Updated: Sep 16, 2024
In today’s economy, we have so many companies that make terrific products. Automobile companies make some great vehicles. Technology companies make some amazing products. Pharmaceutical companies make drugs that save millions of lives. The products that these and other industries create continue to evolve and improve over time.
The financial services industry is the ninth largest industry in the world, The financial services industry in the United States alone represents about 8% of our Gross Domestic Product – about $2 trillion. Financial services companies employ about 8 million people in the US, and they hire some of the best and brightest from the top schools across the country. They utilize the most sophisticated and powerful computers and software that exists.
Despite all the assets and strengths of the financial services industry, I contend that they offer the worst products of any industry. I have been an investor for 40 years and the investment products available to consumers today have changed very little over that time.
Technology has changed the speed and the costs of trading financial products and allowed for the introduction of index funds and exchange traded funds in the last 30 years. While these advancements have increased efficiency, they have very little impact on the results of individual investors. Blockchain technology which supports cryptocurrencies is an impressive technology innovation, but no one understands the value of cryptocurrency.
The financial services industry introduced their prized asset-allocation strategy in the early 1950s. Asset allocation didn’t work then, and it doesn’t work now.
It isn’t fair to blame the financial services industry for the irrational behavior of financial markets. Financial markets are irrational because we humans who trade the markets behave emotionally and irrationally.
But I think it is fair to blame the financial services industry for the lack of safe and effective investment vehicles available to ordinary investors today. All financial services companies advertise about their ability to help people successfully navigate the irrational financial markets. They are constantly promoting their sophisticated solutions and capabilities.
How did those solutions work out for you in 2022? Or 2008? Or 2001? Do you feel that your retirement accounts are protected if the economy enters a recession this year? Will your investments be protected if inflation increases again. How confident are you in your investment strategy? Will your results be better the next time markets crash?
I think I know the answers to those questions.
In our business, we see the results of the weak and confusing solutions offered by the financial services industry. We see conservative investors who have cryptocurrency investments in their IRA accounts. We see inexperienced investors with commodity investments in their retirement accounts. We see experienced investors with over 50% of their retirement funds in cash accounts. We see other investors who have their funds spread across a dozen different investment assets that they barely understand. We have smart customers, and the financial services industry has confused and frustrated all of them.
Invariably, the unusual investment strategies of our customers are the result of working with several ineffective investment advisors. In many cases, our customers were forced to react to the poor results of bad investment advice.
The bad advice did not come from one or two clueless individuals or a couple of bad companies. There are incompetent people and weak companies in every industry.
The lousy guidance came from all the biggest names in the financial services industry. The advice typically originates from the best and the brightest people in the esteemed research departments of the most sophisticated Wall Street firms.
Bad advice and bad solutions are not the exceptions, they are the rule in the financial services industry. Can you name another industry with solutions and products as bad as the financial services industry? I can’t.
It is not unreasonable to expect better investment solutions for yourself and for your family. The stakes are very high. Don’t settle for less than you need and less than you deserve.
The dismal performance of the financial services industry motivated me to solve this big problem. I was forced to take matters into my own hands.
I created the Market Signals product to provide all investors with the ability to achieve better than average returns AND protection against market collapses. We have been told by the financial services industry that higher returns are only possible with a higher risk for losses. Not true.
We achieve higher returns because we avoid major losses in market meltdowns. Losing less money in bear markets actually leads to higher returns. It’s basic math.
If you are not already a subscriber to our Market Signals newsletter, click here to learn about a better and safer way to invest.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Developing financial projections during the retirement years is very similar to the ones we covered last week during the working years. The only differences are:
You need to substitute annual withdrawals (your annual spending) for deposits (your contributions during your working years).
You need a solid cash management strategy to support those withdrawals.
Note: There are tax considerations that need to be taken into account during retirement, but we are not going to cover those today. You should consult either your accountant or a financial advisor to address taxes in retirement.
WHAT YOU’LL NEED:
Beginning retirement accounts balances at age 65 or the age at which you retire.
Estimated amount of money needed to withdraw each year to support your living expenses.
Your investing strategy and expected annual returns.
A cash management strategy.
Beginning balance
Your beginning account balance is simply your ending account balance from the projections we discussed last week. If you plan on retiring at age 65, for example, this would be the projected or actual account balance at the end of your working years at age 65.
Annual withdrawals
During your working years you were making annual contributions to your retirement accounts. During your retirement years you will probably not be making more contributions to your retirement accounts. So rather than adding in your annual contributions to your spreadsheet projections, you will be deducting your annual withdrawals.
