Powerful Investing Rules Made Simple

How Rich People Think About Money (Really)

How the Financial Services Industry is Dangerous to your Wealth – The First Deadly Dogma.

  • You are not retiring into a new, long-term bull market no matter what you hear in the media. The Shiller P/E, a longer-term price/earnings analysis which shakes out fluctuations in business cycles over ten-year rolling periods. As of April 8, 2013, the Shiller P/E was 23.37. Going back as far as 1890, secular bull markets have never been born from these levels, so why would it be any different this time? Long-term bull cycles begin at much lower stock market valuations. Retirees in the year 2000, now in their tenth year, or those fully retiring today, face great risk or the possibility of running out of money before they run out of life.
  • Future returns of fixed income (bonds) are going to face formidable headwinds. Bonds, the anchor of retiree portfolios will most likely face principal risk and/or lower future yields, which will pressure retire portfolio withdrawal rates.
  • Don’t count out inflation. Inflation per the Federal Reserve has been relatively benign, this is true. Inflation has averaged roughly 2 percent over the last few years. However, inflation risk varies and is personal for each household. For example, when it comes to retirees on fixed incomes, even small increases in food and gas prices create a major impact to restricted budgets. Let’s also not forget medical care inflation which has increased dramatically since the year 2000. As planners we also need to consider how Congress may consider limiting COLA (cost-of-living adjustments) utilizing a concept called “chained CPI” which means retirees will feel more inflation pressure in the future as Social Security cost-of-living adjustments are at risk of being formidably curtailed.

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