Norman Bernstein's thoughts on retirement

[George Roberts]

I think it is fair to say that according to Norman Bernstein:

To retire into a upper midde class lifestyle requires $2.5 million in investable assets. 10% is a reasonable risk "free" expected average return on investments. And that a 10% expected average return allows one to withdraw 5% of the principle each year.

I understand the relationship of the 5% and 10% to historical stockmarket performance and perhaps inflation.

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There are problems with the above statements.

1) I don't know what a upper middle class lifestyle is, but $125K (before or after taxes?) is a lot of money to spend.

Based on income and assets my wife and I appear to be in the top 10% of the economy - perhaps a bit better off than middle upper class. We appear to live on under $15k/year - about what we would get from either of our SS retirement benefits. (This ignores business related expenses, foolish travel, and charitable giving. The premium for $3 million dollar health care policies is included but not the $10K/year deductible.)

I guess that is in line with the adage "the rich got rich by trying to live like the poor and the poor got poor trying to live like the rich.)

While $15K might be a bit low for many people's idea of upper middle class life style, $125K appears to be too high for the upper middle class to reach.

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10% return on investement is attainable for any idiot. He can simply purchase the stock that tracks any of the broad market averages. If any idiot can do that well, it is reasonable that an intelligent person can do better.

Investments provide better returns not because they are risky, but rather because the income stream is not suitable for many. Real estate partnerships often offer a low risk 25% return, but they are structured to provide 10-15% cash return for the first few years, lot of capital gains tax obligations and no cash return for decades, and then tax losses and princple/cash returns at the end.

Other investements require large amounts of capital and since few people have the capital they can demand a higher return without an increase in risk.

Finally, a lot of investments have a high failure rate but when successful provide a high rate of return. If an investor invests in many of these oportunities, the overall risk falls to an acceptable level while the return stays above what a "low" risk investmetn provides.

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The 5% figure is based on having a fixed expense schedule. But most expense are not fixed. If one is willing to delay big ticket items - house repairs, car purchases, and trips, during poor investement years until good years the 5% can be increased to the average return rate.

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have to go...

[Donn]

have to go...

After all that, I wouldn't think you'd have to go for a few days, at least.:rolleyes:

[Norman Bernstein]

Wow, no wonder my ears were burning! I made this comment some time ago, somewhat offhand, without benefit of qualification or explanation....

I'd qualify it by saying that the number I quoted isn't necessarily appropriate, or even achievable, for everyone.... and each family's objectives might be different. Some might desire to leave the principal intact for the heirs, others might want to leave it to charity.... some might want to live far more expansively, others far less so.... and some might be determined to spend every last cent by the moment they kick off the mortal coil.

Much has to do with how much of a cushion a person thinks they need against adverse circumstances. In todays circumstances, health insurance can't be taken for granted, nor can adequate care via Medicare.... so the more conservative among us might want a very big cushion against the possibility of some drastic (and extraordinarily expensive) medical crisis.

One other point: the 10% return quoted was nothing more than the long term historical average return for equities, i.e., what a person might expect to earn if their assets were invested purely in index funds. Clearly, some have done far better by being active investors... but not everyone has the time nor inclination to do that. One other important point: 'long term average' means that there will be periods where the return is far lower, and the capital shrinks in downturns, so the total amount quoted was supposed to represent a cushion large enough to preclude having to shrink one's lifestyle in lean years.

[Donn]

Therein lies the difference between Norman and me. It takes him 4 paragraphs to say what took me 16 words.

You should practice adjectival and adverbial conservation, Norman. Not all subjects are superlative, eh?

[Joe ( Cold Spring on Hudson )]

Donn has supposedly made $3 million in the Microsoft IPO but no one calls his bluff on that. :rolleyes: Norman seems like a solid investor.

And George well we all know George ;)

[shamus]

I've been aware of various magic figures for retirement over the years, generally for average people rather than upper MC. The one thing I've noticed is that the current figure recedes upwards from Joe Average as he retires, or shortly after. I expect the same holds true for the average UMC attempting to extract a passive income. I believe George touches on a worthwhile point somewhere in what he wrote (I find he often does): the happiest retirees that I know have some means outside basic pension, but a rather frugal lifestyle. I occasionally wonder what sort of boat I may be able to afford in retirement.

[Paul Fitzgerald]

Westpac publish recommended annual income levels for retirees, from a basic income to a comfortable income in $Aus.
I'll see if I can find a link, but the comfortable retirement income for a couple owning their own home was under $A50,000 this year ($US40,000)

[Paul Fitzgerald]

I think this is it

http://www.superannuation.asn.au/RLS/default.aspx

Go to "Detailed budget breakdowns for comfortable and modest lifestyles ".

Comfortable couple, $A48,000 ($US 38,400), modest couple $A26,000 ($US20,800).

Of course you would have to incorporate a boat owners surcharge.......

[Donn]

Of course you would have to incorporate a boat owners surcharge.......

Ain't that the truth?!? And what a surcharge it can be.:)

[S.V. Airlie]

Too many variables to really say what is nec. for a decent living...Too many bills and taxes are not going to remain static...

Health insurance.. ain't gonna go down. Even with Medicaid etc. Everyone assumes he/she is gonna be healthy...
House payments. property taxes.. house maintainance ( new roof?) things like that
Credit card debt.. a big one these days...
Car expenses....insurances
I probably could come up with a long list here...
Heating oil/gas/propane.. northern climates..
Elec. bills.... mine have fluctuated between 45.00 to 85.00 just over the past few months. usage hasn't changed.. add on taxes has.

Whatever figure you come up with, I'd add another 25-30%

as an example.. my property tax just jumped 2.5%.. Of course the idiots did not charge 2.5%. The county did a number and charged a 25% increase.. Needless to say, I have not paid it yet.. LOL.

[Norman Bernstein]

Donn has supposedly made $3 million in the Microsoft IPO but no one calls his bluff on that.

Maybe he did, maybe he didn't. Since he's not leaving his estate to me, I don't personally care!:D


:rolleyes: Norman seems like a solid investor.