We will be keeping things simple today, but this step can require a lot of detailed calculations. Some people make detailed projections of their monthly living expenses in retirement. This is fine if you want to take the time to do it.
Most people have lower monthly expenses in retirement than they incurred during their working years. Housing expenses are often lower in retirement as most people have paid off their mortgages by the time they retire. Many people also downsize their living space which can lead to lower expenses in retirement. Health insurance premiums are also typically lower in retirement due to switching over to Medicare.
Cost inflation is an important consideration for your retirement projections. While your monthly expenses may start out lower in your mid-sixties, your expenses will continue to rise during your retirement years.
A fairly simple way to handle your spending needs in retirement is to use your monthly living expenses before you retire. For example, if your monthly living expenses are around $8,000 per month before you retire, you could use this amount as your annual after-tax withdrawal amount. A $96,000 (8K time 12) annual spending level would correspond roughly with a 30% tax rate. At a 30% tax rate, you would need to withdraw $137,000 per year to cover taxes and the $96,000 in annual spending.
If you are close to retirement age, it might make sense to do more detailed calculations of your living expenses in retirement. If you are a long way off from retirement (10 years or more), I would recommend a simpler approach.
Investment strategy
Your investment strategy and approach take on even greater importance in retirement. During your working years, you can make up for a poor investment strategy with higher annual contributions to your retirement account. You won’t be able to do this in retirement. Everything depends on your investment strategy.
The lack of contributions and having fewer years to recoup losses causes people to become even more conservative with their investment strategy during retirement. This is totally understandable, but it could lead to running out of money during retirement. Working longer is the only way to avoid this.
The average investor makes only about 4% to 5% per year in their retirement accounts during their working years because they invest too conservatively. Following a similar approach in retirement leads to average annual returns of 3% to 4% per year due to the need to keep an even higher amount of funds in cash.
A lot of 401K investors follow industry best practices and earn a little over 7% per year during their working years by investing in target date funds. Following this approach in retirement leads to average annual returns or around 5.5% to 6% per year due to the need to be even more conservative in retirement.
Earning only 4% to 6% in retirement severely limits spending and wealth creation during the retirement years. But until the last five years, investors had no other good options.
Our clients that subscribe to Market Signals earn at least twice these returns during retirement. It often leads to millions of dollars more available to spend in retirement. It often is the difference between working into your seventies or living very comfortably and without any worries in retirement.
Cash management strategy
A core best practice in money management is to never withdraw money from an investment account at a loss. This is true in your working years and in your retirement years. If you do not have a good cash management strategy in place during retirement, you may be faced with this unfortunate situation.
The way to avoid this situation is to move profitable investment funds (current value is above the purchase price) to safe cash accounts before you need to withdraw the funds. Average investors that are very conservative already have their funds in lower risk assets like cash and bonds. These conservative investors do need to be careful with bond investments, however, since they can and do lose money.
If people had money in bonds at the end of 2021, the price of those bonds may still be 20% lower today and they may take several years to recover. If the bonds you hold have terms of five years or less, you would want to start transferring those bonds to cash accounts three to five years before you need to withdraw the money. Long term bonds would require you to make the transfers even earlier.
Retirement funds that are invested in stocks have even greater risk of losing money which may force you to sell the stocks at a loss when you need to withdraw money during retirement. For this reason, it is recommended that retirement investors move their stock investments to safer cash accounts at least seven years before the need to withdraw the money. From our earlier example of a person needing to withdraw $137,000 per year in retirement and if that person had all of their money in stocks, they would need to start moving $137,000 per year to cash at age 58 (seven years before retiring at age 65).
This is another significant advantage for our Market Signals subscribers. Because our investment system is designed to avoid the big losses that happened during stock market crashes, they only need to begin moving money to cash two or three years before the time they need to withdraw the funds. This alone provides a significant investment performance gain during the retirement years.
Managing all these considerations properly during retirement will lead to a much more successful retirement. You deserve a more secure and more comfortable retirement. You need to get this right.
If you are not already a subscriber to our Market Signals newsletter, click here to learn more.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
This question is the primary concern of most 401K investors. This question creates anxiety in most 401K investors. What is your answer to this question? Does this question stress you out?
You are probably unsure about the answer.
We are not going to be able to provide you with the full answer today, but we want to start you down the path to answering this question and to becoming confident that you will have enough money to retire comfortably.
