What’s your retirement plan?
For many people, their plan is simple: save as much as they can then live off the interest. Unfortunately, both halves of this plan have been hammered recently. Saving and investing has been made difficult by the volatility of the markets, and living off the interest has been made difficult by the Fed.
Market volatility makes setting aside cash discouraging. It’s tough to look at those statements and see the value go down, in spite of the money you’ve set aside. It makes you wonder what you’re doing it for. In spite of the fact that a downturn actually helps savers—each dollar they set aside buys more investment securities—it feels like you’re the patsy at a poker party. Everybody else is laughing into their sleeves while you keep pushing more chips into the pile.
So some folks get discouraged and stop saving, or move to a more conservative asset mix. While that approach may be tempting, the best time to change a strategy is when it’s doing well, not when it’s trailing—that way you lock in gains, not losses. But reducing savings is really problematic. Where will retirement savings come from, if not your own initiative? We can’t flip houses back and forth to each other any more.
But the second part of the equation is the real challenge. As recently as 2007, a million dollars in savings would generate $50 thousand a year in income, just from a money market fund. But those days are over. If people thought money funds were “risk free,” they didn’t count on the risk of rates falling to zero. Any concentrated portfolio carries risk.
No, the best approach to investing is a balanced one that uses a mix of stocks, bonds, cash, and other assets to generate income and capital gains over the long-haul. Assembling such a diversified portfolio isn’t easy, but it can be done with ETFs, mutual funds, and individual securities. Planning for retirement isn’t easy, but it’s not impossible. In spite of the challenges we face today, the future really is in our own hands.
Douglas R. Tengdin, CFA
Chief Investment Officer