Casey Research Publication
 
 
Member Login

To continue reading, enter your email below.

Already a subscriber?Login here.
 

Your Brand-Spanking-New Retirement Strategy

November 20, 2014

Is it even possible today to retire rich? The short answer is “yes.” We all know people who have done just that. Watching your neighbors Bob and Betty Rich live the good life well into their 90s only tells you it’s possible, not whether you’re prepared to do it too. So let’s forget about the Riches and focus on you.

The first question you should ask yourself is: “Do I have enough money for the duration?” Or, if you’re still in your 40s or 50s: “Am I on track to save enough?”

You might not know, but there’s a straightforward way to find out. The simple formulas planners used to use to make retirement projections are now outdated, so Chief Analyst Andrey Dashkov built a Retirement Income Calculator you can download to run your own up-to-date, customized projections.

The second question is: “Do I have an investment strategy in place that will make my hard-earned wealth last?”

Your goal for each nonworking year should be to live off of the interest and never touch your principal. You may have to withdraw some capital periodically, but if your portfolio is healthy, that shouldn’t be the norm.

An Approach That Works in the Real World of 2014

For the generation before us, “100 minus your age” worked well. If you were 70 years old, then 70% of your portfolio went in safe, fixed-income investments; the remaining 30% was conservatively invested in the market. Many simply bought into an S&P 500 fund, and the market return and dividends did the trick. In round numbers, the S&P 500 historically averaged a 10% return. With 30% in the market, that would add 3% to one’s overall portfolio each year to combat inflation.

If you could live off the interest of the 70% and grow your balance by 3% on average, each year your nest egg would maintain its buying power. If the market tanked and you had 30% in the market, even if it dropped by 50%, the most you could lose was 15% of your overall portfolio.

There’s truth in fiction. Let’s take a closer look at how well “100 minus your age” worked, using the fictional Joe and Mary Smith.

In 2006, Joe and Mary turned 70 and decided to retire. They had done well for themselves, accumulating $1,000,000 in their combined retirement nest egg. (We picked $1 million only because it makes mental math easy.)

In addition, they’ll receive a combined $20,000 a year in Social Security benefits. They’re stuck on the old formula and put 70% of their nest egg into 6% CDs earning them $42,000 per year—remember, this is 2006. The remaining 30% goes into an S&P 500 fund. Based on historical data for the period of 1970-2013, they anticipate it will return 10.4% annually, including dividends.

They prepared a budget and are okay with their combined $20,000 in Social Security benefits plus the $42,000 in interest.

At the end of the first year, their $1 million has now grown to $1,031,200 due to the return from their 30% in the stock market. They used the interest from the CDs to live on. They had a good year, enjoyed life, and didn’t worry about money. They estimated inflation at 2%, so their nest egg retained its buying power with a little to spare.

If Joe and Mary used the same formula today, their fixed-income slice would only earn $14,000 in interest ($700,000 at 2%). Couple that with $20,000 in Social Security, and they would have to live on $34,000 a year. That isn’t enough to maintain their lifestyle. They need a different approach, and if this is the formula you’re following, you do too.

A new way that’s working. What would happen if Joe and Mary turned 70 in 2014 and in today’s market, used the allocations and formula we use in the Miller’s Money Forever portfolio? We’ll take our portfolio performance from January 1, 2014 through November 17 and project it through the end of the year.

Our portfolio has earned 9.5% so far this year, so we’re on track to earn 10.8% by the end of 2014. Joe and Mary’s $1 million portfolio is on track to earn $108,000.

If they withdraw $42,000 from their portfolio to supplement Social Security, their balance at the end of the year will be $1,066,000. The remaining $66,000, or 6.6% of the initial principal, is the appreciation they’ll need to protect their principal against inflation. Overall, our yield so far is comparable to the old formula, helping Joe and Mary preserve their lifestyle and purchasing power.

The Worst-Case Scenario in Hard Numbers

How do Joe and Mary know if they can relax? Under the old guidelines, the worst-case scenario would be easy to handle: If the market dropped 50%, the most they would lose was 15% of their overall portfolio.

While our approach provides the income and appreciation they need, what happens if we have another market crash similar to 2008? Will they lose their capital? And if so, how much?

Here’s the worst-case scenario. With our current stop-loss guidance system, the most an investor following that guidance to a T could lose is 13.8% overall. If a new subscriber bought into all of our positions recently and his portfolio takes a plunge and all our stop-loss rules are triggered at once, it will take a 13.8% bite out of his principal. This is in line with the old formula—actually a little bit better.

Those who invested earlier at lower prices would take much lower losses. In fact, we calculated the total loss to our stocks and high-yield investments in case of an all-out crash, and it came out to just 1.5%.

Note that we didn’t include our Stable Income holdings in this stress test, because we don’t intend to sell them if a crash comes. We would either hold them to maturity or rely on their short duration, so they should perform well under stress and bounce back with little, if any, damage to the principal.

We’re pleased that our portfolio is outperforming the “old way” and providing enough income to supplement our subscribers’ other retirement income—safely. However, our strategy and investment recommendations can’t stagnate. This month Andrey, our analyst team, and I found a global powerhouse birthed from Swiss and Swedish parents over a century ago, and we added it to the Stocks section of our portfolio on Tuesday.

As you might guess from its lineage, our newest pick adds another layer of international diversification to the portfolio and is a strong dividend payer to boot. Now, when anything good happens, I’m usually the first guy to jump on the loudspeaker and spread the news. The only thing that’s keeping me from spilling the beans on the name of this and every other investment in our portfolio (because I truly do want you all to retire rich) is the trust that thousands of Money Forever subscribers have placed in our team.

I’m a practical guy, though, and I’d like to offer a practical solution: take us up our risk-free offer and start your trial subscription to Money Forever today. Read Andrey’s analysis of our latest pick, gain access to the entire portfolio, and download our full library of special reports. If, by chance, you decide it’s not your cup of tea, we’ll return every single penny you paid—no fuss, no headache, no explanation required. It’s just that simple. Click here to start your Money Forever subscription now.

On the Lighter Side

Jo and I traveled back to Florida yesterday, expecting to escape the bitterly cold Midwestern weather we endured while visiting the grandkids (it was well worth it). 9° F weather is no joke. Turns out, it’s bitterly cold here too!

And finally…

A few more puns from our friend Sarah W.

  • The batteries were given out… free of charge.
  • A dentist and a manicurist married… they fought tooth and nail.

Follow us on Twitter @millersmoney. Until next week…

 
 

About the Author

Over the course of his career, Dennis Miller has consulted with many Fortune 500 companies, training hundreds of executives to effectively communicate the value of their company's products to their customers. Among his many multi-national clients are: GE, Mobil, Shell, Schlumberger, HP, IBM, Corning Glass, Eastman Kodak, AC Nielsen, and Johns-Manville.

An active international lecturer for 40 years, Dennis wrote several books on sales and sales management. He was a contributor to... read more