The following is a guest post from David, a Financial Samurai reader and ex-government bond strategist in his 60s. We had a fantastic exchange over e-mail and I invited David to share his wisdom about money. After all, the best way to learn is to learn from someone who has been there before. Take it away David!
I sent a long e-mail to Sam with various musings on aging, retirement, debt and all somewhat relevant to the Financial Samurai audience. As punishment for the missive, Sam asked if I’d be willing to write a guest column or, alternatively, do community service. I opted for the former.
I spent the bulk of my working life as a strategist for various investment firms, essentially forecasting the direction of US interest rates for institutions like central banks, pension funds and anyone else with a few billion in assets who would listen. I did that for better than 30 years. For a large chunk of that I was the top-rated strategist in the field, on financial news programs a hundred times, and getting around the world.
Business class had its advantages, like at the end of one trip that in the space of five days found me in Riyadh, Zurich, Rome, London and finally Reykjavik. Reykjavik was not on the schedule, nor was the heart attack I had on the flight home that forced my flight to land Mid-Atlantic. Still, I got to stretch out nicely on the bed in business class.
Retirement moment came just past 60, not entirely by self-determination, but not unwelcomed either. I decided to take the career down a notch, writing from home versus commuting three hours a day, five days a week, for the equivalent of 16 weeks of vacation, to a job I’d grown tired of.
Don’t you know it, shortly after that I was diagnosed with multiple myeloma, an incurable blood cancer. There are treatments, and oncologists say I could go on for years and new treatments are coming that hold promise.
Then there’s the dark side of 50% five-year survival rates. And to think my biggest retirement worry was my money lasting into my 90s. Myeloma puts things in perspective, especially the time I have. Maybe what follows will give others some perspective on that.
The Runway To Retirement Gets Shorter
The older you get the less time you have ahead of you. Now think about that from an investment perspective.
A tale-ender of the baby boom was just leaving college into the 1980-82 recessions. That event proved a career boon because it broke the back of inflation, presaged the tech revolution, and started the financial markets on a remarkable run. There you were entering household formation years, with interest rates plummeting, jobs plentiful, real incomes growing and disco at an end.
By the time the NASDAQ bubble burst in 2000, you likely had a home, a family, and while painful, you were only in your 40s with a long runway ahead to recover from that recession. As an added benefit, the Federal budget was actually in surplus leaving room for tax cuts and fiscal stimulus.
In the ensuing decade, easy money and creative financing encouraged a housing boom allowing you to refinance your home to save on monthly expenses or, better still, refinance into larger mortgage, or take out a home-equity loan to do whatever your material heart desired. It was all the rage; for much of the early 2000s, home-equity borrowing equated to around 10% of total disposable income.
Into the Great Financial Crisis, you’re in your 50s, have kids in college, the home is underwater, 401(k)s just dropped 30%, your economic productivity is stagnant (a statistical fact as you age) and that runway to retirement is rather shorter.
The stock market has, through the benefits of low interest rates and deficit-boosting fiscal policies that have encouraged the biggest buyer of the stocks to be corporations themselves, restored fortunes putting the older demographic cohorts in a better position for retirement.
Here’s the thing. I don’t see the older demographic cohorts, i.e. the 55+ contingent, tolerating another downturn with the patience exhibited in their youth.
Here’s why. The 55+ crowd lived through two major downturns, several minor ones, and had the time, energy and incomes to recover. They don’t have those ‘assets’ now. The time has been spent.
With yields after inflation and taxes zero or negative, the tradition of the bond market as a conservative haven isn’t much of an alternative. When the stock market starts to slip, a lot of people’s goal will be to preserve what they have.
No Upsizers To The Downsizers
The 55+ cohort is both older and larger than at any point in US history, which is to say that to fund their golden years they’ll be selling things – like stocks and their homes.
The next recession might prove to be mild in conventional GDP terms, but the retiring demographic will not have the patience to wade through it.
And they have things to sell. Older folks are richer than everyone else; they’ve had a lifetime to save and pay down mortgages. The older cohorts have a higher rate of stock ownership than younger ones, and higher rate of homeownership as well.
A weight on the already aching backs of the 55+ people is their homes. Historically, homes have been a store of wealth. But urban lifestyles, smaller families, low population growth, and yesterday’s housing fashions could prove the proverbial white elephant when retirees opt to downsize.
This Time Is Different
Apple and Microsoft alone accounted for some 15% of the S&P 500’s gain in 2019. That’s a scary concentration. The chart just below is a perspective of how expensive stocks are to incomes. It displays how many hours of Average Hourly Earnings it takes to buy a share of the S&P 500.
