Philadelphia Reflections

Boomer Retirement Planning, 2019

The world is facing a financial crisis. We do not know the outcome or its timing but we do know that we are piling up financial dislocations that, like the earth's shifting tectonic plates, are building up pressures that will sooner or later will be released in an economic earthquake.

Exageration? Hyperbole? Consider:

• The US has gone from reducing its war debt after WWII to a colossal debt burden larger than any nation in history
• Using a series of tax cuts the US has substantially reduced its revenue, giving the spurious reason that it will promote long-term growth, thereby making the debt grow faster and faster
• All of the EU plus Japan is issuing debt with NEGATIVE interest rates and the US seems headed to zero and below
• US Corporations, using this free money, have amassed debts higher than the GDP
  • with an average credit rating of BBB
  • to buy back stock at all-time highs
  • and to fund ventures that a "normal" NPV analysis would never approve
• Pension Funds have been poorly managed and the low interest rates have provided the coup de gras: they will never make their promised payments
• Because of QE the US Fed has driven rates down and loaded up $trillions on its balance sheet; come the next crisis, they will try all sorts of new tricks, the result of which will only exaggerate their current plight
• The President of the United States, focused on reelection, is packing the Fed and other agencies with his toadies whose sole objective is to exaggerate all these dislocations in hopes of a short-term stock market boost ... to say nothing of his active support of corruption and trade wars which are hardly conducive to economic growth

• The Baby Boom generation is producing the largest cohort of retirees in history
  • they will live longer than any such group in history
  • the majority have not saved nearly enough to live on
  • the pensions the lucky few were promised are bankrupt
  • interest rates are so low that only the ultra-rich can live off their assets without selling them down
  • Boomers are now required to sell roughly 20% of their IRAs etc. each year (RMD) which can only depress the stock market
  • the majority of the holdings in these IRAs are stocks which are at risk of catastrophic losses in a crisis
  • 30 years ago it was determined that retirees could live off 4% of their assets for life
    • today's low rates and high stock prices have changed that calculation to 3%
    • look at your own savings ... 4% of $1 million is $40,000 per year; do you have $1 million after tax?
      even if you do, can you live on $40,000 a year?
  •  
  • ... the Boomers are screwed, God knows how this will manifest itself in the voting booth

These sorts of problems have never been solved by anything other than a calamity which wipes out the bad actors. Unfortunately, many bad actors escape with Government support and it's not just bad actors who get hurt ... the Middle Class suffers the most, many of whom are driven into poverty. So, we can hope for better politicians or regulators but they will not show up; put not your faith in politicians or their propaganda. Individuals must prepare for a financial storm on their own.

So what should an individual Boomer do?

• First of all, what are our choices?
  1. Stocks will get a whipping sometime soon and are unlikely to produce good returns for the next 10 years, but there's not much else available that can ever provide long-term growth
  2. In 2000 and 2007 if you had owned nothing but long-dated zero-coupon Treasuries you'd have come through those crashes smelling like a rose
  3. Unadorned income annuities are currently offering about 7% per year for life but that's all you get: you put your investment in and get 7% a year back until you die, and then it's over ... like a single-life pension
•  
• That's it. Don't believe fantasy promises of anything better. And definitely don't pay fees to anyone who says otherwise.
• You can mix and match the three choices but you probably have too much in stock right now so that's likely to be a good source of cash near the market top to deploy to one or both of the other two choices
•  
• The 4% Rule assumed a portfolio of roughly 50% stocks and 50% bonds which were sold proportionately whenever you needed to make a withdrawal; this has the beneficial side-effect of automatically rebalancing your portfolio. Jack Bogel recommended something similar, with an emphasis on low-cost funds
  but you must control your expenses
• A conservative "bucket portfolio" would be
  • 2 years of income needs in cash
  • 8 years' worth in bonds
  • the remainder in stocks
• Diversification argues for funds rather than individual securities. This can be argued either way but a Total Stock Market index fund will always be better diversified than anything clever you can come up with; Treasuries are supposedly "risk-free" and therefore don't need diversification but a fund is still easier to manage
• And don't forget cash in a money market fund. You'll need cash to pay your bills and extra cash makes a nice buffer when markets are falling

This approach was developed by many people over the last 50 years and was based on "normal" conditions such as positive interest rates. What worked for the generations after WWII may not work for us: monstrous debt, bankrupt pensions, negative interest rates, extreme longevity, and a wholly-dysfunctional federal government are a wide divergence from "normal".

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REFERENCES

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Total Stock Market Index Fund	Morningstar
Long-Dated Treasury Fund	Morningstar
Total Bond Market Index Fund	Morningstar
Income Annuity Quotes	Immediate Annuities
Current Interest Rates	Fidelity

Originally published: Tuesday, August 20, 2019; most-recently modified: Thursday, August 22, 2019