April 11

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A Thousand Stomachs Turned

Family Update

Having a puppy can be a lot like having an infant. My amazing wife gets up on the nights when the puppy cries. One time this week, in the middle of the night, she heard the dog whining so she went, picked him up and headed toward the back door. As she reached the door, she looked down, and realized she was carrying our cat.

The puppy and two kittens continue to feel each other out. The puppy can play pretty rough with the kitties, but they just sit there looking annoyed. Below you will notice that Desmond is not thrilled with sharing his food bowl.

 

 

Dave Kennon, a financial advisor, found himself in his office, sitting in front of Joe and Suzy. Like most of his clients, they were going through the process of retiring from their careers.

 

I have such a great job, Dave thought. Anyone that takes the time to plan for their retired years reduces their anxiety and increases their fun!. I’m going to do whatever I can to give them peace of mind.

 

“How much money do you want leftover when you die?” Dave asked.

 

“Nothing,” Joe replied. I want the last check to the undertaker to bounce!”

 

Dave continued, “So when do you plan on spending the money?”

 

Joe and Suzy looked confused. “I have no idea. We were hoping to live off of our Social Security but there is no way that is enough,” Suzy remarked.

 

“How much do you guys spend each month?” Dave asked.

 

Joe and Suzy looked at each other ashamedly. “We really don’t have a very good idea.”

 

It never ceases to amaze me, Dave thought to himself.  Most people enter into retirement with no real idea about how much money they can safely spend. They also don’t have a great idea of how much they are spending. It isn’t really their fault. This country is terrible at teaching basic financial skills in school.

 

Joe piped up. “This is what I figure. Since we have $500,000 in savings, and our life expectancy is about twenty years, all I need to do is divide $500,000 by twenty-five by $500,000. That means we can spend $20,000 a year.”

 

Suzy shot Joe a look, “My mom lived to ninety-eight. What do we do then?”

 

They are missing the biggest variable, Dave thought. Once you retire your money keeps growing. It’s not like all of your money is buried in the basement. I don’t really understand why people view their retirement finances this way. They witnessed their 401k investments grow over time. Why are they changing their thinking now?

 

After explaining some basic information about stocks and bonds, Suzy chimed in. “How safe are these investments? We are too old to take any risks. We won’t have any time to make it back up.”

 

Dave thought to himself, Joe and Suzy have zero historical understanding of stocks and bonds.  

 

“What was the average return for stocks over the past 100 years,” Dave asked.

 

“I don’t know,” Joe said. “Five percent?”

 

Dave explained, “Stocks have an incredibly consistent track record. In fact, over any meaningful time period, stocks have shown around the same return. Often to the decimal point. Over the past ten, twenty, fifty, and one-hundred years, the markets have returned around 10%.”

 

Joe said, “Really? Why is that?”

 

“I have no idea,” Dave replied. “It’s just how markets work. I’ve chosen to rely on financial instruments that have worked for a very long time. Of course, I can’t guarantee what is going to happen in the future, but you have to put your money somewhere.”

 

“My friend lost all of her money in 2008. I lost a ton of money too. What if something like that were to happen? We would be ruined,” Suzy sighed.

 

I’ve heard this a hundred times, Dave thought. Why do so many people have this misconception? Investors who had their money in a diversified portfolio of stocks and bonds recovered any losses from the housing bubble in a couple of years.

 

Joe looked really nervous too. “Dave, this is all we have. We don’t have an income to rely on anymore. We can’t take any chances. I saw the market went down 1% yesterday. And that was just one day! I would have lost $5000!”

 

I feel terrible for these two, Dave thought. They have to pin their financial security on investment vehicles, that by their very nature, are volatile and unpredictable. How could they not worry? They are in an almost impossible situation. They can stick the money in a savings account and run out of money, or they can put the money into stocks and bonds and get sick with stress.  

 

Dave continued his thought: A generation ago everyone received a pension once retired. Why did we change that system? It worked so well. No stress. You knew exactly how much you had to live on. You knew it would never change.  

 

I guess these companies learned pretty quickly that traditional pension plans are incredibly expensive. So they simply said, “Let the employees save their own money into a 401k. We may match some of their contributions a little bit, but this takes the responsibility (and expense) away from us.”

 

a“Ok,” Dave said, “We are now going to put together a plan that determines your budget needs. We are then going to invest the money into a diversified and balanced portfolio of stocks and bonds. We are then going to send you 5% of the portfolio each year. This amount is not too much and not too little.”

 

Joe and Suzy scheduled an appointment for the following week, and drove home more hopeful than before.

 

Dave noticed that the stock market had lost another point for the day. As he looked over the downtown from his office he thought to himself, there are literally thousands of people in this city sick with worry right now. I bet a lot of them make emotional changes to their investment strategy. What a crummy way to live. If the markets go up you feel ambivalent, and if they go down you worry.

 

This is so frustrating, he thought, it doesn’t matter what the markets do in the short term. It just doesn’t matter. How do I convince people to ignore their investments? What I’m asking them to do is the complete opposite of every other sourceIt is a tall task to be a small voice in a noisy wilderness.

 

As Dave was leaving the office he felt a warm feeling welling up in his chest. Joe and Suzy’s life will be forever changed, he thought. Instead of living in fear, they are going to approach this new chapter of their life with a renewed sense of adventure and opportunity.

 

Be Blessed,

 

Dave

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