Are You Going to Ignore Steve This Time?

Steve is going ALL IN on stocks right now. His prediction is appearing on TV, radio and even as full-page segments of USA Today.The Washington Times and Investor’s Business Daily. He predicts the next 9 to 12 months will be the most profitable we’ve seen in the stock market since 1999.

Who is this Steve fellow, and should you really believe him? Here’s what we know. He’s a reclusive multimillionaire in Florida. You could have doubled your money or better 18 times over the last 17 years, by following his investment ideas.

He’s famous for predicting:

    *   The Dot-com Crash in January 2000…
    *   The Gold Boom of 2003…
    *   The Bottom of the Great Recession in 2009…
    *   The Housing Boom in 2011…
    *   The $1 trillion MSCI China Shift in May 2018 and More.

But beginning October 24th, his newest prediction could be the biggest of his career and could have a huge impact on your retirement. And here’s the strange part…

When stocks plummeted 800 points last week, Steve didn’t care at all. He says we could 5 more corrections just like this. But if you get into stocks now, he says, and do one thing with your money – he believes you could make more money over the next year than you’ve likely made over the last 20 years, combined.

I Urge You to Check Out His Full Announcement Here.

Enjoy,

Jared Kelly
Managing Director, Stansberry Research

P.S. Jim Rickards… Tim Sykes… and Robert Kiyosaki are all supporting what Steve will reveal on October 24th. See what’s happening here.

Is 70 the New 65?

By John Mauldin

As some of us know far too well, forecasting the future with any precision is extremely difficult. There’s at least one exception to the rule, though. Population trends show themselves decades and even centuries in advance. If we know how many people were born in a given year, we can extrapolate what the population will look like far in the future.

On the other hand, demographic forecasting still requires assumptions. At what age will people start having children, and how many will they have? How will new medical advances affect life spans? When will people start working, stop working, and enter retirement? Small changes in any of those assumptions can quickly affect population numbers.

Today’s Outside the Box wrestles with that last question. In the United States we allowed the federal government to set 65 as the retirement age by making Social Security available to most workers at that point in their lives. The retirement age is going up to 67 for the younger members of the Baby Boom generation, but even that may be too “young” to retire in the future.

We Baby Boomers were never big on conformity. Voluntarily or not, a large number of us fully intend to stay in the workforce to age 70 and beyond. If 70 is the new 65, we will see significant changes in the ways people spend their money and the kinds of investments they want.

Matthew Tracey and Joachim Fels of PIMCO outline some of the possibilities in this report. I found it very interesting, and I think you will, too.

Speaking of things changing, the weather in Texas has been nothing like anything in the past. It is mid-February and I’m having to turn the air conditioner on at night. The forecasters tell us it’s going to get into the 80s on Friday. Talking with my long-term Texas friends, none of us can remember weather like this. Cooler than normal summers, milder than normal winters. I guess it’s a good thing it’s not like this every year, because then we’d have a wave of tax refugees showing up from California. Then again, this is Texas. If we wait a bit I’m sure we’ll get our usual ice storms and other nasty stuff. Winter is coming. Maybe.

I am struggling to keep up with the research my 20 some teams are developing for the chapters of The Age of Transformation. Thankfully I have a small team helping me review the research, which is on top of the research I’m doing for the five or so chapters that I’m personally writing. Plus, there’s my regular reading for doing the weekly letters and so forth. It is forcing me to sort through the pile of items in my inbox as to what is must read, what can wait, and what I just don’t have time for. I really am learning to depend on people to make sure the things that I must read get on my radar screen.

I’m going to go ahead and hit the send button, as I have to prepare for an interview with CNBC Asia on Japan and related topics. You have a great week, and I hope that wherever you are, your weather is as good as ours.

Your marveling at the speed of things changing analyst,

John Mauldin

70 Is the New 65: Demographics Still Support 'Lower Rates for Longer'

By Matthew Tracey and Joachim Fels
PIMCO.com, February, 2016
The so-called demographic cliff remains at least a decade away; meanwhile, global demographics should continue fueling the savings glut.

