In praise of saving - NOT investing

[nun]

Fine, if long term history (ie chart above) is any indication that simply means you'll have to work much longer and/or accept much less income each year in retirement. You can quantify with FIRECALC. All part of the risk tolerance decision we each have to come to grips with...

I'll meet my retirement goal, as Zvi Bodie says "When you shift into safe assets, as I have done, you give up the thrill of victory and the agony of defeat". The thing is I don't trust FIRECALC enough to make it the core of my planning as it relies on past data. My basic expenses will be more than paid for by CD ladder, SS and my TIAA traditional.....any equity gains will be reinvested, they aren't necessary for me to live off.

 

[Spanky]

The thing is I don't trust FIRECALC enough to make it the core of my planning as it relies on past data.

Unfortunately, no future data exists. All financial models are based on historical data.

 

[Midpack]

My basic expenses will be more than paid for by CD ladder, SS and my TIAA traditional.....any equity gains will be reinvested, they aren't necessary for me to live off.

Congratulations, we should all be so "well positioned." I wouldn't take any risk if I didn't have to...who would?

 

[nun]

Congratulations, we should all be so "well positioned." I wouldn't take any risk if I didn't have to...who would?

Actually I forgot to include rental income.....but that's very reliable too.

As we approach retirement age people do look to preserve capital more than in the accumulation phase. I think there should be a greater emphasis on capital preservation in accumulation and not this 100% focus on unrealistic growth.....

 

[Nemo2]

Unfortunately, no future data exists. All financial models are based on historical data.

Damn! Because that would've been handy.

 

[ERD50]

The thing is I don't trust FIRECALC enough to make it the core of my planning as it relies on past data.

So what do you use for planning? It seems to me you are planning that these resources will be able to provide even if we have high inflation.

My basic expenses will be more than paid for by CD ladder, SS and my TIAA traditional.....any equity gains will be reinvested, they aren't necessary for me to live off.

I think another way to look at that is - if you have a portfolio that is sufficient to provide for you with little/no equities, you probably also have a portfolio that could handle a big downturn in the market, and still survive as well or better. At that point, you can choose either path, whichever you feel more comfortable with. I guess I'm just saying that it doesn't really make CDs, etc a less risky way to go, it is the large portfolio that lowers the risk.

If you plug that larger portfolio into FIRECALC, with your AA, I'd bet it would tell you the same thing.

Just to be clear - I'm not criticizing your decision in any way, and I don't even see anything wrong with it (not that it matters, who the heck am I?) I'm just trying to look at it in a different light.


-ERD50

 

[nun]

So what do you use for planning? It seems to me you are planning that these resources will be able to provide even if we have high inflation.

I've used FIRECALC and OPR and read the 4% SWR papers and looked at efficient frontiers, but I took "psychohistory" (any Azimov fans out there) with a grain of salt and I use a Siberian mine full of the stuff when it comes to predicting investment returns. So I've always had a core of boring investments that will provide my retirement income with minimal risk and volatility. I believe that financial planners should be pointing people in a more balanced direction.

 

[clifp]

. So I've always had a core of boring investments that will provide my retirement income with minimal risk and volatility. I believe that financial planners should be pointing people in a more balanced direction.

One word Hyperinflation. Equity investors in the Weimar Republic actually did ok while bond/cash were wiped out. There are no risk free investments.

 

[NW-Bound]

In the final analysis, a guy (or gal) is entirely responsible for maintaining his (or her) assets, and is free to do whatever he (or she) feels comfortable with.

I knew a guy who said that buying stocks was gambling. Note that he meant any stock, not just penny stocks, or foreign small-caps, or some bitty pink-sheet Canadian mining stocks. So, I had to ask him why. His answer was that was because any stock could go down! Of course that was true, so I did not dispute that. He equated any risk at all with gambling!