There's no such thing, Joe.... if I hadn't left my company back in 1992, where I was a principal engineer and was sitting on a huge pile of stock options at mere nickels and dimes per share, I'd be living aboard some 50 foot gold-plater down in the BVI's with a Mai Tai in my hand right now.

On the other hand, if I hadn't left my company back in 1992, where I was so burnt out I was roasted, toasted, and burnt to a crisp, I'd probably be in a looney bin somewhere.

Ain't nobody....not even Donn.... who always does the right thing, whether it's money, investing, marriage, boats, or whatever.

[Stiletto]

Hows the sharemarket system going Norman?

[peb]

10% return is difficult to achieve across all of your assets. If all of it is in the stock market AND you are very patient (on the order of 30 years), you will do so.

To assume you can take out 5% from your investment annually is not necessarily good.

Go play with http://firecalc.com/firecalc.php and you will see that money does not always last indefinely.

I plugged in a simple retirement. You need 30,000 a year, you have 600,000 (there is your 5%). Put it all in the stock market. You want a 30 year retirement. Your success rate is roughly 72%, based on historical years of starting since 1872. Now, who wants to run out of money when they are in their 80s? 72% ain't too good.

For a 95% success rate, you need closer to $800000. So you can safely withdraw less than 4% of your networth, if you want it to last.


Remember, the mantra about the stock market return 10% annually is touted by mutual fund companies. It is true only with a very long term view. It is very dangerous. And I am a big believer in investing in the stock market.

[garyspear]

Get Out Of Debt And Stay Out Of Debt. Your Whole Life Will Change Forever.

[peb]

Get Out Of Debt And Stay Out Of Debt. Your Whole Life Will Change Forever.


The best financial advise ever posted on this forum. My dad had a saying, "Only borrow money to make money". In other words the only loan ever allowed was a business load.

May be a bit extreme. I would allow a reasonable home mortgage.

[Norman Bernstein]

10% return is difficult to achieve across all of your assets. If all of it is in the stock market AND you are very patient (on the order of 30 years), you will do so.

To assume you can take out 5% from your investment annually is not necessarily good.

Go play with http://firecalc.com/firecalc.php and you will see that money does not always last indefinely.

I plugged in a simple retirement. You need 30,000 a year, you have 600,000 (there is your 5%). Put it all in the stock market. You want a 30 year retirement. Your success rate is roughly 72%, based on historical years of starting since 1872. Now, who wants to run out of money when they are in their 80s? 72% ain't too good.

For a 95% success rate, you need closer to $800000. So you can safely withdraw less than 4% of your networth, if you want it to last.


Remember, the mantra about the stock market return 10% annually is touted by mutual fund companies. It is true only with a very long term view. It is very dangerous. And I am a big believer in investing in the stock market.

I think the firecalc thing is quite unrealistic. For one thing, it makes assumptions based on the behavior of equities markets in the past, and as they say, past results are no predictor of future earnings.

Secondly, the basic premise is false. One might have a clue as to what their income needs are are the outset of retirement, but those needs are likely to change dramatically in the course of the retirement years, usually downward (excluding serious illness or long term care).

My basic premise (live on 5%, expect another 5% in growth) is nothing more than a very gross approximation of an unknown and changing scenario. These days, the truly risk adverse could lock in a long term 4%, risk free, and not worry about the vagaries of the stock market. Personally, a well diversified stock portfolio is a risk I could live with.

[George Roberts]

"Wow, no wonder my ears were burning! I made this comment some time ago, somewhat offhand, without benefit of qualification or explanation...."

As I indicated I know where most of the numbers came from. I just did not want people to think that there was much substance to them.

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I would make comments about your last post but ...

[Norman Bernstein]

As I indicated I know where most of the numbers came from. I just did not want people to think that there was much substance to them.

Oh, I think that most people here are capable of thinking for themselves, George...

[garyspear]

peb,

I'm not sure how I feel about business loans either. I wouldn't even do that in my current mindset.

My grandfather used to say that you never bought anything on time. I thought he was a good harted but misguided old man. 4 credit cards later I had a very different opinion. My wife and I are blessed in that we learned this lesson at around 25. We cut up the credit cards. spent cash as my grandfather did and stuck to a budget. we took out a home mortgage loan 6 years ago and we will pay it off this year. no it is not a big house but it will be ours and my family will never have to worry about our finances again because we have a plan.

I don't want to rant too long but I have to many friends that are struggling with this. there have been divorces and fighting and sadness of all descriptions. The best advice I ever got came from my grandfather and a friend put it another way this year. " manage your money or the lack of it will manage you."

by the way my grandparents( a janitor and a nursing home cook) retired with about 10 million. I know this because When my grandfather died I had to help my mom go through his finances.

You never know who the millinares are. maybe one day I will be so blessed.

[peb]

I think the firecalc thing is quite unrealistic. For one thing, it makes assumptions based on the behavior of equities markets in the past, and as they say, past results are no predictor of future earnings.


Norman, you can't have it both ways. You can't say that the stock market will return 10% and then say that behavior of equity markets in the past don't count. There is very little reason for the equity markets not to have similiar long periods of under performance and over performance that it has had in the past. Do you think anything has fundamentally changed that will take the volatility out of the equity markets.



I think the firecalc is the best retirement tool you could have. Obviously peoples need's change and their spending changes. Often times, this is "forced on them" due to finances.

[peb]

peb,

I'm not sure how I feel about business loans either. I wouldn't even do that in my current mindset.

My grandfather used to say that you never bought anything on time. I thought he was a good harted but misguided old man. 4 credit cards later I had a very different opinion. My wife and I are blessed in that we learned this lesson at around 25. We cut up the credit cards. spent cash as my grandfather did and stuck to a budget. we took out a home mortgage loan 6 years ago and we will pay it off this year. no it is not a big house but it will be ours and my family will never have to worry about our finances again because we have a plan.

I don't want to rant too long but I have to many friends that are struggling with this. there have been divorces and fighting and sadness of all descriptions. The best advice I ever got came from my grandfather and a friend put it another way this year. " manage your money or the lack of it will manage you."

by the way my grandparents( a janitor and a nursing home cook) retired with about 10 million. I know this because When my grandfather died I had to help my mom go through his finances.