Is global aging about to end the savings glut? Some observers think so. More and more baby boomers are reaching retirement age, and they will soon not only save less but also start to dump their accumulated assets to fund retirement … or so the story goes. If this were true, the consequences for interest rates would be profound. The real long term equilibrium interest rate, which has been on a secular downtrend for decades partly due to strong working age cohorts saving hard for retirement, would start to rise – and what we here at PIMCO call The New Neutral might soon be history.

We strongly disagree with that thesis of an imminent demographics induced savings drought. Rather, we have argued in recent work that the global excess supply of saving over investment, which has been largely responsible for the secular decline in equilibrium interest rates, is not only here to stay but likely to increase further in the coming years for a host of reasons including demographics (see PIMCO Macro Perspectives, “No End to the Savings Glut,” September 2015). As a consequence, we continue to expect the fundamental forces of elevated desired saving to keep the equilibrium real rate depressed and to limit the extent to which other (cyclical) factors can drive up market interest rates.

However, given the popularity of the thesis that demographics will soon end the savings glut, we undertook a deep dive into the data to investigate the link among demographics, saving behavior and the demand for fixed income assets – with some surprising results. Here’s what we found.

A ‘demographic reversal?’ Not so fast!

People of the world, we’re getting old. It’s a well-known fact that, after decades of decline, the global dependency ratio – traditionally defined as the ratio of individuals younger than 15 and older than 64 to the working-age population aged 15-64 – is now rising (see Figure 1).

Some financial market observers argue that this demographic trend reversal will begin to drive interest rates higher, and soon. Why? First, a declining share of high-saving workers and a rising share of dissaving elderly will (the argument goes) erode the demand for saving – and drive interest rates higher via the savings-investment equilibrium. Second, these observers argue, a rapidly growing share of retirees will have to consume (i.e., sell down) their financial asset holdings to fund spending in retirement, and these drawdowns will create selling pressure in financial markets that pushes asset prices down and interest rates up.

Our core thesis in a nutshell: Yes, global aging may someday drive U.S. interest rates structurally higher. But “someday” remains at least a decade away – for two reasons. First, we proffer that global saving will remain stronger than many expect, supporting a low global neutral interest rate. (As investors, we care about the neutral rate because it anchors fixed income yields in the market.) Second, U.S. demographic demand for fixed income assets should remain robust until at least 2025 – and in the meantime should continue to put downward pressure on market yields, all else equal. Combine a low global “anchor” and strong domestic fixed income demand, and what do you get? Lower rates for longer in the U.S.

Continuing robust demographic demand for saving

Remember the link between saving and interest rates: In the savings-investment equilibrium, rising demand for saving pushes down the equilibrium (or neutral, or natural) rate of interest, all else equal, and vice-versa. Our task, then, is to assess how demographic changes affect aggregate saving. We find that the traditional “dependency ratio,” used in many other studies on this topic, is flawed.

We suggest two modifications to address those flaws. First, the young, considered “dependents,” contribute very little to global saving and dissaving in dollar terms (they’re “non-savers”). We therefore prefer to focus on the ratio of “Peak Savers” (mature adult workers who earn and save a lot) to “Elderly” (who save less as they age and ultimately consume their savings in retirement). Let’s preliminarily define “Peak Savers” as individuals aged 35 to 64, for two reasons:

• People 35–64 have generally exhibited much higher savings rates than people in younger and older age groups;
  
• People 35–64 earn considerably more income than people younger and older – so for any given savings rate, this age group’s saving behavior will have an outsized effect on saving and investment flows in dollar terms.
  

Let’s preliminarily define “Elderly” as everyone 65 and older (the traditional definition). Thus, the global Peak Savers versus Elderly ratio in Figure 2 reflects a static 35–64 Peak Saver cohort – and reveals what appears to be a demographic cliff in about year 2010. Those who argue that demographic support for saving will fall sharply in the coming years typically will try to prove their point using a ratio like this one.

