Dear Clients and Friends:
Enclosed is your performance report for the quarter ending March 31, 2007. There was a little excitement when the market dropped 4% or so, but generally everything rebounded and the quarter ended up much as it had begun.
I have been traveling quite a bit the last two months, and have one more conference to attend during the week of April 16th. My recent trips include visits to clients in cities other than Portland, “due diligence trips” to investment management firms, and a major conference about retirement income investing in New York City the last week of March.
This conference was interesting for what did not come out of it. There were no new magic formulas, no breakthrough insights. The high-profile speakers and investment professionals repeated the strategies we have been hearing all along. The real learning seemed to occur during lunch and in the hallways at break.
A. There were some things we all agreed upon. They include:
1. People are living longer. It is possible our children and grandchildren will see an “average” life span that passes 100. It is possible people now in their 50’s and 60’s will live longer in retirement than they spent in their working years.
2. A consequence of living longer is likely to be extensive medical bills, especially in the last years of life. The current estimate is that a married couple with at least one person over Age 65 will spend $200,000 or more on un-reimbursed medical expenses.
3. A consequence of these two factors is that our money will need to last longer – longer than most people are planning.
4. While money can help people live the life they want, it does not seem to be the determining factor about whether they are happy. Good or bad health seems to have a greater impact on one’s happiness than money does. More importantly, strong and healthy relationships with friends and family seem to be essential for happiness, and when there is no family then it would be a good idea to be active in a community so that friendships can be made.
B. There are two majority opinions with which I do not agree.
1. Some financial planners are using past performance to project future investment returns, and they are using these returns to demonstrate how much can be spent in retirement and how long money will last at different withdrawal rates.
2. The majority of advisors recommend in retirement withdrawing 4% of the starting value of your investment accounts, and increase that withdrawal amount slightly each year to keep pace with inflation.
C. I am in a minority but not isolated group whose beliefs are:
1. There is no “safe” formula for how much money can be withdrawn from one’s investment accounts in retirement. Any strategy that is selected must be reviewed every year, and it is best to accept at the beginning that there may be times when it is necessary to reduce withdrawals or risk total draw-down of the investment account.
2. There are reasons to believe the stock and bond markets will continue to show positive long-term growth. There are reasons to believe they will not. Since there have been periods in our history when the stock and bond markets showed little or no progress for 15 years or longer, it is probably not prudent to build a spending plan based upon 10% or greater annual stock market returns.
3. When building a retirement spending plan, it is important to include irregular expenses, such as auto repairs and auto replacements, home improvements, gifts, travel opportunities and “normal” medical and drug costs.
4. Likewise, one should keep in mind that life is unpredictable. Children need help, accidents occur and illnesses strike.
5. You do not want to run out of money while you are still alive, and especially not when you are still healthy. (Duh!) This is why any withdrawal program needs to be reviewed on a regular basis.
6. In retirement, once money is spent it will be very difficult or even impossible to replace.
D. I believe there are three strategies available for investing for cash-flow in retirement.
1. Invest for “total return” and draw money from your accounts on a regular basis. The problem here is that the accounts will go to zero if withdrawals are not made up with investment gains.
2. Invest in income-producing assets, such as dividend-paying stocks, real estate, and bonds, and spend only the net income. There are two problems with this. One is that cash flow will not be perfectly predictable and likely will fluctuate somewhat over the years. The other is that the dramatic kind of account growth seen in the 1990’s is not likely with this kind of portfolio. However, the benefits of this strategy are that a) income likely will require less adjustment during extended down markets, and b) slow growth will be a possibility in all but the worst markets.
3. Use annuities for guaranteed distributions. The problem here is that the guarantees are only as good as the insurance companies offering them. Insurance companies have gone bankrupt in the past and will do so in the future. This may seem like a low-risk venture, but the consequences of a bankrupt annuity company will be devastating to the family who invested with them.
CONCLUSION: Our motto is “Build For the Future, Enjoy the Present.” In other words, try to be both the grasshopper and the ant. We hope we can help you make it all possible.
Robert K. Haley, JD, CFP®, AIF®