You never know who the millinares are. maybe one day I will be so blessed.

Gary, business loans are no light matter. You should be very cautious with them. I know from first hand experience. But there are some business situations that require a certain amount of leverage before they really make sense.

As for you grandfather, sounds like he was a classic PAW (prodigious accumulator of wealth).

The best book you could read is "The Millionaire Next Door" (the follow up similiar books are not as good). In it, the author describes a PAW and a UAW (under accumulator of wealth). He gives the following formula. At any time in your life, your net worth should be greater than "(last years income * your age ) / 10". If your net worth is double that number you are a PAW and will retire happy. If your net worth is less than 1/2 that number, you are a UAW and will not have enough for retirement.

[Dan McCosh]

Gary, business loans are no light matter. You should be very cautious with them. I know from first hand experience. But there are some business situations that require a certain amount of leverage before they really make sense.

As for you grandfather, sounds like he was a classic PAW (prodigious accumulator of wealth).

The best book you could read is "The Millionaire Next Door" (the follow up similiar books are not as good). In it, the author describes a PAW and a UAW (under accumulator of wealth). He gives the following formula. At any time in your life, your net worth should be greater than "(last years income * your age ) / 10". If your net worth is double that number you are a PAW and will retire happy. If your net worth is less than 1/2 that number, you are a UAW and will not have enough for retirement.


Also--remember to pay cash for your house. No one ever made money in real estate, did they?

[garyspear]

Dan please expand? I will never have a home loan again. I will buy with cash only here as well. of course, it will be another 6 years before I have enough to upgrade. but then I won't care what the interest rates are either.

[Norman Bernstein]

Norman, you can't have it both ways. You can't say that the stock market will return 10% and then say that behavior of equity markets in the past don't count.

I don't say that.

Rather, what I'm saying is that the specific patterns of the past are highly unlikely to be repeated; instead, there will be unique patterns, of which, no one can predict.


There is very little reason for the equity markets not to have similiar long periods of under performance and over performance that it has had in the past. Do you think anything has fundamentally changed that will take the volatility out of the equity markets.

Actually, yes... because there are so many more players than there were, in past periods. 30 or 40 years ago, there were no where near the number of 'small players' in the market; for example, 401(k)'s and IRA's. This is much more widespread, and probably helps to dampen the swings to a limited degree.


I think the firecalc is the best retirement tool you could have. Obviously peoples need's change and their spending changes. Often times, this is "forced on them" due to finances.

Firecalc has a specific built-in bias; the exact behavior of the past, including long periods of little or no growth, as well as medium or long periods of skyrocketing growth. When Firecalc produces it's 'percentage likelyhood' number, it's a numbr that presumes that precise past patterns will repeat... and nobody has a crystal ball.

The reason I chose the 5% withdrawal rate is because, over a reasonably long period of time (20-30 years, which is becoming the length of retirement for many people these days), it's a pretty modest number; if long term trends continue, that's 5% withdrawal plus 5% appreciation, which is a margin that preserves capital. Will it always happen that way? OF course not... there will be 'down' periods...and there may be 'up' periods.... but you gotta pick SOME number to use, don't ya?

FWIW, professional money managers often quote 4% as a safe withdrawal rate these days. I'm no professional, so I'm inclined to believe them.

[peb]

Norman,

Good points, but


Actually, yes... because there are so many more players than there were, in past periods. 30 or 40 years ago, there were no where near the number of 'small players' in the market; for example, 401(k)'s and IRA's. This is much more widespread, and probably helps to dampen the swings to a limited degree.


I don't know. many today make a similar argument: "The markets are more efficient because information is better dissseminated and more people are involved." It would seem, based on a limited 15 years of history, that this is not the case. Close but not quite. In that time frame we have seen record periods of low volatility and steady advances (now), we have seen periods of record valuations and than record collapses, and we have seen periods of record volatility (1998). So I think that many of the past market phenomena may simply be exagerated in this new environement. At least that is what 10-15 years of limited history imply.



Firecalc does not assume past patterns will repeat. It does exactly what it states, it looks at your situation and goals on a historical basis and tells you if it would have worked in the past. It is very detailed about how it does it.

Most brokers have retirement planners that do something similiar. Except they don't tell you how they work or they just work off the old 10% number on a year in year out basis. And the is VERY dangerous.

[peb]

Norman by the way, do you know the 4 most dangeous words in investing?

"It's different this time" :)

[Dan McCosh]

Dan please expand? I will never have a home loan again. I will buy with cash only here as well. of course, it will be another 6 years before I have enough to upgrade. but then I won't care what the interest rates are either.


I was mainly just kidding. Few people in the US buy a home these days without a mortgage, generally taking out a low-interest loan and banking on an eventual price rise that exceeds the interest rate. It's not a bad idea, particularly when weighed against the possibility of falling home prices. Parking money in a depreciating asset is not usually a good investment strategy. Anyway, I guess my point is that never borrowing exposes you to risks, as well as borrowing at excessive interest rates.

[Norman Bernstein]

I don't know. many today make a similar argument: "The markets are more efficient because information is better dissseminated and more people are involved." It would seem, based on a limited 15 years of history, that this is not the case. Close but not quite. In that time frame we have seen record periods of low volatility and steady advances (now), we have seen periods of record valuations and than record collapses, and we have seen periods of record volatility (1998). So I think that many of the past market phenomena may simply be exagerated in this new environement. At least that is what 10-15 years of limited history imply.

All of this is absolutely true, peb.... except that I don't think a 10-15 'look-back' is long enough to say whether increased volatility has become any 'permanent' part of the likely path for equities. Once again, nobody has a crystal ball. I've lived through many of these periods, because I've been a market investor since the early 70's... and didn't panic, for example, in October '87, when I saw staggering losses in my portfolio (which were erased within 6-8 months, by the way).