But we ask: Is it sensible to define the Peak Saver and Elderly groups by the same static age ranges over long periods of time? Put differently: Might working and saving behavior evolve over time, warranting a dynamically modified dependency ratio? Seniors’ ability to work (and save) later in life should continue to rise; in our increasingly services-based “knowledge economy,” jobs are becoming less physically demanding and often require more experience, while advances in health technology boost functional age in life’s later stages. Seniors’ willingness (and incentives) to work longer also should rise along with their ability.

True, the retirement age, globally, has not kept pace with rising longevity. But policymakers are slowly catching on. In the U.S., the Social Security full benefit retirement age is increasing to 67 and will go higher still – a government incentive telling people to stay in the workforce. Meanwhile, years of low interest rates have left impending retirees playing catch up in retirement saving. More generally, around the world, longer lives must ultimately be supported by longer working lives. Anything less will prove unsustainable. Our colleague Jim Moore summed up the state of affairs (in the U.S.) in a PIMCO Viewpoint from 2012: “Work a little longer. Save a little more. Get by with a little less.¹

We think this insight applies abroad as well. In fact, global trends already underway support our argument that people will work later and later in life. In many economically important geographies – notably the U.S., eurozone, UK and Japan – senior (age 65+) labor force participation has been trending higher. And China is contemplating steadily raising its retirement age in the coming years.

However, what matters most for global saving demand are those who earn the most income. Consider the U.S. as an example. Top-income-quintile households control nearly two-thirds of U.S. household income, three-quarters of household wealth and more than 80% of household financial assets. Apart from the major social ramifications of wide (and widening) income and wealth inequality, the implications for aggregate saving are critical: Rather obviously, high earners’ working and saving behavior has an outsized effect on global saving in dollar terms.

If the highest earners are working (and saving) later in life, we should pay attention. Witness the dramatic rise in labor force participation within the top income quintile (Figure 3): Over 60% of top-quintile individuals in the 65–74 age group are employed or seeking work, a 19-percentage-point increase in participation over the 15 years through 2013. ² Moreover, participation among top-income-quintile seniors 75 and older has more than doubled over the same period.^4,/sup>

What about seniors’ late life saving behavior? Consider the top two income quintiles, collectively accounting for about 80% of U.S. personal income. Based on 2014 data from the BLS’s Consumer Expenditure Survey, these high earners exhibit no decline in savings rates as they enter retirement (due in part to a strong bequest motive and high conservatism). In Figure 4, note how high and consistent these top earners’ savings rates remain even in their late 60s and 70s.

(Aside: We find it curious that savings rates, based on the BLS’s Consumer Expenditure Survey, do not become negative for lower income quintile seniors even in their late 70s. We suspect that other data sources may show a negative savings rate for these elderly groups, likely due to methodological differences in data collection. Our focus here, however, is on age-related trends in saving behavior rather than savings rates themselves.)

To recap: The most impactful seniors are working (and saving) later in life as functional age and the duration of retirement both increase.³ Therefore, our preferred measure of the demographic support for saving is a dynamic, not static, ratio that accounts for the trend toward longer working lives. Let’s revisit our Peak Savers versus Elderly ratio from Figure 2. In decades past, age 64 may well have been the sensible upper bound for the Peak Saver group.

But what about the coming decades? In Figure 5, we have added a dynamic ratio (red line) that assumes seniors work roughly five years later in life in 2050 than they did in 2000. In other words, our age definition of “Peak Saver” evolves dynamically from 35–64 in 2000 to 35–69 by 2050, and consequently our definition of “Elderly” evolves dynamically from 65+ to 70+ over the same period.

What a different picture the dynamic ratio paints! It suggests that demographic support for saving could well be as strong a decade from now as it has been in recent decades – and illustrates the extent to which traditional static ratios may be flawed.

We concede that our dynamic ratio forecast is only a guess as to what the future may look like if current trends persist. But there is some method to the madness. For example, the reason we start to phase the 65- to 69 year olds into our Peak Saver group specifically in 2000 is that senior labor force participation began to rise rapidly in that year (after two stagnant decades).

