Introduction

I began writing this book after several family members asked me for my perspective about investing for retirement. I shared a number of links to dense financial books and online financial management sites. For some reason, they didn’t have the time or inclination to read several bookshelves of books on investing. Instead, they asked me to distill all that information into something more straightforward.

As I researched for this book, I quickly recognized several things:

• there are a number of very basic personal financial books that lack both specificity and explanation for their recommendations;
• there are a number of very dense academic books on finance that are inaccessible to the typical individual investor;
• there is a lot of misinformation online about finance and investing in books, magazines, newspapers, newsletters, and–especially–online;
• similarly, there is a lot of noise, if not outright misinformation, on business and financial cable channels;
• many of the finance books that I found most informative tended to be very narrow in scope (i.e. too topic specific); and
• many of the best finance books referenced market data that was outdated by years or even decades.

This book addresses investing for the typical individual investor.12 The information herein reflects the financial and investment knowledge that I believe everyone should possess. Given how many years that we spend studying prior to working and then that we spend working to earn our incomes, too many people spend far too little time focusing on how they invest and grow their hard-earned savings. I believe that we should teach the elements of saving and investing for retirement as part of the core curriculum in our high schools. Just as we mandate English and foreign language literacy as well as knowledge of world history, so too we should emphasize financial literacy, economic history, and a basic knowledge of statistics.

You Must Take Charge of Your Financial Future

The majority of retirement plans has shifted in the past decades from defined benefit to defined contribution programs. With a defined benefit program, such as a pension, your employer promised you a lifetime annuity: a specific payment based on your earnings history, age, and tenure. In 1975, 98% of state and local workers and 88% of private workers were covered by a pension plan.3 As of 2017, 78% of state and local government employees have a pension plan. Most federal employees have a pension plan. But only 13% of non-unionized private sector employees have a pension plan.45

Even if you are fortunate enough to have a pension, you shouldn’t assume that it will fully pay out due to:

• how many pension programs are underfunded,
• extended retiree lifespans, and
• an increasing number of bankruptcies designed to shed corporate pension obligations.

Many pension funds face potential insolvency. Moody’s Investors Service estimates that public pensions are underfunded by over $4 trillion. Nearly half of all states haven’t saved enough to cover all their obligations. 6789

With defined contribution programs–notably, 401(k) plans–you make regular contributions but you assume the risk and return of your investments. The burden of establishing your investment objectives, identifying the right assets, defining your overall portfolio, and selecting the proper investment vehicles now falls on you. Beyond investment risk, you also assume both longevity and inflation risks. Finally, you may be constrained by the quality–and cost–of the funds included in your 401(k) plan.

Most retirees will want to spend approximately 70-80% annually of their last year of household income. Therefore, you will likely need to save at least 25 times your last year’s salary to maintain a comparable standard of living in retirement. This shorthand calculation equals an average of a 4% nominal return on your portfolio, minus your Social Security and Medicare benefits. But, this calculation doesn’t include college savings for your children or other large expenditures or bequests that you might wish to make.10  Unfortunately, the typical U.S. household nearing retirement has less than two years worth of income saved.11

To do this, you must maximize your:

• long-term,
• net-of-fees,
• risk-adjusted,
• after-tax,
  
• real investment returns using an
• equity-oriented,
• diversified portfolio that consists of
• passively managed index funds and that is
• tailored to
  • your particular risk tolerance and
  • your personal financial circumstances.

If your eyes just glazed over, don’t worry. I will explain all of this. Herein, I present a 30-40 year view of investing for retirement. My advice isn’t for those seeking to get rich quick or to pick the “best stocks”.  Instead, I recommend a systematic approach that requires discipline and, occasionally, contrarian thinking. My perspective on investing is influenced by the writings of Benjamin Graham, John Bogle, Warren Buffett, David Swenson, Charles Ellis, Burton Malkiel, Robert Shiller, Seth Klarman, and Michael Edleson, among others.

I have included mathematical and statistical concepts that explain the “why” before I address the “how”. For brevity, I have minimized the actual math. Notwithstanding, there are five statistical measurements that are essential to master:

1. alpha,
2. beta,
3. standard deviation,
4. R-squared, and the
5. Sharpe ratio.

Your Primary Goal

Your primary goal is financial peace of mind during your retirement. This includes ensuring that you have sufficient resources to cover expenses like advanced medical treatment and continuing care so that you aren’t a burden on your family. Depending on your family’s financial and medical circumstances, you may need to take care of either your parents or your children in their later years, as well. Beyond that, some retirees desire to maintain a specific monthly income. Other retirees, with greater financial resources, prefer a continued growth of their overall portfolio.

Inherent in that, is your personal definition of “enough”. John Bogle quoted Joseph Heller, the author of Catch-22, who compared himself to a hedge fund billionaire, saying: “I have something he will never have… enough”.12 Bogle’s point was that investors shouldn’t worship wealth but instead focus on character and values. It was simultaneously a call for financial professionals to be fiduciaries and a warning to them against greed and corruption.

To succeed, more than anything else, you need patience to realize your expected returns, confidence in and the discipline to stick to your investment strategy, and–finally–cash reserves. This will permit you to stay the course, achieving your financial objectives even during the inevitable financial downturns. A healthy knowledge of statistics, probability theory, and financial history will give you the necessary fortitude to weather those downturns.

Summary

You should focus solely on the four things that you can control:

1. Your asset allocation, including protecting your portfolio from inflation,
2. Minimizing the costs of managing your portfolio,
3. Deferring taxes as much as possible so that you can increase the compounding of your savings, and
4. Delaying withdrawals until after your retirement (and delaying retirement, if possible)

You should always think about your finances in terms of probabilistic outcomes. Ignore the day-to-day gyrations of the markets. Don’t look at financial news on cable channels. Resist the urge to “check in” daily with your portfolio. If you have the time to check your retirement account daily, you are better off spending that time learning more about statistics, probability theory, and financial history.

For More on this Topic

Coming soon!

Updated on December 21st, 2019