Firecalc does not assume past patterns will repeat. It does exactly what it states, it looks at your situation and goals on a historical basis and tells you if it would have worked in the past. It is very detailed about how it does it.

My point, exactly. Knowing how well you would have done had you started 50 years ago might be interesting... but is it relevant? I don't think so.


Most brokers have retirement planners that do something similiar. Except they don't tell you how they work or they just work off the old 10% number on a year in year out basis. And the is VERY dangerous.

Look, if you're investing for retirement, then you're going to have to make decisions about just how you're going to eventually use those assets, right? That's the point, isn't it?

I'd be curious to know what other possible strategies there are, aside from deciding what a safe withdrawal rate is. You could park every penny in long term fixed income instruments.... and yield maybe 4%... but you'd be forgoing the capital appreciation. You could annuitize the portfolio... which is little more than making a bet with an insurance company. Aside from those options, deciding on a 'safe' percentage to withdraw seems pretty reasonable... and if you don't like the 5% number, you could take out less.

[peb]

I'd be curious to know what other possible strategies there are, aside from deciding what a safe withdrawal rate is. You could park every penny in long term fixed income instruments.... and yield maybe 4%... but you'd be forgoing the capital appreciation. You could annuitize the portfolio... which is little more than making a bet with an insurance company. Aside from those options, deciding on a 'safe' percentage to withdraw seems pretty reasonable... and if you don't like the 5% number, you could take out less.

Of course, this is the whole point. What is a safe withdrawal amount? So you have to have an expected rate of return over a period of time. I have yet to find a retirement calculator that I would trust more than firecalc. As of now, it uses around 100 past historical examples. Much better than the ones that just let you plug in a number that is based on a long term average of the market (eg. 9-10%).

BTW, I am not a fan of annuities. But they might be worth looking into if one is on the borderline and cannot afford an early period of pain which could be very hard to make up.

Of course, if you go through life avoiding debt and trying to hit the PAW level, this will all be much easier.

[Donn]

I don't recall any periods of low volatility since the early 80's. Volatility in equity markets tracks with volume, and, as this chart shows, tracking the history of the S&P500, volume has been steadily increasing since the early 80's, and at a much faster rate through the 90's to now. You can't have that kind of growing volume without volatility.

http://chart.finance.yahoo.com/c/my/_/_gspc

[Norman Bernstein]

Of course, this is the whole point. What is a safe withdrawal amount? So you have to have an expected rate of return over a period of time. I have yet to find a retirement calculator that I would trust more than firecalc.

I'd trust it to tell me what might have happened in the past.... but, since there are no crystal balls, I still think it's useless as a predictor of future performance.


BTW, I am not a fan of annuities. But they might be worth looking into if one is on the borderline and cannot afford an early period of pain which could be very hard to make up.

I'd agree with that; annuities only make sense for the marginal.


Of course, if you go through life avoiding debt and trying to hit the PAW level, this will all be much easier.

Well, I don't mean to disagree just to be disagreeable... but I think the UAW/PAW formula is just more bulls#%t.... other than as some catchy little formula that helps to sell books.

We're talking about retirement here, which means the following: will I have enough money to stop working, and (excluding income from social Security) be able to draw enough from my assets saved towards retirement to live in the manner and style I want, and do what I want to do with my time?

THAT decision has nothing whatsoever to do with either current income (which becomes irrelevant when you stop actually earning it)and it has relatively little to do with net worth, because net worth includes non-liquid investments like your primary residence. Granted, many retirees may sell the family home and downsize, in which case the equity in the primary home matters.... but that isn't always the case.

My simple rule of thumb, which I've already qualified as very rough and crude and not necessarily applicable to all people, was an attempt to do just that: estimate at what level I could live, given a certain level of liquid assets, without exposing myself to inordinate risk over the course of a (hopefully) long retirement.

To make that assesment, you need the following info: what return on invested assets am I likely to earn, after inflation? What amount of withdrawals, accounting for inflation, will I need? What happens in the course of economic downturns? How intensively will I need to manage my money?

As I said before, I could put my money into totaly safe, fixed income securities, and draw 4% or so, forever.... with a fairly high degree of safety... as long as I was willing to forgo the long term capital appreciation.

[Norman Bernstein]

I don't recall any periods of low volatility since the early 80's. Volatility in equity markets tracks with volume, and, as this chart shows, tracking the history of the S&P500, volume has been steadily increasing since the early 80's, and at a much faster rate through the 90's to now. You can't have that kind of growing volume without volatility.



Actually, your chart is pretty instructive. A retiree, according to 'my' formula, is only looking to grab 5% of assets in any given year. Looking at the chart, whatever dips and troughs existed over a 55 year history were actually relatively short, the worst probably being the early 2000-2005 period.... and a bunch of that was the dot com bubble burst. We can assume that, as one nears retirement, assets are slowly shifted into more conservative, and less volatile, investments.... so it's not all that difficult to bridge over the rough spots.

I learned this lesson quite viscerally. My Dad died in 2002... he had retired in early 1987, before the October crash. Obviously, that crash hurt badly, but he was totally unfazed... and, sure enough, the losses were erased in 6-8 months. I subsequently discovered that his portfolio total was far, far lower than I thought it would have been, at the time. Now it's 2006, and my mother is truly wealthy. Despite the viscitudes of the late 80's, the 90's, and the 2000-2005 period, her portfolio has continued it's slow and steady growth.

[peb]

I don't recall any periods of low volatility since the early 80's. Volatility in equity markets tracks with volume, and, as this chart shows, tracking the history of the S&P500, volume has been steadily increasing since the early 80's, and at a much faster rate through the 90's to now. You can't have that kind of growing volume without volatility.

http://chart.finance.yahoo.com/c/my/_/_gspc


Donn, I beliueve we have been in a period of very low valatility from a historical perspective. This is a few months old and off the top of my head, but normally days of 1% change, either up or down, occur at a pace of once every 10 days. Since 2004, I think they have been occuring at a rate of once every month. I would have to go back and find the source of this, but my numbers are very close to being accurate.

From a volatility perspective we are in very abnormal market times.

[peb]

Norman,

Donn's graph does not show what you think.

