Planning and Investing in Difficult Times

Henry K. (Bud) Hebeler



These questions and answers were part of a 1/16/09 phone interview with Dean Foust, Business Week Atlanta Bureau Chief, who covered some of these and other subjects in the Jan. 25, 2009 Business Week magazine as well as on


Q:  What should retirees do now to cope with their future?


A:  There are many retirees in serious trouble, particularly those who retired ten or so years ago.  Not only have their investments tanked, but they far overspent because they were far too optimistic in their planning—if they did any planning at all.  The essentials of good planning for the future include:


Setting aside a portion of savings for emergencies and replacement of things that wear out.

Making sure that you don’t overspend early so that your investments will last as long as you do.

A diversified investment allocation of stocks and fixed income securities that’s appropriate for your age.

Unlike brokers and many advisors, you should use conservative projections for future returns, inflation and taxes.  Remember that fees, mutual fund costs and taxes reduce returns.  Also retirees lose about a percent of their returns to reverse-dollar-cost-averaging.


Q:  I note that you have a free retirement calculator on  What do you consider representative returns for financial planning?


A:  I should start this answer by saying that neither I nor anyone else knows what will happen in the future, either about economic events nor personal things that will come up.  The programs on my Web site try to get people to consider both of these uncertainties.  I believe that historical perspective is good, but things could be worse or better than extremes of the past.  Nevertheless, my programs show three scenarios:  (1) One of your invention, (2) one that shows what would have happened if you retired in 1948 which was about the best year in history to retire, and (3) a scenario showing what would have happened if you retired in 1965, one of the worst historical years to retire because of periods of sharp investment declines in the years that followed as well as high inflation.   I would choose returns and inflation that are closer to the 1965 case than even the middle of the historical range.  I have long urged people to plan conservatively both with regard to the economics as well as for the need for investment reserves to at least cover some part of unknown events that may occur in the future such as support of parents or adult children.


Q:  What do you consider an appropriate allocation between stocks and fixed income?


A:  I like using a simple formula to determine the fixed income percentage.  That’s a percent that’s between your age (e.g., 70% for a 70 year old) and 10% less (e.g., 60% for a 70 year old).  The remainder would be in stocks (e.g., between 30% and 40%).  I was on a financial talk-show last year when the host criticized this formula as being too conservative.  I thought to myself that he’ll learn.  I’m sure he has.  I’ve done well with this formula for over 40 years now.  I’ve bought stocks when the market is low and sold when it is high.  I only rebalance once a year.   There’s quite a bit on this subject in my book “Getting Started in a Financially Secure Retirement,” Wiley, 2007.


Q:  What do you think are good investment s for retirement?


A:  I like mutual funds for stocks as opposed to stock picking.  Simple index funds may be best form of stock diversification.  Target funds are also well diversified and do the rebalancing for you, but ensure that you’ve selected a low-cost target fund family.


With some exceptions, I don’t like to satisfy the fixed income part of an allocation with mutual funds.  Your principal in a bond fund can go down appreciably when interest rates go up.  It’s better to buy actual bonds and hold them to maturity when you’ll get all of your principal back.  I ladder bonds so that they mature in different years.


Several fixed income investments are often overlooked, but they can be very good.  Consider CDs, EE Savings Bonds, I Bonds and TIPS.  Older retirees should consider immediate annuities.   I have several inflation-adjusted immediate annuities which I still consider a good investment even though they are backed by AIG.


Q:  When do you think people should plan to start their Social Security?


A:  A single person or higher income spouse should consider delaying until age 70 if it won’t largely deplete savings and if there is a good chance she or he will live past 80.


A married couple with a low-income spouse should consider 70 for the high income spouse and 66 for the low income spouse.  Again they will need sufficient savings for the in-between years, but in this case, only one of the spouses needs to live past 80 to make this a good deal.  Remember that a low income spouse starting at 66 is entitled to 50% of the high income spouse’s full retirement age benefit while the high income spouse is alive and 100% after the high income spouse dies.  There is a Social Security program on that has helped a lot of people personalize the optimum starting ages for their Social Security.


Q:  What if a person has already started Social Security too early?


