There has got to be a better way to save & invest

[soupcxan]

As a young person starting out in their career, I have a lot of years of saving for retirement ahead. I don't expect to receive a pension, nor do I think that SS will provide any meaningful standard of living. So I have to save this money myself if I ever want to retire. Not to mention other long-term savings for things like kids' education and whatnot.

This raises the question of what to do with all those long-term funds that I need to accumulate. Short-term/emergency funds are easy: bank or money market fund. Until 2008, I followed conventional wisdom that the market was the place for long-term investments. But even my conservative mix of dividend stock and bond index funds was down 20% last year. Diversification? There was no place to hide. REITs, commidities, etc. all had a good run then blew up. Treasuries were up, yes, but that option is less appealing when the 10 year note is yielding 2.4%.

A buy-and-hold investment in stocks that can drop 30% for reasons that you have nothing to do with is not such a great long-term investment in my book, especially when your dividends get cut along with capital losses. I don't think I'm smart enough to time the market or daytrade my way to profits. You can argue that stocks will come back over the long term, but if the next 10 years is anything like the last 10 years, that's far from guaranteed. You can stretch your investment horizon out as far as you like but that still doesn't ensure you'll eventually make your money back. Obviously the risk/return tradeoff exists. But for risk to be real (and for investors to be compensated for it) sometimes investments will blow up. If we all agreed stocks were risky but you could get around this risk just by never selling when they were down, they wouldn't really be risky after all. I'm not arguing that "this time it's different" but I am skeptical that patience solves all of equities' problems.

So what else is there? I haven't found a whole lot of good options for long-term savings.

CDs/MMFs: low yield, inflation will eat me alive over the long term

Annuities: the fees make me want to barf, the vendor is as likely to go bankrupt as I am, and I can't get to the funds when I need them anyway.

Muni bonds: low expected return, crazy spending by municipalities with falling tax revenues may put them next in line for a bailout.

Real estate: <cough>

Start your own business: time consuming, not a good fit for my personality.

TIPS: Looks good today at CPI+2.5%. But inefficient to hold in a taxable account. CPI may not match personal inflation over the long term.

 

[deepc]

Agreed that if your risk tolerance does not stomach 30+ pct drops in your principal that equities are no way to go. Read all the posts on here from those who are either delaying their retirement or not anticipating being whole again for years.

To answer your question, consider the true risk of inflation eating you alive vs the very real risk of large capital losses in equity investments. CDs and similar can be bought heavily and for long terms when interest rates get to the point that you deem an acceptable rate of return. They're likely not there yet. For example, if your goal return is 6 pct, buy them up in long terms when you see 6 pct. You'll give up the opportunity for greater returns if rates go higher, but protect yourself if rates go lower.

If rates drop, you can buy in shorter terms so that you're not stuck in a lower return certificate as long. The easiest way to do this routine is via a CD ladder, this ends up dollar cost averaging your CD purchases with the added flexibility of responding to interest rate trends.

Will this make you wealthy? Doubt it. Is this a way to protect your savings? In the hierarchy of risk I'd say you're pretty well protected. If you've got the mindset that a loss of one year's worth of salary is the loss of one year of your life, this is the way to go.

Can you retire way early on this plan? Been there, done that. With the requisite LBYM and...

Full disclosure: with a COLAed pension. I think accepting the non-availability of a secure pension is why many go the equity route, and have lost big recently. There are great jobs (ok likely in the public sector) that still fund pretty good pensions. This is a decision one makes--pursue a job that may pay a little less, stick to it for the requisite number of years, and twenty or so years later they buy you a million bucks worth of annuity. WARNING: This plan is only for those who are willing to accept delayed gratification!

Especially if you are not the own your own business type, there's something freeing about working for the State, Fed, or DoD. Check out what's available on USAJOBs before you discount the possibility of a fully funded retirement.

