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It’s Déjà Vu All Over Again

Tom Gayner once commented that the secret to investing successfully is surviving the first thirty years. He was half joking and half serious, but his reasoning was sound. He suggested, after that length of time an investor would have experienced several market trends and cycles and he ought to be able to recognize their recurrence.

Since the new year, market participants have seen the following:

  • a hike in interest rates
  • a 13.5% decline in the S&P 500
  • a 9.5% decline in the Dow Jones Industrial Average (DJIA)
  • a 25% decline in the NASDAQ

None of these should come as a surprise to anyone. As Yogi Berra might say, “IT’s déjà vu all over again.”

In January 1966, the Dow Jones Industrial Average hovered around 8,891. But, by June 1982 – after years of decline, the DJIA had surrendered 72% of its value closing around 2,406. “The Nifty Fifty” – a group of cutting-edge, high-tech companies including Xerox, Polaroid, Kodak, etc. had vaulted the DJIA to lofty levels. It seems speculators were willing to pay 50-100 times earnings – not unlike some of the valuations we’ve seen in the recent market environment.

The late 1990’s also saw similar valuations placed upon countless dot.com/high tech companies as the world prepared for Y2K.

When speculation ramps up, it can drive equities to levels that simply aren’t sustainable or justifiable. Is it any wonder the NASDAQ has lost 25 percent so far this year?

Investors and speculators seeking refuge in fixed income won’t find much comfort either. If interest rates continue to rise – as they’re likely to do, bond valuations will also decline.

As a reminder of this, I keep a de-commissioned “50-year bond” certificate on my wall. The bond was issued in 1945 by the Reading Railroad Co. (yes, the same one from Monopoly). The bond was set to mature in 1995 and the attached coupons paid an annual rate of 3.25%.

In 1972, the bond was surrendered. The owner would have likely seen a 40% drop in the value of the bond as interest rates climbed from 5.45% in March 1972 to 6.66% in July.

It’s impossible to know what interest rates or markets will do over the short term. There are advantages to be had by studying market history and those of us over 55, have been to this rodeo before.

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the BiGGEST Retirement Risk

This past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Cheques and other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retiremenThis past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Chequesand other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retirement.” They included:

  1. Longevity Risk – the risk of outliving your money
  2. Deflation – the risk that goods and services might decline (like during the Depression)
  3. Market Risk – the chance of a sustained bear market
  4. Withdraw Rate Risk – the risk of drawing down too much from your nest egg
  5. Sequence of Returns – risk of a permanent capital loss by drawing funds in a down market
  6. Regulatory Risk – a change or failure in regulatory framework (governance, Madoff)
  7. Taxation Risk – a hike in current rates or the imposition of new unforeseen taxes
  8. Inflation – an across the board increase in the cost of needed goods and services
  9. Long Term Care – the risk that a senior will require years of costly palliative care
  10. Mortality – the risk of a premature death

Of all the risks he highlighted, “longevity risk” was the most critical. It’s what he called the “Retirement Risk Multiplier.” IF that risk was not addressed first, the other risks could easily become more acute.

Life expectancy is a bit of a moving target and a tough concept for most. Most people see that life expectancy is around 84 for males and around 87 for females. What people miss is that notion that these numbers represent “averages.” They shouldn’t necessarily be used for planning purposes.

There’s a 50/50 chance (i.e. 1 in 2) that one member of a 65 year old couple will live to age 92 and a 25% (i.e. 1 in 4) that one member will live to age 97.

Hegna also noted, of all the risks retirees are exposed to, longevity risk is the easiest to take “off the table.” He advises retirees to calculate their basic human needs (food, clothing, shelter, utilities, etc.), see how much is covered by CCP and OAS and to top up income with an annuity – which guarantees retirees will never run out of income nor ever take a cut in pay (recent rates can be viewed here: https://think-income.com/annuity-info/ ).

Finally, Hegna noted how most brokers and financial planners run “Monte Carlo” analysis as a means of measuring and managing “risk.” Yet, their proposals always have a  disclaimer on the bottom of the page their retirement illustrations that reads, “63% of plans fail to provide income at or after age 90.”

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4% Retirement Rule Now Obsolete

For years, financial professionals have suggested retirees draw 4% from their nest egg as a means of drawing sustainable income. That plan – designed by Financial Planner Bill Bengen in 1994, typically included allocating 60% into equities for long term growth and 40% into cash and fixed income as a means of dampening market volatility.

In theory, a senior with $250,000 of retirement savings would allocate $150,000 into equities for long term growth and $100,000 into cash and bonds. Then, they would draw $10,000 /year (or $833 /month) from the cash portion and re-balance the portfolio annually.

That plan is now being challenged by… the individual who first advocated the 4% rule.

In a recent Wall Street Journal article, Bill Bengen suggests retirees cut spending and exercise caution with the latest surge in inflation. He suggests adherents to the 4% rule take a pay cut and roll back their drawdown rate to 3%.  (See: https://www.wsj.com/articles/cut-your-retirement-spending-now-says-creator-of-the-4-rule-11650327097?st=gmubxx8uvq6aakz&reflink=desktopwebshare_permalink )

The problem is that there’s no precedent for today’s conditions,” he said.

A recent Morningstar report recommended a 3.3% initial withdrawal rate for those retiring today. It suggested that was an optimal rate for those who want spending to keep pace with inflation over three decades and want a high degree of certainty their money will last.

As of March 1st, Canadians had $2 trillion invested in mutual funds. Roughly 1/2 of those funds were invested in balanced funds, 1/3 were invested in equities and 1/8 were invested in fixed income/bond funds. Old ways of thinking still permeate retirement income strategies and expose Canadians to

Any retirement income strategy ought to include the use of annuities. Retirees receive higher, tax favoured income and retirees can rest assured they will never have to take a pay cut. Recent rates were posted here: https://think-income.com/annuity-info/