We’re at the highest such ratio ever. The S&P was up 31% in 2019, a huge gain, but with GDP was up just a tad over 2%. That doesn’t make a lot of sense, certainly not over the long haul.
Consider the aging population and the very real chance that entitlements will be at risk as Federal Deficits mount. For my crowd, it’s a frequent topic of conversation if not anticipation.
The median age in the US was 30 in 1980; it’s over 38 now and will be over 43 in a few decades. Older people behave differently than younger ones; they spend less on things, more on services and medical stuff. It’s no wonder that they tend to be more conservative with their investments as well.
Where Does One Invest?
I’d look to short-term, say no longer than 2-3 year high-grade bonds, to park money and look to safe-as-can-be dividends in blue-chip stocks. I might stay up at night if they’re down 20%, but it’s income that’s my concern.
The safe-haven need can be adequately complicated via other means investment firms offer, but you get the point. I do like holding some gold (mining shares) to about 5-10% of my portfolio because I think the Fed will try to raise the inflation bar, rhetorically anyway, in the next cycle.
And I’m worried about the Federal deficit; the GOP has lost the fiscal-responsibility plot and Democrats have a spending lean all their own.
Rolling The Clock Back
Facing both retirement and an incurable cancer, I admit to asking how I would have done things differently. In retrospect, I’d have bought more Apple, Amazon and Google, but that’s not the point.
Looking back is a difficult task as it can incur a degree of guilt or shame or self-recrimination; shoulda, woulda, coulda.
I come back from that and realize that ultimately I’m in a very good place. It’s easy to say I could have been this or that, but without the benefit of maturity, confidence and perspectives gained over the intervening period I doubt I would have been able to do this or that.
It’s the dilemma George Bernard Shaw put forth that youth is wasted on the young. And indeed, the journey itself was rather fun. There’s a lovely poem called ‘I’d Pick More Daisies’ that I sent to my boys after I got diagnosed. So there, I’d pick more daisies.
That said, I would emphasize the things I did right financially; saved as much as I could, maxed out on retirement plans, didn’t get carried away with the noise presented by the financial media and kept my eyes on the prize of retiring in comfort early enough to enjoy it because one never knows.
I know that you know things happen as you age. But let me warn you that you will appreciate time, whatever time you have, when these events cross your path and cross they will; the runway I mentioned earlier is not only about personal finances.
The future will come and come quickly. I only hope it keeps it coming. I suppose I’d still be working if money could buy time. Instead, I’m spending my children’s inheritance to live as much as I can. It’s a fair deal they tell me so I must have done something right.
How Much Money Is Enough?
$4 million give or take. In reality, I can’t speak for anyone but myself. Get a realistic budget together. Make sure there’s enough of a cushion for a rough time. Figure out where you can cut if you have to and still be content. Be honest about your spend and realistic about investment returns.
Yeah, $4 million seems about right here in an expensive town in an expensive state when we want to squeeze in a good deal of bucket-list stuff. But we also know where we can shave expenses could dip if we toned down the travel, downsized the house, moved out of state and didn’t want to help our kids as they start their lives.
As an aside, my wife and I maxed out to our IRAs and 401(k)s when we started working in 1982 and are happy we did so. I encourage, and assist, my kids in doing the same with their 401k’s.
I use the Vanguard Wellington Fund as my benchmark, though any low cost balanced fund would do. I am banking on a 3% real return over time, say the next 20 years, which is vastly conservative but then look where I’ve been coming from.
I must say that aside from health issues, the biggest stress is paying for them. When you are on your own, it’s daunting.
The healthcare plans are confusing, the coverage mixed and, egads, the out-of-pocket maximums between in- and out-of-network benefits will kill you if illness doesn’t. You don’t think about those in your 30s or 40s; you do in your 50s and 60s.
The exchange plans in Connecticut, where I live, don’t include hospitals out of state like Dana-Farber or Sloane Kettering. My wife and I would have to consider moving to get covered (an idea suggested by an insurance broker) or pay an arm and a leg, which is why I’m typing with one hand.
My parting words are my way of encouraging you to, if not exactly retire early, make sure you enjoy whatever you’re doing and leave ample time for family, friends and interests. It’s a cliché but as John Lennon put it ‘life is what happens to you when you’re busy making other plans.
David Ader is a 61-year old trying bent on rediscovering his imagination and interests, seeing the world, and trying to do 20 pull-ups a day (he’s up to 13) on his daily routine at the local gym. He’s an A student in archaeology and geology at local colleges, is fishing until he’s bored (he’s not bored yet), and expressing himself on a blog, iratestrategist.com. Prior to all this, he was a strategist forecasting the direction of interest rates and financial markets for a variety of banks. For 12 years running the #1 Government Bond Strategist according to Institutional Investor Magazine.