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End of the Road

End of the Road

July 05, 2022
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I’m 58 years old.  I’m not thinking about retirement yet, but it’s closer than it used to be.  Here’s one definition of retirement:  the action or fact of leaving one’s job and ceasing to work.  From a job or career standpoint that could be thought of as the end of the road.  But from a life and investment standpoint, retirement isn’t the end.  In fact, you might be retired for as long as you worked.  Let’s talk about this a bit.

I Don’t Want to Lose Money


I can’t tell you how many times over the years I have talked to someone, and they told me, I don’t want to lose money.  Or they say, is it risky?  I guess it depends on what your definition of lose or risky is.  Here’s what I’m talking about.  Let’s say you get to retirement age and want to put your money in something “safe”.  For most people that means there won’t be any fluctuations in their principal.  For example, let’s say you have $1,000,000 when you retire, and you don’t want it to go down.  Where can you invest your money and not lose any principal?

You can put it in a savings account at the bank or buy CDs.  You could put it in a fixed annuity with an insurance company.  You could buy treasury bills or put it in a money market mutual fund.  Those are a few things I can think of off the top of my head.  You won’t lose any principal but is it really safe?

Since the early 1980s, interest rates have been dropping.  Here’s a chart that shows CD rates in the United States since 1965:

If you click on this, you can see back in the early 1980s CD rates were close to 18%.  Even in the early 2000s CD were paying close to 7% per year.  So, my person with $1,000,000 could have put their money in the bank and received almost $70,000 per year for the duration of their CD.  When the Great Recession hit, all of that went away.

In June of 2009, a 90-day CD was paying .39%.  Now our person was getting $3900.00 per year instead of the $70,000 they had been getting previously.  From June of 2009 until May of 2022, the highest rate I see in the chart is 2.69% in December of 2018.  While your principal stayed “safe”, your purchasing power was getting destroyed.  I don’t know about you but, I would find it hard to go from $70,000 per year of income to $3900 per year. 

In the meantime, things were getting more expensive.  There’s a guy named Nick Murray who is a writer and helps financial advisors.  He always uses a postage stamp as a proxy for the cost of things.  If we look back to June of 1992, the cost of a postage stamp at that time was $0.29.  Today, 30 years later, that same postage stamp is going to cost $0.60 starting in July 2022.  When I pull out my handy dandy HP12C calculator, that works out to a 2.45% increase per year. 

Here's another example.  My first car was a 1986 Honda Civic LX.  The base price was $7,500.00.  Today that same model starts at $22,350.  That works out to 3.07% increase per year.  This is called inflation.  It costs more money to buy the same stuff.  If you have lower investment income in your “safe” investments and things cost more, thus you are losing purchasing power, is that investment really safe?

You’re Going to Live a Long Time!


In the United States, the average life expectancy is close to 79 years.  That’s for a baby born in 2019.  I did a quick life expectancy calculator for a 65 year old male who doesn’t smoke, exercises a little and is generally healthy and the calculator said this person’s estimated life expectance was age 94 with a 75% chance that they lived until age 86.  I have seen other studies that show a couple, aged 65 will have a 50% chance that one of them will be alive at age 93.  The fastest growing age group in the United States is people over the age of 85.  In other words, there’s a good chance you’re going to live a long time even after you have retired.

With this information you can see the problem.  With our “safe” investments, you’re getting paid very little interest, prices are constantly increasing and you’re going to live a very long time.  What’s a person to do?

Volatility Does Not Equal Risk


The other day I was in a 401k review meeting and one of the participants asked me, is it safe?  I said it depends on your definition of safe.  For most people safe means no volatility.  I would argue that having the ability to pay your bills and maintain your purchasing power is safer than maintaining your original investment yet have your income from that investment diminish over time.

I ran a hypothetical with one of my money managers, American Funds.  Here are the parameters.  I said somebody put $1,000,000 into one of their funds called Income Fund of America.  They paid a 1.00% advisory fee along with the expense ratio of the fund which is at .35 bps or .0035%.  This makes the cost of owning this investment 1.35% per year.  I also show taking a 4% systematic withdrawal of the fund at the end of each year. Here’s a link to the hypothetical: 


I ran this illustration from 6/1/1992 through 5/31/2022.  During that 30-year period of time we experienced things like the Dot Com bubble, 9/11, the Great Recession and Covid, to name a few.  Over that period of time, the systematic withdrawal generally increases most years.  After 2008 the income went down from a little over $85,000 per year to $68,000 per year.  At the end of 2010, the income was $64,000 and some change but eventually grew to over $100,000 per year by the end of 2021. 

The value of the account went from the initial investment of $1,000,000 to almost $2,800,000 at the end of the illustration on 5/31/2022.  While there was a steady increase in the value of the account at the end of each year, at the end of 2008, the value had dropped from $2,236,457 on 12/31/2007 to $1,503,456 on 12/31/2008.  So, this person “lost” a little over $700,000! However, if they never sold, they didn’t lose anything.  Here's the result of this hypotheticl investment.  They invested $1,000,000 in June of 1992.  They paid $569,888 in advisory fees.  They collected $2,268,410 in income and the value of their account on 5/31/2022 was $2,789,851.

Here's the chart that shows 90 CD rates from 6/1/1992 through the end of the first quarter in 2022:

If our person had put their money in something safe like a CD, they would have experience wild fluctuations in their income.  They started out at 3.27% which eventually grew to 6.6% in the year 2000.  Interest rates started to decline, and our person was receiving a little over 1% in 2004.  By the end of 2007 rates were back up again to a little over 5% only to drop to almost 0% during the Great Recession and the subsequent year.  In addition to all this variation in income, after starting with $1,000,000 in 1992, he still had $1,000,000 at the end of the illustration in 2022.

Death by 1000 Paper Cuts


Which investment is safe?  The one that has no change in value, returns your original principal yet pays anywhere between $70,000 and $3900 in income?  Or is it the one that had a drop in value from one year to the next of over $700,000 and a change in income of $17,000 in one year yet paid out over 2.2 times the original investment and had an ending value of almost 2.8 times the original investment to boot?  Oh, by the way, in this example the CD was free and our example paid almost $600,000 in advisory fees.

This is just a hypothetical example.  Your experience could be different.  The point I am trying to share is volatility is not risk.  In reality, safe may not be that safe. If you would like to talk about your personal situation, feel free to reach out to me HERE.  As always, thanks for reading.  KB