Help me with my thinking

**bjl584** · 09-29-2012, 08:32 AM

Consider healthcare costs. Most people underestimate it.

**EEinNJ** · 10-02-2012, 11:19 AM

These things all sound like reasonable assumptions, at least based on conventional financial advise rules-of-thumb. Anymore, though, I question how valid those assumptions are, things like rates of return, inflation, taxes, etc. Back testing 20-30 years, you see periods where equities netted negative or no returns, inflation was double digit (as are health care costs now).

So averages are great, but we don't get to pick which 20-30 year period. Best thing you can do is save as much as comfortable, invest as much as your risk tolerance allows, and work as long as you can happily and healthily can. The vast majority of us will never retire as multi-millionaires, anyway.

**jpg7n16** · 10-02-2012, 05:45 PM

Originally posted by EEinNJ View Post

Back testing 20-30 years, you see periods where equities netted negative or no returns, inflation was double digit (as are health care costs now).

So averages are great, but we don't get to pick which 20-30 year period.

Really? Like which ones?

Please post 1 or more 20-30 year period(s) where equities netted negative or no returns.

-----------------------------------

I would say the big things to consider are
1) Inflation
2) Healthcare (as Brian already pointed out, most people do not include rising healthcare expenses in their budget at first. they just think, "what do I need to keep living like I am today?")
3) Longevity risk -- this is the one that compounds everything else

Some of your main decisions should be:
-- when to claim Social Security
-- when to stop working
-- how to reduce the inevitable tax liability on your IRAs
-- what else you'd like to do with your money besides just surviving (trips, events, charities, etc.)

You've gotta do something while you're retired. And most things aren't free. Is that reflected in your budgeted expenses?

**dczech09** · 10-02-2012, 07:16 PM

[QUOTE=EEinNJ;336098] Back testing 20-30 years, you see periods where equities netted negative or no returns, inflation was double digit (as are health care costs now).
[QUOTE]

If you are going to make this claim, please back it up. I am interested to hear of even 1 20-30 year time period where equities netted negative or no returns.

Using Yahoo! Finance and Robert Schiller data of the S&P 500, I have not found a single 20 year period where the CAGR (geometic average, not arithmetic average) was negative or zero. Even after adjusting for inflation, the worse I found was about 4%. The average was about 8.31% per year nominal return (6.66% real return).

Again, this is geometic averaging so we factor in the weight of market crashes and not simply "smoothing" the peaks and valleys.

So I'm pretty lost with that "back testing."

Anyway, OP-

Since you are using a cost method for calculating your return needs, I would factor in health costs.

Also, I am not really comfortable with factoring Social Security and inheritence in the decision making process.

SS- you have no control over this. With 20 to 25 years until retirement, who the heck knows what the system will look like. I'm not saying it is going to fall apart right away, but the track it is on does not give me confidence for anyone under the age of 50.

Inherit- again, you have no control over this. Yes, there is a little more certainty with this variable, but there is still much uncertainty (just like any investment you make).

Thats just my opinion- you may certainly see things differently than me.

**mgkimsal** · 10-03-2012, 05:16 AM

People are reading too much in to the "backtesting" comment, maybe because "backtesting" is a more technical term. I suspect the OP meant "look back 20-30 years and there are periods (of time) where there were negative returns on stocks". I don't think they were meaning there were 20-year periods of negative returns, but there were certainly 1 year periods and probably some 2 (or even 3?) year periods of negative or flat returns in some equities and funds.

**jpg7n16** · 10-03-2012, 07:47 AM

Originally posted by mgkimsal View Post

People are reading too much in to the "backtesting" comment, maybe because "backtesting" is a more technical term. I suspect the OP meant "look back 20-30 years and there are periods (of time) where there were negative returns on stocks".

You don't have to do any testing to know that there are obviously years where the market goes down.

Remember 2008? Yup. Done.

Originally posted by EEinNJ View Post

So averages are great, but we don't get to pick which 20-30 year period.

EEinNJ is obv talking about returns over 20-30 year periods of time, and hasn't provided any evidence to back it up. I suspect they've never actually looked at the data, just making a guess based on "experience."