 

[Texarkandy]

....
Full disclosure: with a COLAed pension. I think accepting the non-availability of a secure pension is why many go the equity route, and have lost big recently. There are great jobs (ok likely in the public sector) that still fund pretty good pensions. This is a decision one makes--pursue a job that may pay a little less, stick to it for the requisite number of years, and twenty or so years later they buy you a million bucks worth of annuity. WARNING: This plan is only for those who are willing to accept delayed gratification!
....

That's what I did & I'm almost to the finish line at age 48 (even in this current economic environment I'll be able to walk away from the j*b)

As an added note: I found a Law Enforcement career to be a no-brainer path to a modest, but secure, ER in one's early to mid-fifties (of course you still have to LBYM along the way, invest conservatively and regularly, get your house paid for, etc)

As to SS - I was hearing in 1978 that it would be defunct in 20 years and not to count on it - 30 years later it's still here & I think will be a fixture in our society for quite some time (i.e. generations) - although someday I will not be surprised if workers will be required to contribute 10%, 12%, or 15% of their wages and the cap will be lifted entirely. Payments may become means-tested to receive anything above a certain basic payment. I think ultimately the govt will do whatever is necessary to keep SS alive.

 

[Goonie]

Full disclosure: with a COLAed pension. I think accepting the non-availability of a secure pension is why many go the equity route, and have lost big recently. There are great jobs (ok likely in the public sector) that still fund pretty good pensions. This is a decision one makes--pursue a job that may pay a little less, stick to it for the requisite number of years, and twenty or so years later they buy you a million bucks worth of annuity. WARNING: This plan is only for those who are willing to accept delayed gratification!

That's what I did & I'm almost to the finish line at age 48 (even in this current economic environment I'll be able to walk away from the j*b)

As an added note: I found a Law Enforcement career to be a no-brainer path to a modest, but secure, ER in one's early to mid-fifties (of course you still have to LBYM along the way, invest conservatively and regularly, get your house paid for, etc)

Been there...done that! (Wasn't law enforcement though...it was in water pollution control with the muni gov't.) Living a very comfortable FIRE'd life because of it! I could have found a better paying job when I got out of school, but there weren't too many jobs around with the added bennies that the muni offered! Reached the finish line in April '07 @ 50 years of age.....full pension (DB & COLA'd), lifetime medical, dental, and prescription ins., life ins., and most importantly....FREEDOM to live my life any way that I want to without ever having to work again!!!

 

[Texarkandy]

Been there...done that! (Wasn't law enforcement though...it was in water pollution control with the muni gov't.) Living a very comfortable FIRE'd life because of it! I could have found a better paying job when I got out of school, but there weren't too many jobs around with the added bennies that the muni offered! Reached the finish line in April '07 @ 50 years of age.....full pension (DB & COLA'd), lifetime medical, dental, and prescription ins., life ins., and most importantly....FREEDOM to live my life any way that I want to without ever having to work again!!!

Right on that!! I won't be rich - but I will be Free (after 30 years of indentured servitude) - and only 50 y/o

I've never lacked for guts to do a lot of nervy things on the job over the years - but I'm not ashamed to admit I've always been a bit of the coward when it comes to my money. I have high admiration for those who do it on investments alone.

 

[soupcxan]

Seems like the game has changed for people that are in their 20-30s today. Someone planning for retirement in the 1970s had the "three legged stool" of SS, pension, and whatever investments they made. So if the investments didn't pan out (stocks -30%) they might have to reduce their standard of living a little, but they weren't going to be eating cat food.

My new job has a decent pension, but will I be there long enough for it to vest and become anything substantial? Maybe, but I'm not counting on that. Over 20 years, the cumulative probability of layoffs or voluntary job changes is just too high.

Waiting for yields to reach an acceptable level and then locking in long term, low-risk investments is one option, but difficult to time. You buy a long term bond at 10% then rates go to 15%? Ouch.

 

[ziggy29]

My new job has a decent pension, but will I be there long enough for it to vest and become anything substantial? Maybe, but I'm not counting on that. Over 20 years, the cumulative probability of layoffs or voluntary job changes is just too high.

