June 13

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Joe and Frank: The Tale of Two Savers

Family Update

We are in Pittsburgh visiting Grammy and Pop. My four kids look forward to this trip every year. We always come up for one of the kid’s birthdays. This year Alex turned twelve. He loves games so we played:

Shuffleboard

Croquet

Ping pong

Playing cards (spades and hearts)

and much much more

For some reason, I can’t figure out how to upload pictures on this computer. Extra pictures of pets and kiddos next week!

 

While the story below is fictional, it is based on real scenarios I’ve witnessed during my career.

Joe and Frank both retired 25 years ago, 1993. They were both 65, both married, and both had $1,000,000 in savings. Their stories are remarkably similar in the beginning, except for one big difference — Joe made his decisions based on fear, and Frank based his decisions on realistic expectations.

When Joe retired he went to his local bank and said, “I’m retired now, I can’t afford to lose anything. I want to put all my money in a money market account.” In 1993 money markets were paying an average of 3.9% and Joe felt pretty good about that.

Of course, there was no way he could have known that interest rates would drop so low later on in his retired years.

As the market fluctuated, Joe became more and more fearful. “I don’t want to spend any of this money unless I HAVE to. I know Ellie wants a new kitchen, and I would love to visit the grandkids in Rhode Island, but … I’m not making a salary anymore. I have to be very careful with this.”

Over the next 30 years Joe scrimped and saved. He never once needed to take more than a few thousand dollars out of savings. When he died in 2016, there was quite a bit of money still there. Over 25 years of compounding interest inside the money market account had turned his $1,000,000 into $1,800,000.

Joe and Ellie never made the trip to visit the grandkids. Ellie never got her updated kitchen. In fact, they spent most of their retirement trying to live with less and less.

They never ran out of money, but they also never got to really enjoy their retirement.

Now Frank looked at things differently.

“I’ve worked my whole life so that I could enjoy the fruits of my labor in retirement. We are going to put a pool in the backyard. Both Mary and I love to swim and it will keep us active and healthy. We are going to travel as much as we can for as long as we are healthy enough to do so.”

Frank went to a local advisor and said, “I want my money to keep working for me since I am no longer working and making a salary.”

The advisor suggested a diversified portfolio of stocks and bonds.

So Frank put 60% of his savings into stocks and 40% into bonds — a very common portfolio asset mix.

Frank then started taking out $50,000 a year from his portfolio, or 5% of the original value. His friends called him crazy. “You are too old for investing,” they’d say. “You are going to run out of money!”

But Frank knew he was reasonably safe to spend the money his investments were earning.

Frank spent the $50,000 each year on things that made him and his wife Mary happy. They spent an entire month in Australia. They traveled up north for each of their grandkids’ birthdays. Frank even bought himself a 1969 cherry-red Chevy Camaro.

When Frank died in 2021, his kids gathered and looked at his investment statement. He had taken out $1,250,000 over those 25 years. Were his kids angry or resentful? Not at all. They remembered all the crazy adventures he and Mom had with that money. All the family vacations, the special occasions made more special by their presence. They also remembered the times they’d needed help and had been able to turn to their parents.

How much money did Frank have left over in 2021?

At Frank’s death a little over $4,725,890. That is not a typo. He started with $1,000,000, took out $1,750,000, and ended up with over four times the amount he started with. He also ended up with more than twice as much as Joe.

The Moral of the Story: Being “safe” with your money may not actually be safe at all!

A well-diversified and balanced portfolio of stocks and bonds is a powerful wealth creation tool. You may be able to spend more of your retirement savings than you realize, and enjoy more of your retirement years.

Please pass this story on to friends and family. It might just possibly change someone’s life.

Be Blessed!

Dave

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