Once again, I am working frmo memery but for any money put in the market in 1966, to achieve the mythical 10% a year return, you needed to wait until 1990. 8 years into the bull market, to make up for 15 years of a flat market.

You can kind of see this from Donn's graph.

[garyspear]

I don't know anything about a PAW/UAW formula. I just know that 1000 (I have no other debt so this is easy.) per month for the next 30 years. (typical length of a home mortgage) with a good interest rate around 10% I will retire with more that 3 million dollars.

My situation.

I have no debt now other than my house which will be gone this year.
I have 6 months worth of income as an emergency fund.
I make car payments to myself
My childrens college is taken care of.
AND I LIVE WELL UNDER MY INCOME. Which is well less than 100,000 dollars per year. burn the credit cardit cards people and pay off your debt. then this talk of PAW/UAW and inerest rates is acedemic. compoud intrest working for you is a beautiful thing.

[Donn]

The graph was posted merely to illustrate the growth of volume. I don't think you can see volatility, in a blended index like the S&P500, any other way.

A 1% swing day in a blended index is not as common as it is in the more active individual issues making up the index. 1% in January of 2004 was 11 points. Today it's 14 points. In January of 2004, average volume was 1.6 billion shares. Today it's 2.6 billion.

Since January of 2004, the value of the index has increased 27%, while the volume increased 62%. That's volatility.

[peb]

Well, I don't mean to disagree just to be disagreeable... but I think the UAW/PAW formula is just more bulls#%t.... other than as some catchy little formula that helps to sell books.

We're talking about retirement here, which means the following: will I have enough money to stop working, and (excluding income from social Security) be able to draw enough from my assets saved towards retirement to live in the manner and style I want, and do what I want to do with my time?

THAT decision has nothing whatsoever to do with either current income (which becomes irrelevant when you stop actually earning it)and it has relatively little to do with net worth, because net worth includes non-liquid investments like your primary residence. Granted, many retirees may sell the family home and downsize, in which case the equity in the primary home matters.... but that isn't always the case.


Norman, well the formula is based on current income for a very important reason. Your standard of living is typically based on your income. Your retirement standard of living is not arbitrary. It tends to reflect what you have become accustomed to. So any attempt to judge retirement, should take into account the standard of living expected. And it turns out, many studies have shown that current income is a good proxy for this.


So before you say things are pure BS, think about it a little bit. And I will agree that 99% of the inancial/investing bools at the bookstore are next to worthless. "The Millionaire Next Door" is not. It stresses one thing, live within your means and save money. It gives a simple formula to see how you are doing. And no investment strategy can beat this advice.

[peb]

The graph was posted merely to illustrate the growth of volume. I don't think you can see volatility, in a blended index like the S&P500, any other way.

A 1% swing day in a blended index is not as common as it is in the more active individual issues making up the index. 1% in January of 2004 was 11 points. Today it's 14 points. In January of 2004, average volume was 1.6 billion shares. Today it's 2.6 billion.

Since January of 2004, the value of the index has increased 27%, while the volume increased 62%. That's volatility.

Donn, that is not volatility in the common accepted ways of analyzing market action. That is simply a bull market.

The two normal ways of measuring market volitility is
"percentage trading days over a period of time when daily prices change more than 1% from the previous day"

or

"high standard diviation of daily price changes compared to historical norms".

Since 2004, neither of these have been high. Quite the opposite.

[Donn]

The two normal ways of measuring market volitility is
"percentage trading days over a period of time when daily prices change more than 1% from the previous day"

or

"high standard diviation of daily price changes compared to historical norms".



I don't know who you're quoting with those definitions, but, as I said, large blended indices, like the S&P, have the volatility of their constituents averaged away. You cannot judge the volatility of a market with such a broad index, other than by looking at volume and % change, in either direction, over time.

[peb]

Donn, I provided the quote out of Adam's "The Complete Investment and Finance Dictionary". It is a neat little reference book that I use. And it seems that one of those definitions match what is used in all research studies of market volitility that I have seen, except for some which use call and put ratios on the options markets.


I have not seend volitility defined as a function of change and volume. Feel free to provide me with reference material.

[Donn]

I have not seend volitility defined as a function of change and volume. Feel free to provide me with reference material.

Sure. Refer to my last post. Equity value change over time (greater than 1 day), accompanied by increasing volume, equals volatility.

The use of an arbitrary daily change as a measure of volatility serves only the daytrader. By your definition, a market which goes up 1% one day, and down 1% the next, is volatile.

[peb]

Yes, that would be volatile. I looked at your previous post and did not see the reference to material.

You seem to a market going up over a period of time as volatile.

I think we will just have to agree to disagree on this. Everything I have seen shows a market that has been going up for a long period of time with record low volatility. As opposed to the late 1990s where it went up with very high volatility.

Like I said, we are working from different definitions. And if you don't treat volatility like most, that is fine. I am a big believer in not following the crowd when it comes to investing.

[Henning 4148]

Assuming you are happy to live on 20 kUSD a year now and you want to keep your current lifestyle.

Assuming the inflation will be such, that the purchasing power of your money halves every 20 years (a good value for post WW II Germany).

Assuming you still want to enjoy retirement in 40 years, then you will need 80 kUSD per year in 40 years to maintain the lifestyle you have today for 20 kUSD per year. This is without any expensive medical treatments or investments in care robotics or investments that enable you to deal with climate change or whatever will be around in 40 years time.

Assuming the inflation will be higher, the figure will be worse, but lets stay with the 80 kUSD / year.

Now, to pull 80 kUSD / year in 40 years, depending on calculation etc etc, you would probably be looking at a retirement fund value very roughly somewhere in excess of 0.75 mioUSD. This figure is no accurate figure, it is just to get a feeling for the size of the fund necessary, I leave the details to the experts. Everyone happy so far?

Now, however I look at this figure, it is not easy to reach.

Now, on top of this, just assuming that the inflation will be higher, that you may require expensive medical treatment and that there will be additional costs in 40 years time we don't even know about today, necessary retirement fund values beyond 1 mioUSD are not unrealistic.