Here are some reasons why the answer to this big retirement question is such a problem for most people:
Uncertainty about whether they are saving enough.
Uncertainty about whether they are investing their retirement savings properly.
Confusing and conflicting information in the financial services world.
Lack of the proper planning tools.
Uncertainty about how much money they will need in retirement.
Bad investing advice.
Fear of losing their savings in the stock market.
We discuss most of these things regularly in our newsletters and webinars and we will continue to do so in the future. Our entire mission is to help people retire comfortably and to grow their confidence in all these areas.
Today, will focus on the planning tools. We provide more in-depth training on these topics in our Market Signals program, but we want to cover just a few key points today.
Spreadsheets are terrific for creating the forecasts and projections that you will need for retirement planning. There are two spreadsheets that you need for retirement planning:
Projections for your working years up until age 65 or when you plan to retire.
Projections for your retirement years.
This week, we will focus on the first set of projections – your working years. Next week, we will cover the second one – your retirement years. Constructing these projections is not that difficult if you have some basic spreadsheet skills. We produce these plans for free for our Market Signals subscribers.
The information to create the working years projections is as follows:
Current age and expected retirement age.
Current retirement account balance.
Annual retirement account contributions – yours and your employers.
Expected investment returns based on your investing strategy.
Expected annual withdrawals in retirement.
Plugging in all those data elements and creating the formulas will produce a simple spreadsheet with a projected retirement account balance at retirement age.
The first three data elements (age, balance, and contributions) are straightforward. It is the last two (projected investment returns and expected retirement withdrawals) where people struggle the most. This week, we will focus on the critical element of projected investment returns. Next week, we will address the topic of expected retirement withdrawals.
Your expected investment returns can range anywhere from 3% per year up to around 12% per year depending upon your investment strategy.
Most financial advisors do not tie your projected investment returns to your investment strategy. They try to be conservative and tend to use an average return of around 5% to 6%. They do this because of the uncertainty around future results but also to make sure people don’t run out of money when they retire – a good thing.
We believe that it is much better to take the time to develop the most accurate projections for something so important. What is the point if you are not going to use the most accurate information?
Here are the most common types of retirement investors and retirement investment strategies and their expected annual investment returns.
STRATEGY ASSETS EXPECTED RETURNS*
Highly Risk Averse Cash & Bonds only 3% to 4%
Do It Yourself (low risk) A Little bit of everything 5% to 6%
But lots of bonds & cash
Industry Recommended Target date funds 7.5%
Mix of stocks & bonds
Do It Yourself (High risk) Mostly mutual funds 8%
Best Practice 100% S&P Index Fund 9%
Market Signals Index Funds Bull Markets 12.7%
Cash in Bear Markets
*These are average annual returns. Actual returns by year will fluctuate quite a bit but over long periods of time you can expect these average rates of return.
Most 401K investors fall into the first two strategies above – highly risk averse and do-it-yourself low risk. This is why the average annual investment returns for 401K account holders is between 4% and 5% per year.
People would be much better off just putting all of their money in a target date fund or in an S&P 500 index fund. It is simpler and produces better returns. The only drawback is the financial and emotional suffering during stock market collapses. And it is the excessive volatility of the stock market that causes lots of people to choose the conservative investment strategies. But if you hold onto diversified large cap index funds for the long run, you will see much higher returns.
Our Market Signals system invests primarily in large cap index funds like the S&P 500, but it also includes a strategy and system to deal with stock market collapses. It provides similar returns during bull markets, but it performs better in the long run because it avoids big losses during stock market collapses.
Which investment strategy from the list above do you follow? Whatever it is, use the associated annual investment returns in your retirement planning spreadsheets.
Along with when you start to save for retirement and how much you save for retirement, your investment strategy and its associated annual investment return is the biggest factor in determining your security and your comfort in retirement. If you are totally risk averse, you don’t have to fear stock market collapses, but you need to be prepared for very low investment returns (3% to 4% per year). To achieve your financial goals in retirement you will need to save and contribute much more each year to your retirement fund.
Your investment returns for all the other strategies will be much higher. But unless you use the Market Signals system, you will also have to be prepared to suffer terribly during stock market collapses.
The most successful investors invest in the best assets (large cap index funds) and they have a proven strategy/system to deal with major stock market declines (Market Signals).
Next week, we will focus on the retirement years and how much money you will need after you retire.
If you are not already a subscriber to our Market Signals newsletter, click here to learn more.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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