Why does it matter? Because we're talking about planning. People adjust their lives today in order to have a better tomorrow. The goal is to maximize the quality of life, while keeping things in balance. If you plan based on returns that are too low (4%), then you will end up having to cut back on life today to account for that.

For instance, say you have 25 years until retirement. Say you make $50k/year. And based on Social Security, pensions, and rental income, you determine you need $500k in investment assets when you retire. ($20k income) So far, you've built up $100k in your 401k. If you plan on 4% returns going forward, you still need to save $5600/year to be on pace (11% of income). If you plan on 7-11% returns, you actually don't need to save anything to be on pace.

That's 11% of your income that you would have the freedom over today. Would you rather be free to save that or spend it as you see fit? Or would you rather feel forced to save it to barely stay on pace?

Or say you're a bit late to the party and are just beginning to save at age 40 and want to retire in 25 years. Same $50k income. You do the calculations and determine you need $750k to retire in comfort ($30k income from assets). If you plan on 4% returns, you need to save $18,000/year or 36% of income. If 7-11%, you need $7-12k, or 13-24% of income.

You may see that 36% and go "whoa, there's no way I could do that" and give up altogether. So you don't do anything.

Each of these problems is directly caused by an improper rate of return expectation.

**Bob B.** · 10-03-2012, 08:33 AM

Originally posted by jpg7n16 View Post

For instance, say you have 25 years until retirement. Say you make $50k/year... So far, you've built up $100k in your 401k.

You're good JPG. That's pretty darn close to my situation.

Thanks all for your comments, and debate. Very helpful. Although, I find it more difficult to project health care spending 40-50 years from now than anything else. The bottom line I guess is that for most middle class people, having more saved is better than having less saved, and you do have to strike that balance between future and present needs/wants.

Lots to think about.

Thanks.

**Bob B.** · 10-03-2012, 09:01 AM

Originally posted by dczech09 View Post

I am not really comfortable with factoring Social Security and inheritence in the decision making process.

SS- you have no control over this. With 20 to 25 years until retirement, who the heck knows what the system will look like. I'm not saying it is going to fall apart right away, but the track it is on does not give me confidence for anyone under the age of 50.

Inherit- again, you have no control over this. Yes, there is a little more certainty with this variable, but there is still much uncertainty (just like any investment you make).

I appreciate your input. Very helpful. I'm on the same page as you are with SS. The figures I used in my scenario represent a decrease in benefits over current SS provided projection, and an increase in age of when I begin drawing. But, I'm also assuming that SS will be available in some form, so I decided to pick an age and benefit level, and go with them for planning purposes.

As far a the rental property goes, clearly nothing is guaranteed. Heck, my having this job with my current benefits package is not guaranteed, and that's the biggest variable in my plan. Anyway, back to the farm land. That land has been owned by my family for 129 years. My dad inherited it 3 or 4 years ago. He rents it out. It has no mortgage against it. Mom and dad have little, if any debt. They live a frugal lifestyle. We live in a VERY rural corner of Michigan, six miles from the nearest town. No one is likely to offer $2M to build a condo or strip mall development.

Sure, a farmer could offer to buy it. That's very possible, but I think it's unlikely that dad would sell. Back to the 129 years thing. Dad would have to be fairly strapped for cash, I think. Back to the no debt frugal lifestyle thing. Or, the price would have to be too good to refuse. And, if it were, I doubt parents would spend it all, and (I assume) I would inherit part of it. All in all, I think the inheritance is likely enough that I'll keep it in my plan at this point.

**EEinNJ** · 10-03-2012, 09:42 AM

I should clarify my previous comment. I did not mean there have been 20 or 30 year periods of negative or no returns. It's been frequently quoted in the financial press that the 2000's were a "lost decade" for investors, with no net return after inflation. There was, after all, the "tech bust" and the "Great Recession".

Just look at a 5 year chart for the S&P 500, it is below where it was 5 years ago. Now, if you bought in at the bottom in '09, you'd be doing great. But even if you DCA'd over the last 5 years, your result would be flat.