By the way, the chances that your salary will be double of what it is today in 20 years are pretty small for all guys beyond approx. 30, so part of the inflation will already have to come out of your pocket.

And than there is also the risk of loss. The generation of my great grandparents lost a lot of their assets in the doldrums after WWI, the generation of my grandparents lost a lot during WWII.

[Norman Bernstein]

Norman, well the formula is based on current income for a very important reason. Your standard of living is typically based on your income. Your retirement standard of living is not arbitrary. It tends to reflect what you have become accustomed to. So any attempt to judge retirement, should take into account the standard of living expected. And it turns out, many studies have shown that current income is a good proxy for this.

Sure, current income, as some indicator of lifestyle expectation, is naturally an important constituent of retirement planning... but it's not the same for everyone. There are those who retire on substantially higher or lower expense levels than they enjoyed in their working years. So the inclusion of current income levels as part of that formula isn't BS.... but it might be, if you plan to retire at a very different expense level.


So before you say things are pure BS, think about it a little bit. And I will agree that 99% of the inancial/investing bools at the bookstore are next to worthless. "The Millionaire Next Door" is not. It stresses one thing, live within your means and save money. It gives a simple formula to see how you are doing. And no investment strategy can beat this advice.

I haven't read 'The Millionaire Next Door', so I can't make any judgment about it... othar than to say that no one book can provide the best possible advice, because no one book can look into everyone's own personal circumstances.

How, for example, would the book look at George Roberts, who is fond of risky investments requiring great market savvy, lives on $15K/yr, and figures he'd rather die than spend $5,000 on his own medical care? Does anyone else you know share a similar philosophy?

Everyone's circumstances are different, so no one source of advice can possibly be good for everyone. There is no single 'simple formula' that can possibly apply, across the board, except for a very proscribed set of personal circumstances.

[George Roberts]

Norm ---

Your investment scheme and your refusal to believe that there are risk "free" oportunities that return 20% or more lead me to believe that you don't understand risk.

Your comments about diversification indicate that you fail to understand diversification.

Your investment "scheme" leads me to believe that you don't understand much about the stock markets.

---

But then I do not expect good financial advice from the internet.

[paladin]

Perhaps I did it all wrong. I have never been interested in stocks, with one exception. Living as a fresh teenager in an asian community changes your outlook on things. I managed to save a large percentage of my military pay. I lived in the barracks, ate in the mess hall, washed and ironed my own clothes, rode a motor scooter, didn't gamble, drink or otherwise throw the money away. and when I went to work I stashed most of my earnings away and in the mid 60's started buying gold. In addition to 3 one kil solid gold I.D. bracelets that I wore and brought home, I came back in '75 with 38 kilos of gold plus various stones that I had purchased. My pinky ring was a 2 7/8th carat AAA white diamond that I paid about 4700 bucks for in Saigon....in '75 it was appraised at well over 30K in the U.s....
I did unload all the gold when the price went above 615 an ounce, and then started buying silver...started at 1.28 oz and by the time it got to 22 an ounze I stopped buying......and I had a few thousand ounces....when the Hunt brother went berserk I unloaded all the silver at 54 bucks an ounce.....the price dropped back to around 2.50....then I bought a load of butchers silver at an estate sale for silver value...about 2400 spanish pillar dollars in very fine condition, maybe 5 bucks each, little higher than silver...but they were all dated 1738,1739 1nd 1740....each coin is now worth more than 600 each...I dabbled with european silver and gold coins for a while, but if you can get a 15-20 % boost you're doing good, but it takes a while...latest acquisition is some uncirculated U.S. one dollar gold pieces minted 1851,52 and '53........the stone market is too cutthroat for me....silver and gold coins are better...

[Norman Bernstein]

Your investment scheme and your refusal to believe that there are risk "free" oportunities that return 20% or more lead me to believe that you don't understand risk.

You've told us about 'risk free 20% return' investments for a while now. I'll leave it up to others to decide if what you're saying is true, or bulls#%t, but you ought to at least back up the statement by telling us about one. What investment could any of us make today, or at any time in the future, which is a) truly risk free, and b) guarantees a return of 20% or better? Nobody is interested in past results, or in investments which depend on the gullibility of others, like the Treasury note fraud you once mentioned. Tell us about a real one, and we can track it and see if it's true or not. Remember: a) truly risk free, and b) 20% or greater return, guaranteed.


Your comments about diversification indicate that you fail to understand diversification.

Your investment "scheme" leads me to believe that you don't understand much about the stock markets.

I must be incredibly dumb and incredibly lucky, then... because I've been investing in the stock market for over 30 years, and without revealing specifically what my assets are, or how well I've done, let's just say that I've beat peb's 'PAW' criteria handily in the 11 portfolios I manage for my family.


But then I do not expect good financial advice from the internet.

You haven't given any, either. Who would want to take investment advice from someone who lives on $15K/year, and doesn't think his life is worth $5000 in medical costs to save?

However, I haven't 'given any investment advice' here on the net. All I did was reveal a simple stock trading strategy that is 100% back-testable and can be shown to work... and gave an opinion about retirement. My trading strategy is by no means the only possible one, just one I devised and tested... and my retirement ideas were accompanied by the proviso that they weren't appropriate for everyone.

What I'm really curious to know, though.... is why you even started this thread.... using my own name, even... did you do it just to let everyone know how much contempt you have for me and my ideas?

Congratulations. They are now aware.

[Donn]

Nobody is interested in past results

..a simple stock trading strategy that is 100% back-testable

Hmmm.

[Paul Fitzgerald]

Norm, do you have a link to the thread?

[Norman Bernstein]

Hmmm.

I could send you the program I wrote to back-test it.... written in Borlad/Inprise Delphi, runs on Windows. With it you can load a historical table of price for any stock (easily retrievable from Yahoo or other sites, but I set it up for Yahoo's format) and run a 'what if' scenario based on adjustable criteria.

Remember the basic premise here: "A stock which has dropped by x percent in excess of some average daily fluctuation has a better than even statistical shot at rising y percent over the dropped price at some point within a short period after the drop. (where y>x... and sometimes y>>x). A limit order is used to minimize the downside risk."