So, what did he like, I asked. Well, this being in 2005, he was upgrading to a bigger house. We were not close friends, and so I had never been to his existing home that he was upgrading from, but knew that he and his wife made good money. So that new house that he was buying had to be a spectacular mansion. He said "nobody ever lost money in their house".

Well, this guy was perhaps 10 years younger than me, but even at that age, I thought he should be through a mini housing bust already in his life. As I remember, there was one in the late 1980s or early 1990s. Perhaps he was not a homeowner then to know that one does not always make money with houses.

 

[Chuckanut]

403(b). But when we checked out the many mutual fund options, I was dismayed at the absurdly high expense ratios, many of them in the 2-3% range, for funds which were not showing very high returns.

Boy, this is all too familiar! My 403b options are ALL load funds except for the MM fund. The yearly fee on the MM fund wipes out the interest earned in this low yield environment. This is all to common.

 

[nun]

One word Hyperinflation. Equity investors in the Weimar Republic actually did ok while bond/cash were wiped out. There are no risk free investments.

I have equites, (index funds with low expense ratios) so if my boring stuff stops being able to cover my retirement expenses because of hyperinflation I'll have them to fall back on. Right now I don't see that being a big issue, but I'm prepared. At 55 I'll ER and will get $20k a year from TIAA-Traditional and $20k from rental income. Once SS and UK state pension start I'll have an income surplus.

 

[NW-Bound]

I just looked at my "number". I figured that if I were 100% risk-averse and just looked to find something that simply kept up with inflation, no more than that, I would still have enough to live on for 30 years. That's assuming no SS, and of course we have no pension. I don't think I will last more than 30 years, nor does my wife. And when we croak, we will still have real estate to leave behind for my children.

Still, I am not doing that 100% safe method (does one even exist?). I like to invest, to put my money into what I believe in. So, it goes up and down, and that adds spice to life. I am currently 71% in equity, some fairly high-beta stocks too (more economic sensitive).

I often ask myself, while people in the 3rd world have to worry about their next meal, or worse, like the North Koreans who worry that they may not be seen as wailing loud enough in distress in the wake of their beloved leader and may get hauled off to the gulag, why am I worried about the obviously insignificant risks that I may face?

So, if I will not be able afford my current homes, and have to live full-time in my little 25' motorhome (which does not even have a nice countertop, just a Formica one, for crying out loud), would that be the end of the world? Let's see... I would have to move around more. I would be outdoors more, so as not to be cooped up in that little space. I would be more active, and healthier...

Gee, I think I am talking myself more and more into going full-time in this little RV, whether I have to or not. Well, at least for a long trip to Alaska first...

I guess I have to sweet talk the missus some more, trying to get her on-board (literally Heh heh heh...

 

[Koolau]

I thought of one practical advantage which might give the "edge" to saving rather than to investing. Those who "invest", must save money first. But, they probably are counting on their investing to do the heavy lifting, so they probably save less than one who depends only on what he saves. This leaves them with more to spend (aka, a higher standard of living.) Are you with me so far? So the "saver" learns to live on less (in general) than the investor. Bad investing results would therefore cause the investor more grief because their spending is already higher than that of the saver. The saver already knows how to live on less. He needs less because he saves more.

But I think moderation is the key. Save AND invest. YMMV

 

[brewer12345]

I often ask myself, while people in the 3rd world have to worry about their next meal, or worse, like the North Koreans who worry that they may not be seen as wailing loud enough in distress in the wake of their beloved leader and may get hauled off to the gulag, why am I worried about the obviously insignificant risks that I may face?

So, if I will not be able afford my current homes, and have to live full-time in my little 25' motorhome (which does not even have a nice countertop, just a Formica one, for crying out loud), would that be the end of the world? Let's see... I would have to move around more. I would be outdoors more, so as not to be cooped up in that little space. I would be more active, and healthier...

Gee, I think I am talking myself more and more into going full-time in this little RV, whether I have to or not. Well, at least for a long trip to Alaska first...

I guess I have to sweet talk the missus some more, trying to get her on-board (literally Heh heh heh...