Our five years later in life by 2050 employment assumption is slightly more arbitrary, but reasonable given that, globally, the largest increases in retirement age likely lie ahead of us. And our dynamic ratio does not account for the rising share of seniors 70+ who remain working, introducing an element of conservatism to our assumptions. So while our dynamic ratio embeds some simplifying assumptions, to be more scientific risks missing the forest for the trees.

Almost regardless of the assumptions used, if you define a dependency ratio dynamically – based even loosely on observable trends – you are likely to paint a very different (and more accurate) picture of the future than you will paint using a static ratio.

What about the rest of the world? It appears we’ve made an argument about global demographics supported mainly with U.S. data. However, publicly available data for other economically significant regions does not permit as granular an analysis as we have shown for the U.S. We do have reason to believe similar trends are occurring outside the U.S.: Elderly labor force participation is rising in Europe, the UK and Japan, and some countries – including China – are contemplating raising the retirement age.

In Japan, whose demographic cliff materialized many years ago, senior labor force participation has been trending higher, and as a result the labor force shrank only about 0.8% over the past decade even as the “working-age population” (aged 15 to 64) fell almost 9%. Patterns like this one are likely to repeat in other aging countries as societies adapt to meet their demographic challenges.

Bottom line: The people who move the needle most in saving demand, the highest earners, are the people working and saving later in life. This trend should be a tailwind for saving demand in the years to come that will push the global demographic cliff at least a decade into the future – and support a low global neutral interest rate, per the savings-investment equilibrium. 70 is the new 65!

U.S. household (demographic) demand for fixed income assets: a decade-long tailwind for bonds

We’ve just argued that demographics should help keep the global neutral rate low over the coming decade – which means that market yields in the U.S. should have a low “anchor.” But waves of baby boomers are retiring (albeit, as we have argued above, increasingly later), and many will eventually draw down (i.e., sell) their financial asset holdings to fund late life consumption. Are we fast approaching the point when boomer drawdowns create selling pressure in fixed income markets that pushes interest rates higher? Or might U.S. aging (boomers included) actually bolster the (net) demand for bonds and help maintain a low ceiling for market yields?

Consider two key observations.

• First, as we should expect, investors generally de-risk away from equities and toward fixed income with age – most aggressively once they reach their 60s (and beyond).⁵
  
• Second, individual asset accumulation and drawdown patterns vary significantly by income level. In the U.S., individuals in the lowest income quintile tend to sell their limited financial assets beginning in their 50s and completely exhaust their assets by, or before, death (relying on social assistance to meet their basic needs in life’s latest stages). Middle-income individuals tend to draw down financial assets beginning in their 60s but not at a rate that would deplete their assets before death. Individuals in the highest income quintile, however, are shown to have rising financial asset balances until roughly age 80 (after which they decline only very gradually). In other words, for top-income-quintile individuals, portfolio drawdowns don’t tend to begin until roughly age 80 (an important point). 
  

The highest earners have historically been able to fund retirement consumption from income (generally employment income, investment portfolio income and annuitized income), “leaving their financial assets virtually untouched.”⁶Here’s the key: Top-income-quintile households own over 80% of U.S. household financial assets. Consider how significantly this group’s future asset accumulation and drawdown profile will impact financial markets!

Back to our question about whether U.S. demographics will be a headwind or tailwind for bond flows in the years ahead. For starters, we assess when (demographics-driven) bond buying might peak relative to bond selling. We define “Bond Buyers” as individuals aged 60–74 and “Bond Sellers” as individuals 80 and older.

These age definitions are somewhat arbitrary, but they’re based on the two previously introduced empirical observations about households in the top quintile of the U.S. income distribution (which hold over 80% of U.S. household financial assets):

1. Bond buying tends to peak during individuals’ 60s and early 70s (aggressive de-risking);
   
2. Bond selling tends to peak in the years after age 80 (as individuals sell down their financial assets to fund consumption in retirement).
   