I don't think my original post is still on the forum, but I tested this on a wide variety of common stocks, and the large majority of them returned surprising gains.

Look, this isn't rocket science. I had an idea, and I tested it. The results looked promising. I used the idea in real trading over a 4 month period, and it worked very well. The only reason I'm not using it right now: I'm deeply involved with a consulting contract that pays me one hell of a lot better than the stock trading scheme would, at the levels I was willing to invest... but I don't have the time to play with my trading scheme.

I'm sure there are substantially better ideas out there... this one was just my idea. Doesn't matter to me if anyone 'likes' it or not, because they may have better ideas, with greater or lessor risk, and greater or lessor returns. I just wanted to try my own idea.

[Donn]

The "Hmmm" was due to the disparity between the idea that no one cares about past results, but the trading scheme can be back-tested.;)

[peb]

We've kinda wondered all over the place on this thread, so I will clarify a couple of my points.

The most dangerous thing to assume is that 10% return is easy with the stock market, as long as you are patient. This is simply not the case. And you don't have to buy in at the height of the market to be disappointed. If you bought spiders on Jan 1st, 1997 and sold on Jan1st, 2007, what would your return be? An annuallized 6.76%. Not even close to 10%. So if you think it is easy to make 10% in the market, you may be disappointed. Sometimes you have to wait 15-20 years for those types of returns.


When working towards retirements, stay out of debt and keep saving money. This is by far more important than any investment philosophy for most people. And it leads into the final point:

Most people who can truly retire nicely do so based on making money through a business, not so much due to investing. Investing is a way of staying ahead of inflation. For some, not many, it can be a way of earning a living. But working hard and saving money is the way to prepare for retirement.

[Norman Bernstein]

The most dangerous thing to assume is that 10% return is easy with the stock market, as long as you are patient. This is simply not the case. And you don't have to buy in at the height of the market to be disappointed. If you bought spiders on Jan 1st, 1997 and sold on Jan1st, 2007, what would your return be? An annuallized 6.76%. Not even close to 10%. So if you think it is easy to make 10% in the market, you may be disappointed. Sometimes you have to wait 15-20 years for those types of returns.

I completely agree... which is why retirement investing needs to be started very early in life. My daughter and son-in-law, both in their mid-20's, are pouring a great deal of money into whatever retirement vehicles are available to them... both Roth as well as conventional IRA's.



When working towards retirements, stay out of debt and keep saving money. This is by far more important than any investment philosophy for most people.

I also agree completely. I've managed to maintain an extremely low debt/equity ratio for many years now... and the only debt I have is the sort which is prudent and is tax leveraged (i.e., my home mortgage).


Most people who can truly retire nicely do so based on making money through a business, not so much due to investing. Investing is a way of staying ahead of inflation. For some, not many, it can be a way of earning a living. But working hard and saving money is the way to prepare for retirement.

I might slightly disagree on this one. I know a couple of retired schoolteachers who are living a fabulously luxurious life ( a home in Santa Barbara, overlooking the harbor!), based primarily on investments... they were wise, lucky, or more probably, both. However, the 'working hard and saving money' aspect can't be emphasized too much.

[Norman Bernstein]

The "Hmmm" was due to the disparity between the idea that no one cares about past results, but the trading scheme can be back-tested.;)

Ohh, come ON! There's a huge difference between presuming that the history of the stock market of the past 60 years is any kind of model for future performance, versus simply looking at day-to-day issue prices over the past year or two.

You do like to pick the flys#%t outta the pepper, don't ya? :D

[peb]

Norman, I may have overstated/mistated my last point. Your example of school teachers retiring nicely mirrors a couple of examples in the book I cited above. But the most important thing your techer friends probably did was save money, probably all the time, and they probably always stayed out of debt (excluding home mortgage). Investing those savings may have pushed them to the luxurious level, but they probably reached security thought saving. So we are probably on the same page.

[Norman Bernstein]

Norman, I may have overstated/mistated my last point. Your example of school teachers retiring nicely mirrors a couple of examples in the book I cited above. But the most important thing your techer friends probably did was save money, probably all the time, and they probably always stayed out of debt (excluding home mortgage). Investing those savings may have pushed them to the luxurious level, but they probably reached security thought saving. So we are probably on the same page.

Actually, they invested in residential real estate during the late 70's to the mid-90's... which was a good period for that kind of investment. At one point they had 60+ units under management. Whether their market timing was foresight or dumb luck is hard to say... but, nonetheless, it worked.

Here's the really interesting part: the properties gave them an additional income stream over the years, but the capital appreciation was enormous. When they retired, instead of paying the tax, they did a tax free swap by buying commercial properties with 'triple-net' leases, like convenience stores and small strip malls. The income from these leases is what funds their luxurious lifestyle.

So, yes, the certainly 'saved', but their success was far more due to 'investing' than 'saving'.

[peb]

Norman, if that is how they made their money, I would categorize it more towards running a business than investing. So they would typify my third point.

[Kaa]

I completely agree... which is why retirement investing needs to be started very early in life. My daughter and son-in-law, both in their mid-20's, are pouring a great deal of money into whatever retirement vehicles are available to them... both Roth as well as conventional IRA's.

Well, it's an interesting question. The point isn't to die with the most money, the point is to die having led an interesting and fulfilling life.

Generally speaking, you want to spend your money when you can enjoy it :-) Yes, there is the danger of outliving your money, but there is also the danger of spending your whole life just preparing for the retirement.

Kaa

[Norman Bernstein]

Well, it's an interesting question. The point isn't to die with the most money, the point is to die having led an interesting and fulfilling life.

Generally speaking, you want to spend your money when you can enjoy it :-) Yes, there is the danger of outliving your money, but there is also the danger of spending your whole life just preparing for the retirement.

Well, George Roberts may be living at, or near, the poverty line while earning huge profits from his 'no risk, 20% return' investments....