Don't forget pension plans being frozen. My first employer had a pension plan which was frozen after I was there for 11 years. (Fortunately, anyone with 10+ years was eligible for a pension.) But for 11 years of service ending at age 33, I'm looking at something like $700 a month in 2030 (age 65). That's hardly going to cut it -- it beats a sharp stick in the eye, but it's not all that much.

I've said over and over again that our current expectations of middle class retirement for the masses are unrealistic moving forward, and I still believe that. This expectation was born of an economic post-WW2 aberration in the U.S. economy that allowed it to be the most generous ever. For about the last three decades we've borrowed prosperity from younger generations to try to pretend it's still feasible. But I think the bill for that is coming due, and it's going to put the hurt on us.

Fortunately I've been saving and investing for retirement until I bleed, since the age of 23, so as far as personal retirement savings go, even after getting whacked 30% I'm still in pretty good shape for my age. But I'll bet 98% of the people my age don't have this much personal savings, and with no pension, they can forget about retirement, plain and simple, IMO.

 

[leftbucket]

Soup-

In hopes of providing some encouragement, two more ways of investing and saving:

1) Skills maintenance: Your skills are one of your most valuable investments.
Assuming you have a marketable skill or license; retire when you can, but do the minimum necessary to keep it up: classes, recerts, etc. I hope to retire at 40,
but I'll probably keep up an auto inspection license I have until I'm 55 or more
as a safety. The test only comes once every 3 years and it's open book! I figure that's not to much work in retirement and it's one way of saving and investing
in myself.

2) Geographic investing: Your skills are worth the most in a high cost area.
If you work in a high cost area and save your money, the money you take with
you when you retire will be worth much more in a low cost area. As another
personal example, I'm currently just outside Washington DC. If I retire and go 1-1/2 hrs from here, the cost of living drops nearly in half. Essentially, I've doubled my
retirement investment and am still reasonably close to family and friends.

Hang in there,
LB

 

[TromboneAl]

The view from here in the trough of the biggest financial crisis since the great depression is bound to be a little distorted.

 

[honobob]

Considering that there are areas of Texas that have experienced decades of double digit appreciation and even 9%+ over the last twelve months I think you're making this way more difficult than it is. Leverage turns that appreciation into 40%-110% return on your equity. I don't understand the reluctance to put your money where it will do the best. I've never returned any of MY money in RE but the good old stock market has taken MY money along with MY return.

But hey, keep doing what's working for you.

 

[ziggy29]

The view from here in the trough of the biggest financial crisis since the great depression is bound to be a little distorted.

Yes, but I was saying this a couple of years ago.

The prosperity and retirement security many have felt since the rules were starting to change in the 1970s was largely illusory and purchased with money borrowed from future generations. At some point it was bound to come down crashing like a house of cards.

There are WAY too many headwinds for average young middle-class individuals to face today regarding retirement. An imminent (now playing) financial crisis and market crash caused by the collapsing of the credit bubble and borrowed economic prosperity. Soaring unemployment and underemployment. Social Security weakening. Pensions and retiree health insurance going the way of the dodo. The near-certainty of higher taxes in the future. The increasing unaffordability of health care in general.

No generation since WW2 has had this many headwinds to face -- and with each generation it gets worse. I think I'm glad I don't have any children (or future grandkids) because I'd be constantly apologizing for the world the older generations left for them and the likely futility they will face in pretending retirement is still an option, especially before the age of 70. I'm dead serious.

 

[FIRE'd@51]

I think you really have to believe that over many many years dollar cost averaging will work. The only other approach that I think might be feasible would be to hold 100% equities and buy index puts as insurance on a systematic basis (e.g., Dec 31 every year). At least the cost of the insurance is tax deductible in the years you don't need it. Most people don't like to do this long-term because the put (insurance) cost eats away at your portfolio balance over the years the market rises. This cost can be reduced by taking on a deductible (an out-of-the-money put). The fact is, that avoiding very bad years, like 2008, can pay for a lot of insurance. Someone who lost little or no net worth in 2008 has made real gains on everyone else.