Even pros can't time the market, and whether you achieve the mythic 8% average return depends on which years you're in the market. A year or 2 one way or the other can make a huge difference. There are plenty of stories of people who've had to defer retirement because they lost so much in 2007-2008.

So maybe a refined way to plan financially is to make some age-adjusted assumptions, such as what happens if the market goes down 20% when retirement is only 5 years away, and plan asset allocation accordingly.

**jpg7n16** · 10-03-2012, 05:57 PM

Originally posted by Bob B. View Post

The bottom line I guess is that for most middle class people, having more saved is better than having less saved, and you do have to strike that balance between future and present needs/wants.

I completely agree.

Originally posted by EEinNJ View Post

It's been frequently quoted in the financial press that the 2000's were a "lost decade" for investors, with no net return after inflation. There was, after all, the "tech bust" and the "Great Recession".

And yet, you would have more money today if you invested in stocks at the beginning of 2000 than you would if it sat in cash.

Just look at a 5 year chart for the S&P 500, it is below where it was 5 years ago. Now, if you bought in at the bottom in '09, you'd be doing great. But even if you DCA'd over the last 5 years, your result would be flat.

Now I'm convinced you are not looking at data but basing your "facts" on emotion and the media.

The reason? Dividends. They don't show up on the chart, but they do show up in your account.

And you're grasping for straws now. A 5 year period is a far cry from the 20-30 years most people plan for in retirement.

S&P500 5 year average is positive.

Spartan 500 Index Fund - Investor Class (FUSEX)

Even pros can't time the market, and whether you achieve the mythic 8% average return depends on which years you're in the market. A year or 2 one way or the other can make a huge difference.

Really?? Mythic??? That's a very odd phrase for something that happens more than 50% of the time...

And 1-2 years does not make that big of a difference.

If you go back and look at even 2008. Your average return in the market over the previous 20 years? 8.43% on average. 20 year period ending 2007? 11.84%

Sure you have less after 2008, but if you saved on a schedule for the 20 years prior and planned on 7-11% long term average returns, you're still right where you should be. And if you planned appropriately, you'd be just fine.

There are plenty of stories of people who've had to defer retirement because they lost so much in 2007-2008.

That's true that are plenty of stories out there (in the media).

Please check out this thread for one of them. Compare the thoughts then vs. now. Interesting comparison.

Saving Advice Forums

http://www.savingadvice.com/forums/personal-finance-news-articles-blog-posts/57479-60-minutes-re-run-401ks.html

**dczech09** · 10-03-2012, 06:49 PM

Originally posted by EEinNJ View Post

I should clarify my previous comment. I did not mean there have been 20 or 30 year periods of negative or no returns. It's been frequently quoted in the financial press that the 2000's were a "lost decade" for investors, with no net return after inflation. There was, after all, the "tech bust" and the "Great Recession".

Again, the averages I mentioned earlier (CAGR of 8.31%) factors in the market crashes. You are focusing on a short time frame, thus being subjected to a time period bias.

If you invest long-term (20 to 50 years) then those little crashes like the Tech Burst and Great Recession are mere inconveniences.

Originally posted by EEinNJ View Post

Even pros can't time the market, and whether you achieve the mythic 8% average return depends on which years you're in the market. A year or 2 one way or the other can make a huge difference.

"Pros" have lost a lot of people a lot of money. So I take the term "pro" with a grain of salt.

And "mythic 8% average return" is an oxymoronic statment if you think about it. You cannot call something mythic and average in the same sentence. Real numbers (not my humble opinion) show that 8% average is legit and not some hyped up number from Narnia.

Originally posted by EEinNJ View Post

There are plenty of stories of people who've had to defer retirement because they lost so much in 2007-2008.

Yes this is very true. But who is to say that we have all of the information?

This is like the media bemoaning the fact that so many people are unemployed, yet they don't mention that so many people have stopped looking for work.

