I recently met with a couple in their mid-50's who were referred to me by their CPA. The conversation went like this.
"We are sitting with our nest egg in cash and we don't know what to do." Mr. S explained.
"From everything we hear, this is not a good time to invest our money, yet, we know that keeping our assets in cash is not a good choice either." Mrs. S followed up.
"We'd like to retire in about ten years or so and we are counting on this money to take us through the end of our lives." Mr. S continued.
"I am terribly afraid of the stock market; all you hear is bad news!" Mrs. S added.
I listened intently to a story I've heard many times before. Each time I hear it, I feel that much more frustrated. I begin.
"Let's try and take a step back and start with the end goal here. I heard you say that you wish to retire in approximately ten years and that you are depending on these assets to support you through the end of your lives. Is that correct?"
They both nodded in agreement. I continued.
"We also know that right now, interest on money markets, savings, short term certificates of deposit and treasury bills are pretty close to zero. Correct?"
Again they agreed.
Referring to my note pad that included their annual expenses, I began.
"Do you expect your expenses to change during retirement substantially?"
They looked at each other and shook their heads no.
"Based very, very roughly, if your expenses remain flat and you continue to earn next to nothing on your assets you would probably run out of funds in your early 80's. Is this acceptable?"
Mr. S answered quickly, "Wouldn't you expect interest rates on these instruments to rise? I mean they are at record lows and surely, they'll go up."
"That's a pretty fair assumption, yet after taxes, for non-qualified accounts, and inflation, your real return will mostly likely remain close to nominal."
It was obvious from their reaction that they were not pleased with my answer.
"What should we do?" Mrs. S asked pointedly.
"Well, in reality, you have several options; save more, work longer, spend less or put your money to work using a realistic and conservative estimate that will hopefully exceed zero as a real return."
"We've discussed this" Mr. S interjected, "we really want to retire in ten years or so. We cannot imagine working into our mid-70's. What about all the bad economic news? Aren't we putting ourselves in terrible risk?"
"Risk is relative and time can either be your ally or enemy. The fact is, you need to think less of the headlines and their ‘today' focus and look on a longer term basis. The news changes every day, based on what has happened, or expected to happen or might happen; putting too much emphasis on each day, detracts from your ability to look more objectively at the true picture."
I could see the fog slowly beginning to lift.
These discussions happen all the time; people are fearful and frustrated. The best way, in my opinion, to work your way through these harrowing times, is the following:
1. Data should be examined over long periods of time.
2. Discern that risk is more than the stock market
3. Define that the reporter's point of view might be skewed and very narrow.
4. Distinguish what you read, hear and think. Perhaps there's more that needs to be uncovered that you will not get in a ten second sound bite on the radio or headline.
By taking a step back and understanding that there is a potential agenda or point of view that is being promulgated by the source, it might have very little importance in your goals and could actually hurt your ability to live your dreams.