If you think about the way the hedge ratio of a put works - it effectively acts as self-correcting portfolio diversifier. For example, suppose you are 100% in equities and own an at-the-money put. The initial hedge ratio of the put is about 0.5, so in effect, your portfolio is really 50% equities and 50% cash. If the market rises, the put hedge ratio drops, increasing your equity exposure, and vice-versa, if the market drops. Over a long period of time, this strategy should outperform a 50-50 stock-cash portfolio because of this self-correcting mechanism. However, most folks want to compare it to a 100% stock portfolio, and look at the put as a drag. I would implement such a strategy by choosing the strike price of the put, such that its hedge ratio gives the initial equity exposure you desire, e.g 50%, 60%, 70% etc. Then you just have to commit to it, because, you know the year you forgo the insurance will be the year the market tanks.

 

[FIREd]

Soup, I am with you. I am in my thirties, no pension, probably little SS, and in all likelihood I will have to finance my retirement completely on my own. And I probably won't get bailed out either if I screw up.

I have resigned myself to the fact that I may very well have to save my way to retirement. My portfolio's return for the past 8 years has been pretty much nil. Every penny I have in my account is a penny I saved. Based on our original plan (which assumed a 8% annual return on our investments), we were supposed to be about half way to our FIRE goal by now. Until 2007 we were right on target, but the stock market crash erased all the gains from the past 7 years. And we are now only about a third of the way to FIRE despite saving more than anticipated along the way.

The only way I have found to make FIRE happen at a reasonably early age is to lower our standard of living, make and save as much as we can, and invest the money relatively conservatively. CDs might not pay much, but at least they pay something. For all the risk I have taken during the past 8 years in the equity market, I have received zero reward. That's right, my equity portfolio hasn't even kept up with inflation. I think that people of all ages will stay away from equities for many years to come. I haven't given up on equities completely myself, but the case for an equity-heavy portfolio is getting harder to make with each passing year.

 

[honobob]

My portfolio's return for the past 8 years has been pretty much nil. Every penny I have in my account is a penny I saved.

Over the past 5 years the two properties that I purchased at market value have appreciated almost $400,000 and I still have my original monies going in plus an income stream.


Local housing shows 5-year net value growth

Federal Housing Finance Agency reports 273 out of 292 metro markets showing positive net home values over the previous 5 years as of the third quarter.

Syracuse, NY 29.9% appreciation over the last 5 years!

Oahu home prices stable in 2008 - Pacific Business News (Honolulu):


If only there was a better way...................

 

[calmloki]

.... For all the risk I have taken during the past 8 years in the equity market, I have received zero reward. That's right, my equity portfolio hasn't even kept up with inflation. I think that people of all ages will stay away from equities for many years to come. I haven't given up on equities completely myself, but the case for an equity-heavy portfolio is getting harder to make with each passing year.

Without banging the drum too loudly, i have a hard time imagining any real estate investment that isn't well in the black if the purchase date was 8 years ago. With prices down and interest at historic lows this is a great time to take on a mortgage. (sez the guy who's trying to sell some stuff)

OP: Real estate: <cough>

 

[pasadenaDC]

Over the past 5 years the two properties that I purchased at market value have appreciated almost $400,000 and I still have my original monies going in plus an income stream.


Local housing shows 5-year net value growth

Federal Housing Finance Agency reports 273 out of 292 metro markets showing positive net home values over the previous 5 years as of the third quarter.

Syracuse, NY 29.9% appreciation over the last 5 years!

Oahu home prices stable in 2008 - Pacific Business News (Honolulu):


If only there was a better way...................

Starting today, how practical is this scenario for the average 30-ish investor and saver? I mean, congrats on timing RE well and the appreciation, but banks are tightening up credit and most requiring 20% down on cashflow investment properties. I'm guessing you were highly leveraged (maybe 20 to 1) using a 30-year or ARM which works when prices are appreciating. Again, congrats on the purchases.