It might not be pan B (more like C or D), but a modest life as a fulltimer in a small RV/trailer is definately a low cost life I could fall back on oce the kids are launched.

 

[Koogie]

Outing myself as well as a Saver, not Investor.
Been down that road, didn't care for it. Equities especially. How many stories do we have to read before you realize a great number of publicly traded companies cook the books to satisfy shareholder demands, executive vanity or simply to conceal incompetence (olympus, etc..) ?
I mean, more power to you all but to often I watch these smarmy CEOs on the television and realize the financial reports and stock prices are manipulated six ways from Sunday and I'll never have the inside knowledge to know if a company is truly well run or not.
All our funds are either in GIC/HIA (CDs to you in the US) or actively being used in our small business. And, I can assure you, those books are slightly cooked too... ha ha

 

[ziggy29]

I'm not saying that you shouldn't be [-]throwing the dice[/-] investing in the stock market, just that the value of saving has been lost since the mutual fund industry began to sell it's products aggressively. CDs and savings accounts are like the Rodney Dangerfield of the financial world....they just don't get any respect.

But correlation does not equal causation here. The simple fact is that (a) "Rodney Dangerfield" has tended to lose money after inflation and taxes in recent years.... and (b) the loss of DB pensions for many folks means that their only realistic hopes for a comfortable retirement require more long-term growth of personal savings than Rodney can provide alone. As I said before, if I knew I had a COLA'd pension that exceeded my living expenses and I had the health care beast covered, it would be a LOT easier to pull out of stocks because I wouldn't *need* their growth potential to retire.

Both of these factors, I think, have made putting a huge chunk of excess cash flow into low-yield "safe" savings vehicles a pretty good way to "run in place" and make them unsuitable for most folks whose only hopes to retire depend on a decent amount of growth over (say) 25+ years. People who don't have large pensions waiting for them at the end of their careers aren't likely to be able to retire by putting money aside in financial instruments that provide (at best) a real 1% annual return (and often negative real return, as we're seeing today's real returns in the -3% range, give or take).

 

[Major Tom]

I often ask myself, while people in the 3rd world have to worry about their next meal, or worse, like the North Koreans who worry that they may not be seen as wailing loud enough in distress in the wake of their beloved leader and may get hauled off to the gulag, why am I worried about the obviously insignificant risks that I may face?

So, if I will not be able afford my current homes, and have to live full-time in my little 25' motorhome (which does not even have a nice countertop, just a Formica one, for crying out loud), would that be the end of the world? Let's see... I would have to move around more. I would be outdoors more, so as not to be cooped up in that little space. I would be more active, and healthier...

It sure puts things in perspective when you look at them that way doesn't it? I wonder what the chances are of a North Korean resident being able to wander freely in a motorhome wherever they wanted within their country?

 

[Bestwifeever]

This is a really strange time to deal with our money whatever we do with it. Neither savings nor investments are keeping up with inflation right now--both options suck. And many of us learned we really aren't that risk tolerant.

Go ahead and invest, get these great returns in 2011 (from http://www.usatoday.com/money/perfi/funds/story/2011-12-16/mutual-fund-performance/52056356/1):

The average diversified U.S. stock mutual fund has fallen 5.9% this year, vs. a 1.4% loss for the Standard & Poor's 500-stock index, says Lipper, which tracks the funds. Out of 8,036 funds, 7,399, or 92%, are showing a loss — and some are doozies.

Or, go ahead and put your money in the bank--let's use PenFed! where you can get that 0.19 percent on your savings account, up to 0.30 on a money market, and up to 2.75 on a 7-year CD. At least your money is safe in FDIC/NCUA/whatever federally insured institutions for the most part and won't be losing money.

