subjects.

Thanks
Bill

 

[bhobba]

The following interesting discussion about T-Bill's is also of relevance:
https://www.physicsforums.com/threads/most-stocks-under-perform-t-bills.969802/
Thanks
Bill

 

[Michael Price]

In the news:
https://www.abc.net.au/news/2019-09-06/heres-how-to-semi-retire-in-your-30s/10311360

 

[DEvens]

My best investment move was to buy my house near the bottom in 2008. The house market has done quite well since. If I could only predict when such a thing might happen again, but I cannot.

 

[jdavis417]

There is enough.