But when RE prices are flat or decreasing, this is not a time to be leveraged in investments like real estate. Its equivalent with going 'all-in' in the stock market not just with the 20K you have in the bank, but another 80K that the bank loaned you at 5% interest. So you're in the market all-in with 100K and subject to market forces. You have to pay back you bank 5% interest over the next 30 years on that 80K you borrowed. You have to hope that investments appreciate and not stay flat or decline.

 

[FIREd]

Over the past 5 years the two properties that I purchased at market value have appreciated almost $400,000 and I still have my original monies going in plus an income stream.


Local housing shows 5-year net value growth

Federal Housing Finance Agency reports 273 out of 292 metro markets showing positive net home values over the previous 5 years as of the third quarter.

Syracuse, NY 29.9% appreciation over the last 5 years!

Oahu home prices stable in 2008 - Pacific Business News (Honolulu):


If only there was a better way...................

My home has done very well since I bought it 4 years ago (up about 25%). And the value of the raw land I own has gone up even more. But I don't want to sink all my money in RE. I will inherit a lot of RE properties in an area which historically has done very, very well so I don't want to overweight RE myself.

 

[calmloki]

Starting today, how practical is this scenario for the average 30-ish investor and saver? I mean, congrats on timing RE well and the appreciation, but banks are tightening up credit and most requiring 20% down on cashflow investment properties. I'm guessing you were highly leveraged (maybe 20 to 1) using a 30-year or ARM which works when prices are appreciating. Again, congrats on the purchases.

But when RE prices are flat or decreasing, this is not a time to be leveraged in investments like real estate. Its equivalent with going 'all-in' in the stock market not just with the 20K you have in the bank, but another 80K that the bank loaned you at 5% interest. So you're in the market all-in with 100K and subject to market forces. You have to pay back you bank 5% interest over the next 30 years on that 80K you borrowed. You have to hope that investments appreciate and not stay flat or decline.

Bob & i play at different ends of the playground - what you describe is pretty much the same sort of thing we did. Only interest rates were crazy high. Mid '80s and on we were buying beat up places that the owners wanted out of bad. Did a number of owner-carry contracts, put all our time and money into fixing them up and getting them rented, and ran in the red as we pushed the principal payments. I'm seeing plenty of places that $20k would get a buyer in.

Yes, you do have to hope that property values go up - not a very tough thing to imagine if you (1)figure that government regulation($$$) will always increase, making building more and more expensive(2)figure population will increase(3)figure that inflation will increase as more and more free money is printed. You can't think in terms of 5 years though, and, if doing rental property, do need to realize that you are buying your retirement with an extra job. Not like the stock market, where i understand money is given to investors free free free.

 

[honobob]

My home has done very well since I bought it 4 years ago (up about 25%). And the value of the raw land I own has gone up even more. But I don't want to sink all my money in RE. I will inherit a lot of RE in an area that historically has done very, very well so I don't want to overweight RE myself.

"I have resigned myself to the fact that I may very well have to save my way to retirement."

Then I don't understand your complaint. Stock market sucks?
Agree. SS probably won't be a big part of your retirement? Agree.

You'll inherit alot of high appreciating real estate. Quityerbitchin

 

[calmloki]

AND it will be inherited at the cost basis at time of (what's the term?) decedents death. assuming tax law stays the same.....

 

[pasadenaDC]

You can argue that stocks will come back over the long term, but if the next 10 years is anything like the last 10 years, that's far from guaranteed. You can stretch your investment horizon out as far as you like but that still doesn't ensure you'll eventually make your money back. Obviously the risk/return tradeoff exists. But for risk to be real (and for investors to be compensated for it) sometimes investments will blow up. If we all agreed stocks were risky but you could get around this risk just by never selling when they were down, they wouldn't really be risky after all. I'm not arguing that "this time it's different" but I am skeptical that patience solves all of equities' problems.

So what else is there? I haven't found a whole lot of good options for long-term savings.