This recent thread here highlighted some of the e-r.org folks' portfolio performance this past year (and we still have a couple of trading days to go): http://www.early-retirement.org/forums/f28/how-has-your-portfolio-done-in-2011-a-59117.html

 

[clifp]

This is a really strange time to deal with our money whatever we do with it. Neither savings nor investments are keeping up with inflation right now--both options suck. And many of us learned we really aren't that risk tolerant.


l

It has been an exceptionally challenging time to invest (or save) for the last 18 months. With the two traditional choices heads (savings) I lose small and tails (investing) I could lose big. Another option real estate looked even worse especially if you took at a normal 25% down mortgage.

Gold was a good investment if your timing was perfect buying the beginning of the year and selling in the middle.

Still compared to so many Americans with neither jobs nor savings, I feel very fortunate.

 

[nun]

As I said before, if I knew I had a COLA'd pension that exceeded my living expenses and I had the health care beast covered, it would be a LOT easier to pull out of stocks because I wouldn't *need* their growth potential to retire.

Putting part if your money into a low yield low risk account like a TIAA Traditional will give you something like a DB pension for retirement. Having a basing income vehicle with 20 plus years of contributions reduces the need for equity exposure in retirement.

 

[Texas Proud]

/snip/

When I hear these type of complaints, and over the years I have heard a few, I always first ask the person, " have you sold it yet?". Generally the answer is no at which point I remind them that they haven't lost anything until they sell.

I know there are a lot of people who think this way... but it is not true...

You HAVE lost value... there is nobody who is willing to buy your stock or ETF at the price you paid... which makes it a loss.... it has not been 'realized' yet because you have not sold..... and there is a chance that the value will go back up and you might gain back all of your losses, but to say you haven't lost anything at that moment in time is wishful thinking...

 

[ziggy29]

Putting part if your money into a low yield low risk account like a TIAA Traditional will give you something like a DB pension for retirement. Having a basing income vehicle with 20 plus years of contributions reduces the need for equity exposure in retirement.

This can work if you can save 40-50% (or more) of your after-tax income for 30 years. Otherwise the pitiful growth will leave you with something like a DB pension, but a very puny one that probably wouldn't even exceed your SS income.

Then again, investing (appropriately) for decades and then rolling some or all of it into an SPIA is another way to "buy" a pension, too -- but at today's interest rates the cost of an income stream is way too high.

 

[REWahoo]

But correlation does not equal causation here. The simple fact is that (a) "Rodney Dangerfield" has tended to lose money after inflation and taxes in recent years.... and (b) the loss of DB pensions for many folks means that their only realistic hopes for a comfortable retirement require more long-term growth of personal savings than Rodney can provide alone.

+1

I didn't lose a DB pension, I never had one to lose.

Had I decided to 'play it safe' with CD's and passbook savings accounts when I began investing for retirement in 1978, not only would I still be working instead of being retired for 6+ years, I would have to continue working for at least five more years (to age 70) to approach the income I currently have.

When it comes to early retirement, 'saving' instead of 'investing' is a quaint concept but not very realistic. The risk I took with a 60/40 allocation of stock and bond mutual funds over that 27 year period was well worth it for me and history indicates it will be the same in the future.

I suspect 'recency' is coloring some judgement on this thread. Things haven't been all that rosy of late but the long term will likely be considerably better. And if not, we can expect the usual suspects to show up here to say "I told you so".

 

[ziggy29]

I suspect 'recency' is coloring some judgement on this thread. Things haven't been all that rosy of late but the long term will likely be considerably better. And if not, we can expect the usual suspects to show up here to say "I told you so".

I tend to agree. I mean, look at the 1966-82 period -- that was 16 years of terrible market performance (with higher inflation for the most part) and we've only had 11 so far. Heck, 11 years into the last terrible cycle -- 1977 -- I'll bet people were saying the same things, and the "Death of Equities" was what, two years later?

 

[Dawg52]

It might not be pan B (more like C or D), but a modest life as a fulltimer in a small RV/trailer is definately a low cost life I could fall back on oce the kids are launched.

This guy has been doing it for 9 years. It can be done.

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