A:  You can pay back all of the previous gross Social Security receipts and start again.   There can be some irritation with Medicare rules if you start again after age 65, but with a lot of persistence you can overcome these.


Q:  With the downturn in business, lots of people face lay-offs.  What do you recommend they do to better protect themselves?


A:  Work hard to be an exemplary employee and continue to sharpen skills.  Even if one gets laid off, the demonstration of a strong work ethic will look good in recommendations, and sharpening of skills will impress recruiters.


They should also try to save as much as possible to build up a reserve that would tide them over for as much time as it might take to get a new job in a particular industry.


Q:  What should employees do relative to health or disability insurance protection if they lose their jobs?


A:  They have the protection of COBRA in which they can continue their insurance with their employer for 18 months or so, but that insurance is not cheap and has a small extra fee added.  After 65,Medicare kicks in.   A worker might consider health insurance premiums in the interval after COBRA and before Medicare to be part of emergency reserves.


I personally think that one of the best forms of health insurance is to exercise and eat right.  Staying healthy is the best and most economical benefit you can have even if you are insured all of your life.


Q:  Do you have any thoughts on things that people can do to save more?


A:  The first thing someone might do is to consider how their parents lived.  They didn’t have computers, cable TV, TiVo, internet service, cell phones, cars for their kids, CDs, DVDs, large homes, unlimited restaurants, etc.  Then decide if they really need all of the things some people now consider as necessary.


It’s really important to only fund needs and be Scotch about wants.  We know an 80 year old lady who went back to work in a part-time job at Walmart straightening clothes and materials for the next day.  She earned enough for a computer and now is busy emailing everyone.  That was a “want” for her.


Or consider what our grandparents did.  They farmed, canned and kept root cellars.  They were self-sufficient and had little need for cash.  I believe we’re going to see the time when many people are going to have small gardens.   Remember Victory Gardens?  That was the political thing to do, and often necessary, in World War II.


Q:  Do you really think that we are going to go back to an economy as dire as the Great Depression or World War II?


A:  This is a subject I’ve covered in several papers on, but if you ever have a chance to see the movie, I.O.U.S.A., it shows part of the problem as well.   I’m one of the few who thinks we should be prepared for that.  This country’s debts are far too high.   All of the following debts are at record highs—simultaneously:  National, State, Local, industry and commercial, balance of payments, credit cards, mortgages, education, etc.  So are the unfunded liabilities for Social Security, Medicare, pensions and the Pension Benefit Guarantee Corporation.  For the national debt alone, if the average interest rate was 5%, every worker who pays income tax would have an annual interest cost of about $2,000—and that would only keep the debt even without paying back any of the stimulus payments much less the basic national debt itself.  Add the unfunded obligations of Social Security and Medicare and you have an equivalent debt that is about the same as the entire world’s GDP.  Those would bring you up to about $10,000 per taxpayer per year.   And that’s without any of the personal or other overwhelming debts.


On top of that, financial firms have been making side bets on debts.  The amount of credit default swaps and other derivatives also exceed the GDP of the world.


I believe that economists ought to put more focus on the National Savings Rate which historically was at about 9% of disposable income from after World War II till 1985.  After 1985 savings gradually dropped to almost zero in 2005 and have stayed that way since.  In World War II, the national savings rate was over 20%.  In order to get cumulative savings per person back to the historical 9%, everyone would have to save over 20% of their disposable income for two decades starting now.  That’s not going to happen.  Actually, they would have to save more, because firms offering retirement pensions also started to drop after 1985, thereby increasing the need for people to save more for retirement on their own.


What economists are forgetting is that we have 60 million baby boomers who want to retire in the near future.  The problem is that they won’t be able to afford it.  Vanguard found that savings in 2007 averaged $60,740 per 55 to 64 year old age investors in their 401(k) accounts.*  That’s probably less than 10% of what it should be and has further declined this year.  We are looking at a large population of people who will have to work in their old age—just like our grandparents who worked until they died or were disabled.  So think again about how these people lived or the conditions in World War II when people saved over 20% of their income.


You can learn lots more about this in articles on


* WSJ, 1-8-09 p. A12.