Investing for the Future
So many people have asked me for investment advice that I decided to expose my own plans—which are based on the assumption that we will have a number of years of very low economic growth followed by a significant period of high inflation. In my book, Getting Started in a Financially Secure Retirement (Wiley, 2007), I analyzed what it would take for the average person to catch up from the last two decades of excessive consumption and lack of savings. It wasn’t pretty. In fact, except for the most dedicated savers, it’s not even possible. Baby boomers, on average, will not have prosperous retirements. The lack of spending capability of a large part of our population and the heavy weight of taxes to pay for the interest on the national debt and the unfunded cash liabilities of Social Security, Medicare, Medicaid and government employee pensions will be a drag on our economy for decades.
So what should we do to rise above the miserable average? Of course I can’t see the future any better than anyone else, but I know that the integral of years of low savings and increasing debt in all sectors must have an impact, something that’s ignored by the majority of forecasters. I can tell you what I feel are some good investment possibilities, but others will feel differently, thank goodness. I say thank goodness because for every buyer there must be a seller and vice versa. Not only that, but if too many people want to do what I do, it will bid up the prices of what I consider to be good at this point. I’m overjoyed to see that those that make their living selling securities get a lot of press to reflect their optimism.
Most financial advisers like to advocate a strong allocation policy—as do I. Of course, we differ on what that policy should be. I’ve been on financial talk shows where experts have panned my own philosophy which is to have both maximum and minimum equity allocation limits that reduce every year of my life. It’s too conservative for many planners because my lower limit for equities is, as a percentage, 100 minus my age. One talk-show host said I was “too old fashioned.” That was in the year 2000. I’m hoping he retired shortly thereafter and has learned his lesson by now. My upper limit is 10% higher. Staying within these bounds with an annual rebalancing really helped my portfolio both over my pre-retirement years and my 21 years of retirement so far.
There’s an interesting thing about getting into what some people call an “elderly” age. That’s the fact that we don’t know whether we will die next year or go on to reach 100. If you are doing retirement planning when you are 50, a 10 year difference in life-expectancy assumptions has a much smaller effect on affordable retirement spending than a 10 year difference when you approach 80. An “elderly person can’t afford to assume she will die within the next couple of years and plan on exhausting savings quickly. Nor can she afford to invest in volatile securities because there is too much chance that she will fall victim to reverse-dollar-cost-averaging, that is, make regular withdrawals in a declining market as opposed to those not yet retired who are adding to investments during a declining market.
With regard to investments, my own plan calls for converting a significant part of my qualified accounts to a Roth IRA next year when the income limit for a Roth goes away. That helps solve the problem of what I feel is inevitable tax increases. Then there’s the question of what should go into the Roth IRA. I’m thinking of starting with TIPS, not a TIPS fund, but actual bonds so that when interest rates increase I will not lose principal. That will help to combat the threat of inflation and take care of the obnoxious tax treatment of TIPS in taxable accounts. When the real estate market gets really bad, and I don’t think we’re there yet, I’ll get more active in REITs—again in the Roth IRA for tax reasons.
A number of years ago, when interest rates were higher, I laddered some inflation-adjusted immediate annuities that have turned out great, and I expect, that when interest rates go up again, I'll do some more from the remnants of my remaining qualified accounts. Although we normally don’t think that immediate annuities are very good for heirs, both my wife and I have longevity in our families. Only one of us has to live past the life-expectancy used by the insurers—or to have a period of very high inflation-- for us to win this bet instead of the insurer. These annuities mean that we can reduce the draws from our other investments thereby helping their growth and what will be left of our estate.
So, considering that for every buyer there must be a seller, I hope that there are lots of people who disagree with my allocation and investment philosophies. That will reduce my investment costs. I still will have a part of my investments in muni bonds and stock index and tax-managed funds. After all, the optimists may be right—and we have to be diversified in case they are.
Henry K. (Bud) Hebeler