Figure 6 shows the ratio of Bond Buyers to Bond Sellers, which we use to gauge when net demographic buying demand might theoretically peak. On this metric, U.S. demographic demand for bonds should continue to rise in the next five years or so before peaking and may still be as strong in 2025 as it is today. (Our age definitions are based on patterns observed among U.S. households, so we focus primarily on the blue U.S. line in the figure. We include a global version of the Buyers versus Sellers ratio as well – the green line – which reveals an even later potential peak in global demographic demand for bonds.⁷

Our interpretation of this Buyers versus Sellers ratio assumes that each buyer exerts about the same influence on markets as each seller, an assumption that may be conservative given high-earning sellers draw down their portfolios only very gradually, whereas buyers likely will be de-risking aggressively in their 60s and early 70s. We “stress test” this assumption and result with scenario analysis in the Appendix.

Next, we explore the demographics of U.S. financial asset ownership at a very high level. Figure 7 shows household financial asset holdings by both age and income.⁸

^{Click to enlarge}

The lion’s share of the $31 trillion in U.S. household financial assets⁹ ($21 trillion, or about 70%) is held within – or over the next 10 years will be held within – age cohorts that typically need to grow their fixed income allocation. This $21 trillion, outlined in green in Figure 7, is expected to remain in an accumulation or de-risking phase and won’t enter a drawdown phase within the next decade (based on the age-related asset drawdown patterns we described earlier). This $21 trillion will likely be a demographic tailwind for bonds over the next decade (especially for municipal bonds given high earners’ need for tax-free income). Conversely, only about $5 trillion (approximately 15%) of household financial assets seems likely to be a headwind for bonds during this period (outlined in red).

One caveat: Many factors other than demographics influence investors’ asset allocation decisions – among them changes in valuations, evolving expectations about future asset returns, individual risk preferences, U.S. investor preference for domestic versus foreign assets, foreign investor preference for U.S. assets, and market disruptions that may trigger significant portfolio rebalancing. Our analysis here focuses only on demographic effects, holding all else equal.

Now let’s go a level deeper. In the Appendix we model the potential demographics-related asset flows we might see over time from the gradual de-risking and drawdown of household financial assets. We analyze 10 unique scenarios in order to test a range of assumptions. Our “baseline” scenario reflects a set of assumptions about de-risking behavior and asset decumulation that we think is realistic (and possibly conservative) based on historical patterns. Our modeling suggests that U.S. demographics driven fixed income inflows are likely to be almost as strong 10 years from now as we project them to be today – and that demographics may not be a material headwind for bonds until the 2030s.

How can we explain these conclusions? In our analysis, for at least the next decade, de-risking flows and rebalancing flows into fixed income more than compensate for seniors’ portfolio drawdowns. In stress testing our baseline assumptions we found it hard to come up with a plausible scenario in which U.S. demographics become a fixed income headwind within 10 years. Yet we found it easy to imagine realistic scenarios in which demographic demand for bonds remains robust for the next 15 years or more.

Consider as an example the high-earning elderly, for whom longevity risk is rising rapidly as life-extending medical technologies proliferate. High earners, historically, have been overly cautious in recalibrating their spending to meet anticipated future needs – a finding that could warrant an even more gradual asset-drawdown trajectory for this next generation of retirees than we have modeled based on historical experience. See the Appendix for our assumptions, baseline scenario modeling and alternative scenarios.

A brief aside: Our focus here has been U.S. demographics and, implicitly, U.S. fixed income. However, U.S. demographics are likely to influence global fixed income markets given U.S. households account for over 40% of global household financial assets. For context, Western Europe and Asia each account for about 25%.¹⁰

Finally, a quick note on changes in the composition of household retirement savings. The shift from defined benefit (DB) to defined contribution (DC) plans in the U.S. persists, and in our estimation U.S. DB plans hold a lower allocation to bonds than a market-average glide path suggests is optimal for DC participants.¹¹ In aggregate, therefore, the continued shift toward DC may represent an additional tailwind for bonds in the coming years.