...but I don't have that problem. I am enjoying life quite nicely, while not impacting my retirement assets. This is one of the reason why I can afford to own a new 43' sloop, and sail her for a month at a time in the summer.

As for lifestyle in future retirement, what I've observed is that, as people get older and older, they have less motivation to spend money to enhance thier lifestyle. My mother, for example, is a multimillionaire, yet I have to remind her that she doesn't have to scrimp, she can buy what she wants.... and she can barely bring herself to do so, at age 83.

I figure that I'll be a fairly big spender in my 60's, and that will naturally slow down in my 70's and later. I expect that I'll end up leaving an inheritance to my children and grandchildren, but it's frankly NOT at the top of the 'importance' list. Whatever is left over, I'm glad they will get it... but I'm not going to manage it solely for the sake of leaving the biggest imaginable inheritance.

[Kaa]

The most dangerous thing to assume is that 10% return is easy with the stock market, as long as you are patient. This is simply not the case. And you don't have to buy in at the height of the market to be disappointed. If you bought spiders on Jan 1st, 1997 and sold on Jan1st, 2007, what would your return be? An annuallized 6.76%. Not even close to 10%. So if you think it is easy to make 10% in the market, you may be disappointed. Sometimes you have to wait 15-20 years for those types of returns.
The situation is actually worse than that if you look outside of the US (and there is not much reason to think that US markets are magical and not just lucky).

Let's take a look at a democratic country, an industrial powerhouse -- Japan. If you bought the Japanese broad index (Nikkei 225) at the end of 1989, what would your return be by Jan 1, 2007 -- over 18 years? Oops, it's negative 45% -- you lost almost half of your money even before taking inflation into account.

Europe is better, but still... The FTSE 100 (British broad index) right now is still below its high made last century -- in 1999. So are CAC (the French index) and DAX (the German index).

So, yes, blindly assuming that stock markets will make you 10% year is a very, very dangerous assumption to make.


Investing is a way of staying ahead of inflation. For some, not many, it can be a way of earning a living. But working hard and saving money is the way to prepare for retirement.
Not necessarily -- the problem is with the "saving money" part. What do you keep your money in? Just cash in the bank? Government bonds? What? Essentially the problem is that you have to safeguard yourself against inflation (which has been VERY tame lately, but it doesn't mean it's always going to be this way) and at the same time avoid risks inherent in investing.

Kaa

[peb]

Kaa,

Well to your first point, I disagree. Historically there are very good reasons to believe that the US markets are better than other countries. Take japan for example. They were touted as the envy of the world in the 70s and 80s, yet they had structural problesm (poor banking system and incestrous industrial model) beneath the surface which rose up and created havoc.

European countries have historically been more socialized than the US. Nationalized industries have never performed well. They have also had tax structures which stifled competition.



To your second point, yes you have to do something with it. I am in favor of investing in equity and bond markets. Also in real estate and perhaps private business ventures. Modern economies are built on a certain level of inflation, so sitting on cash is not a good thing. My points are simply to stress caution and not to believe everything the mutual fund salesmen, brokers, and annuity salemen. And there are always TIPS for the reeally conservative part of your assets.

[Donn]

You do like to pick the flys#%t outta the pepper, don't ya? :D


Do you just go ahead and eat it?:eek:

[Kaa]

Well to your first point, I disagree. Historically there are very good reasons to believe that the US markets are better than other countries.

Hindsight is a 20/20 vision, isn't it? :-) The future is uncertain and while it's true that the US markets WERE in a better position vs. the rest of the developed world, it does not necessarily follow that this situation will continue.

The point is that it's perfectly possible for markets of a developed Western (or Westernized) country to do nothing useful or even tank for decades, not just years.

Kaa

[Norman Bernstein]

Hindsight is a 20/20 vision, isn't it? :-) The future is uncertain and while it's true that the US markets WERE in a better position vs. the rest of the developed world, it does not necessarily follow that this situation will continue.

The point is that it's perfectly possible for markets of a developed Western (or Westernized) country to do nothing useful or even tank for decades, not just years.

Kaa

I think you're right...which is why I'm moving a little bit more heavily into European stock funds. I've done fairly well with Eastern European funds. I'm thinking about Far East funds now....

[peb]

Norman, the problm with far east funds is they all currently are heavily invested in China. I am quite contraian here, but I am not optimistic about China for several structural reasons.

1) The government still controlls quite a bit (if not all) of the capital allocation. IMO, Centralized control of economies does not bode well long term.
2) Their banking system has gone from being rotten, to simply having a new coat of paint slapped on it.
3) China is caught between a rock and a hard spot. On one hand, economic growth at a 10% annualy rate is not normally sustainable without some major hiccups. On the other hand, they can't slow down growth because of the enormous human migration that has gone on in the country.
4) Their industries work at very small profit margins.
5) In many ways, their people are still not free and their government is still totalitarian.

I have looked for far east funds that are underweight in China for the last couple of years. Unless I go pure Japan, it seems tough to find. I did find a emerging markets fund that was underwieght China, but it also is heavy in Eastern Europe and Latin America.

[Norman Bernstein]

Norman, the problm with far east funds is they all currently are heavily invested in China. I am quite contraian here, but I am not optimistic about China for several structural reasons.

Your reasons for pessimism are fair, but I still think China's 'run' has a very long way to go. My wife spent three weeks there, a few months ago, and her narrative, plus her pictures, are showing me a vastly different image of what urban China is like. Development there shows no signs of slowing down, and (most importantly), the population is rapidly and eagerly adopting the consumer model... young kids dressed in fashionable clothes, MP3 players in their ears, cellphones everywhere, and 'upscale' brands a spreading through the marketplace. My wife visited several private homes... most were indistinguishable from modern western homes (although they were all apartments, not houses), elegantly furnished. Sure, this isn't the countryside, but urbanization is spreading.

The most encouraging sign: in three weeks and three major cities, my wife saw one, and only one, portrait of Mao... in Tienamen Square. Other than that, communist dogma and propaganda was nowhere to be seen.

We're 'defeating' the Chinese in the best possible way; not with military might, missles, and planes.... but with blue jeans!:D