Soup, I feel ya bro. Since I graduated college, I've been through two bubbles.. the tech crash and now the subprime/credit/upcoming consumer crisis. The talking heads on TV, and message boards pundits for that matter, will tell you that 'time is on your side' and 'every XXX number of years has been a positive return in stocks' and 'a well diversified portfolio will protect downside risk' etc, etc.

While I don't disagree with any of these comments my first hand experience is exactly zero or slightly negative return after exposure to equities over the past 9 years. So basically it definitely sobers me up and allows me to laugh at the Dave Ramsey/David Bach/Suze Orman's of the world that magically project a 10% ROI over 30-40 years of equity investments. Laugh out freaking loud. I think many of us young-ins will live with 5% net of fees, expenses, and gains taxes. Not much inflation protection there either.

soup, I got no great advice for you. I do think that you should probably stock your cash coffers over the next 1-2 years. Not just emergency fund, but I call it my F-I-F-U fund. Having, let's say 2 years of living expenses in cash would make you Financially Independent. The last part, F-U is having enough cash in the bank to basically say F-U to your job if things go incredibly sour and you find no way out. It helps you sleep at night. Yeah there's the risk that inflation eats away at it, but inflation eats away at equity returns, when realized, as well. Plus you've already paid taxes on the cash you have in the bank. As for investments, I have not stopped DCA into the stock market and considering RE investments. This should and will not cease for me. Equities, in theory, have much more upside than cash and RE as we all know has historically been a good leveraged investment outpacing inflations by a couple percentage points per year. Good luck man

 

[ziggy29]

So basically it definitely sobers me up and allows me to laugh at the Dave Ramsey/David Bach/Suze Orman's of the world that magically project a 10% ROI over 30-40 years of equity investments.

Actually, Ramsey's worse. The number he routinely throws out is 12%. As in doubling your money about every six years.

For someone as generally conservative with finances as he is, it floors me that he makes such overly optimistic assumptions.

 

[pasadenaDC]

Bob & i play at different ends of the playground - what you describe is pretty much the same sort of thing we did. Only interest rates were crazy high. Mid '80s and on we were buying beat up places that the owners wanted out of bad. Did a number of owner-carry contracts, put all our time and money into fixing them up and getting them rented, and ran in the red as we pushed the principal payments. I'm seeing plenty of places that $20k would get a buyer in.

Yes, you do have to hope that property values go up - not a very tough thing to imagine if you (1)figure that government regulation($$$) will always increase, making building more and more expensive(2)figure population will increase(3)figure that inflation will increase as more and more free money is printed. You can't think in terms of 5 years though, and, if doing rental property, do need to realize that you are buying your retirement with an extra job. Not like the stock market, where i understand money is given to investors free free free.

calmloki, I'm bearish on RE where I live (Los Angeles) but I do agree with you in theory. There are many local markets where investment and cash flow properties are an excellent long-term investment. Not just monthly cash flow but also... tax shelters, limited liability via say an LLC, price appreciation, and depreciation writeoff. Quick, don't let the secret out!!

What is stopping me is that there aren't many local places like this in SoCal b/c there are too many investors with too much capital to compete with. There are however a few neighborhoods in the East Coast which I am currently scouting and am planning a visit in the spring to visit properties. It may be a pain to hire out a property company, deal with rent payment defaults (~10% of the time), and some overall tax complications. Its not without some headaches but worth it over the long haul. We'll see what happens.

 

[FIREd]

You'll inherit alot of high appreciating real estate. Quityerbitchin

It's not that easy. I will inherit ancestral properties that, yes have appreciated nicely, but that I have sworn not to sell (unless I have no other choice). I inherit them to enjoy but also to maintain for future generations. So they will represent a huge chunk of my net worth, but will provide zero income (cash flow currently balances out) and zero capital to fund my retirement. In other words, it doesn't change the fact that I have to find ways to fund my own retirement independently of any inheritance I receive.

 

[OAG]

I would not believe any governmental entities saying "appreciation" is plus any percent and any area regarding homes. They have a very VESTED interest in you believing that - how else are they going to get you to go along with raising your RE taxes?