Bottom line on U.S. aging and the demand for bonds: Persistent demographic support for fixed income should, all else equal, drive net flows into bonds and help maintain low yields over the next decade.

‘Speed read’ and key conclusions

Some financial market observers believe in the following dramatic scenario:

• We’ve just gone over a demographic cliff; globally, the ratio of high-saving adult workers to dissaving elderly is now declining. This demographic reversal will erode the demand for saving.
  
• The global savings glut will reverse as the demand for saving falls, pushing the global neutral interest rate higher.
  
• Baby boomers in the U.S. will compound the problem as they sell their financial assets (including bonds) to fund retirement consumption, driving U.S. fixed income yields higher.
  

In this note, we challenge traditional thinking about the timing of the feared “demographic cliff.” A demographics-induced structural rise in U.S. interest rates remains at least a decade away:

1. Global demand for saving will remain robust, supporting a low global neutral interest rate (the “anchor” for U.S. fixed income yields):
   • Traditional dependency ratios – which use fixed, static age definitions – are flawed because they fail to account for how the world is changing.
     
   • U.S. elderly, especially the highest earners, are working and saving later in life. High earners matter a lot because they drive the lion’s share of global saving. 70 is the new 65.
     
   • Similar trends can be observed in economically significant economies outside the U.S.
     
   • We argue for a dynamic, not static, ratio of mature adults to elderly that does account for how working and saving behaviors are changing. Our dynamic ratio suggests that demographic support for saving may be as strong over the next decade as it has been over the past several. Possibly stronger.
     
   • Strong saving demand should support a low global neutral interest rate in the coming years – and should continue fueling the global savings glut.
     
2. In financial markets, strong U.S. demographic demand for fixed income assets should – all else equal – help maintain low U.S. bond yields over the next decade:
   • The lion’s share of U.S. household financial assets is held within age cohorts that will need to grow their fixed income allocation over the next ten years.
     
   • Top-income-quintile households own over 80% of these assets, and high earners sell financial assets only very gradually in retirement to fund consumption.
     
   • For another decade or more, demographics should remain a net contributor to fixed income flows, as high earners’ de-risking into bonds should dominate bond outflows due to portfolio drawdowns.
     

Combine a low global neutral interest rate and strong domestic demand for bonds, and what do you get? Lower rates for longer in the U.S.
The authors would like to thank PIMCO colleague Jim Moore for his contributions.

Appendix: U.S. household financial assets and fixed income flows – scenario analysis

This Appendix details the assumptions used in our baseline scenario for U.S. (demographics-driven) fixed income flows and offers a number of alternative scenarios.
Baseline scenario assumptions:

• Financial asset portfolios consist of two asset types (for simplicity): “risk assets” (excluding fixed income) and fixed income.
  • Long-term annual risk asset return: 5% nominal.
    
  • Long-term annual fixed income return: 2.5% nominal.
    
• Investors de-risk their portfolios into fixed income over time according to a market-average glide path,¹² interpolated as necessary. (We conservatively assume that de-risking into fixed income ceases at age 75 and that investors’ asset allocations remain constant thereafter. This assumption is driven by a lack of available data on market-average glide path allocations for ages older than about 75.)
  
• Each year, top-income-quintile households re-optimize to draw down 50% of their financial assets by the end of their planning horizon, beginning at age 80 and ending at age 95. (50% may be a conservatively high drawdown percentage.)
  
• Each year, households in the bottom four income quintiles re-optimize to draw down 75% of their financial assets by the end of their planning horizon, beginning at age 65 and ending at age 90. (75% may be a conservatively high drawdown percentage.)
  
• Financial asset drawdowns occur proportionally across risk assets and fixed income. (This assumption is fair to conservative, given there is evidence that people draw down their riskiest assets first.¹³)
  
• Financial asset portfolios do not exist in perpetuity; mortality effects (based on the most recent mortality tables from the Society of Actuaries) lead to bequests that generate “re-risking” flows from fixed income into risk assets.¹⁴
  

Alternative scenarios:
Each alternative scenario represents a modification relative to our baseline scenario.