Just because someone has to defer retirement does not mean that the market messed up. The reality is that a lot of people simply don't save enough or don't save at all. A 2010 study concluded that about 47% of working Americans have less than $10,000 saved up for retirement.

You cannot tell me that the issue is entirely on market returns. The Great Recession did not cause someone's portfolio to go from $500k to less than $10k if it was actually a good balanced portfolio. And if someone is about 5 years to retirement, I would sure hope they have at least $500k. I mean c'mon!

**EEinNJ** · 10-04-2012, 10:02 AM

Sorry, both you guys are wrong- you're entitled to your own opinions, but not your own facts.
I used the S&P 500 as a broad, easy example, and if you want to check facts, go to your broker's website and look at the performance, for the last 5, 10, 25 years, of their S&P 500 index fund, with dividends/gains reinvested. I used Schwab- for the last 25 years, avg. return is 5.34%, 10 years, 7.96%. 5 years, 1.06%

Of course, past performance is no guarantee.... If you go even longer than 25 years, you actually see much lower growth. The investing world has changed quite a bit since then, and in the last 15 years, you see 2 booms & busts. Again, my point is, we don't get to pick which 5-10-25 year period of retirement saving & investing we live in. 8% is simply a guess for planning purposes.

**jpg7n16** · 10-04-2012, 05:50 PM

Originally posted by EEinNJ View Post

Sorry, both you guys are wrong- you're entitled to your own opinions, but not your own facts.

Really?

You obv have no idea about the true history of the market. The data is freely available. Look it up.

I used the S&P 500 as a broad, easy example, and if you want to check facts, go to your broker's website and look at the performance, for the last 5, 10, 25 years, of their S&P 500 index fund, with dividends/gains reinvested. I used Schwab- for the last 25 years, avg. return is 5.34%, 10 years, 7.96%. 5 years, 1.06%

Of course, past performance is no guarantee.... If you go even longer than 25 years, you actually see much lower growth.

No. As you go back 25 years, the returns get closer to the historical average.

https://www.google.com/finance?client=ob&q=INDEXSP:.INX

There is a chart of the S&P 500 index. Go back 25 years (Oct 4, 1987) what was the price? $311. What is the price today? $1461

(1461/311)^(1/25) - 1 = 4.69^(1/25) - 1 = 1.0638 - 1 = 0.0638 = 6.38%

And that is w/o dividends.

Using -- CAGR of the Stock Market: Annualized Returns of the S&P 500 -- which has a historical returns of the S&P 500, the return of the past 25 years is 9.32%

Look it up. Those facts are freely available. We didn't make them up.

Do more research.

**dczech09** · 10-04-2012, 07:32 PM

Originally posted by EEinNJ View Post

I used the S&P 500 as a broad, easy example, and if you want to check facts, go to your broker's website and look at the performance, for the last 5, 10, 25 years, of their S&P 500 index fund, with dividends/gains reinvested. I used Schwab- for the last 25 years, avg. return is 5.34%, 10 years, 7.96%. 5 years, 1.06%

Use my broker? Why would I use my broker when I can do the number crunching myself and not be subjected to a bias? I use my broker to run the transactions; I use my brain, a calculator, and research to know what I am doing.

Originally posted by EEinNJ View Post

Of course, past performance is no guarantee.... If you go even longer than 25 years, you actually see much lower growth.

Really? Show me the data. Not your opinion or your broker's opinion. Raw data. My research shows that the further back you go in history, the larger the return gets.

The more time you spend in the market, the larger your actual return becomes. This is called the "law of large numbers" which means that the more exposure you have to a situation of variation, the closer your actual returns gets to the expected return.

Its the same phenomena that tells you the more times you spin the roulette wheel, the more money you will lose.

Originally posted by EEinNJ View Post

8% is simply a guess for planning purposes.

A guess? I consider myself a pretty smart dude. And as a smart person, I do not play with guesses- that is like flirting with disaster. The 8% figure I use for planning is thoroughly researched. It is also pretty conservative.

You are entitled to your opinion, but if you going to attack reality, please do so with facts. Not opinion. Not your broker's opinion. Cold hard facts.

Help me with my thinking