• Alternative 1: De-risking into fixed income proves significantly faster than expected (ultimate fixed income allocation of 50% is reached 10 years earlier than baseline glide path suggests).
  
• Alternative 2: De-risking into fixed income proves significantly slower than expected (ultimate fixed income allocation of 50% is not reached until 10 years after baseline glide path suggests).
  
• Alternative 3: Seniors 50+ ultimately de-risk much less significantly than baseline glide path suggests (fixed income allocation reaches 15% at age 50, per glide path, but then flat-lines for 10 years before gradually increasing to a level only half that suggested by baseline glide path, i.e., a terminal allocation of 25% instead of 50%).
  
• Alternative 4: Annual fixed income returns equal annual risk asset returns, such that market-return-driven rebalancing flows no longer support fixed income (5% annual nominal return assumed for both asset types). (This scenario has a natural hedge property; if ex ante fixed income returns ever were expected to equal ex ante risk asset returns, the relative attractiveness of fixed income probably would increase on a risk-adjusted basis, likely triggering non-demographics-related reallocations into fixed income – which we have not modeled here.)
  
• Alternative 5: Top-income-quintile households re-optimize each year to ultimately draw down 75% of their financial assets by the end of their planning horizon, while households in the bottom four quintiles re-optimize to draw down 100% (for both groups, a far higher drawdown percentage than is likely).
  
• Alternative 6: Top-income-quintile households commence drawdowns a full decade earlier than history suggests is likely, i.e., at age 70 (if anything, as life expectancies and planning horizons lengthen, one might expect drawdowns to begin later).
  
• Alternative 7: A combination of alternatives 5 and 6 (i.e., a highly conservative mix of assumptions).
  
• Alternative 8: Households commence drawdowns five years later and lengthen their planning horizon by five years (optimistic, but plausible given rising longevity risk and rising labor force participation among the high-earning elderly).
  
• Alternative 9: Top-income-quintile households re-optimize to draw down 25% of their financial assets by the end of their planning horizon (instead of 50%), consistent with a high bequest motive and historical excess conservatism during retirement.
  

The chart below shows our estimate of future demographics-driven U.S. household fixed income flows by scenario. These projections are NOT meant to be interpreted as forecasts of the actual dollar volume of flows, in part because the $31 trillion stock of household financial assets used to model these flows omits certain large asset pools (see our technical note further on). So focus on the trends depicted, not on the dollars.

As you can see in the chart, across almost all of our scenarios demographics remain a fixed income tailwind for the next 10 years, and in most scenarios longer. Note that this analysis may lean conservative in that we have modeled potential flows based only on the existing stock of financial assets. Yet every year, mature adult workers (especially the high income earners) will invest some portion of their savings in financial assets, including bonds, both inside and outside their retirement plans. These flows, all else equal, represent a tailwind for all financial assets that we haven’t attempted to model.

Finally, a technical note on our primary source for U.S. household financial asset data: the Federal Reserve’s 2013 Survey of Consumer Finances. To our knowledge, there are two primary sources for U.S. household balance sheet detail: the Federal Reserve’s Survey of Consumer Finances (“SCF”), a triennial survey of a cross-section of U.S. households, and the U.S. national flow of funds accounts. We use the SCF, which is widely used in Federal Reserve analysis, academic research at major economic research centers, and private financial industry analysis and writings. The SCF is, to our knowledge, unparalleled in its demographic granularity across age groups, income quintiles and other key variables.

Significant differences are worth highlighting between the SCF and the household balance sheet data contained in the U.S. national accounts. Of note, the 2013 SCF excludes about $19 trillion in DB pension entitlements and $2.4 trillion in assets of nonprofit institutions. As a result of these and certain other omissions, the SCF identifies a materially lower total value for U.S. household financial assets than the national accounts identify. The question, for us, is whether there is any reason to think that the omissions made by the SCF, notably DB pension entitlements, will bias our results. 

We see no obvious bias. At a high level, DB pension plan asset allocations tend to be a function more of the level of interest rates and plan funding status than of the age profile of plan beneficiaries. Also, as we’ve argued in the body of our note, as the U.S. shifts from defined benefit to defined contribution schemes we may see additional support for fixed income given that DB plans seem to allocate less to bonds than a market average glide path suggests is optimal for DC participants. For these reasons, we think using a source that excludes DB pension entitlements likely leads us – if anything – to underestimate demographics-related fixed income demand over the next decade.

See the recent research paper linked below, from the Federal Reserve, for a more detailed explanation of the differences between SCF data and data from the U.S. national flow of funds accounts, as well as a defense of the use of SCF data in economic research: http://www.federalreserve.gov/econresdata/feds/2015/files/2015086pap.pdf

Works consulted

• Mercedes Aguirre and Brendan McFarland, “2014 Asset Allocations in Fortune 1000 Pension Plans,” Towers Watson, October 2015.
  
• Robert Arnott and Denis Chaves, “Demographic Changes, Financial Markets, and the Economy,” Financial Analysts Journal Volume 68 Number 1, 2012.
  
• Charles Bean et al., “Low for Long? Causes and Consequences of Persistently Low Interest Rates,” Geneva Reports on the World Economy 17, International Center for Monetary and Banking Studies, October 2015.
  
• Lisa Dettling et al., “Comparing Micro and Macro Sources for Household Accounts in the United States: Evidence from the Survey of Consumer Finances,” Finance and Economics Discussion Series 2015-086, Washington: Board of Governors of the Federal Reserve System, 2015.
  
• “The Eurosystem Household Finance and Consumption Survey,” Statistical Paper Series No 2, European Central Bank, April 2013.
  
• “2013 Survey of Consumer Finances (SCF),” Federal Reserve, September 2014.
  
• Michael Gapen, “Demand for safe havens to remain robust,” Barclays Equity Gilt Study, February 2013.
  
• Michael Gavin, “Population dynamics and the (soon-to-be-disappearing) global ‘savings glut,’” Barclays, February 2015.
  
• Charles Goodhart et al., “Could Demographics Reverse Three Multi-Decade Trends?” Morgan Stanley, September 2015.
  
• Dr. Michaela Grimm et al., “Allianz Global Wealth Report 2015,” Allianz SE, August 2015.
  
• Markus Lorenz et al., “Man and Machine in Industry 4.0: How Will Technology Transform the Industrial Workforce Through 2025?” Boston Consulting Group, September 2015.
  
• Dr. Susan Lund, “The Impact of Demographic Shifts on Financial Markets,” McKinsey Global Institute, June 2012.
  
• “Pension Markets in Focus,” The Organisation for Economic Co-operation and Development, 2015.
  
• James Poterba et al., “The Composition and Draw-Down of Wealth in Retirement,” NBER Working Paper 17536, October 2011.
  
• Karen Smith et al., “How Seniors Change Their Asset Holdings During Retirement,” Center for Retirement Research at Boston College Working Paper 2009-31, December 2009.
  

¹ PIMCO Viewpoint “What’s Your Number at the Zero Bound”, by Dr. James Moore, 2012.
² 2013 represents most current data available.
³ Our argument would be even stronger if we could show that the personal savings rate among high-earning seniors in their late 60s and early 70s has been increasing over time (parallel to the rise in labor force participation). However, the BLS has advised us that a comparison between 2014 data and prior-year data may be misleading due to recent changes in survey methodology.
⁴ From 2000 to 2050, our dynamic ratio – mechanically – is a weighted average of two individual static ratios (35–64 versus 65+ and, separately, 35–69 versus 70+); the weights change each year to reflect our assumption about rising longevity.
⁵ See, for instance, “The Impact of Demographic Shifts on Financial Markets” (McKinsey Global Institute, 2012).
⁶ “How Seniors Change Their Asset Holdings During Retirement” (Smith et al, 2009).
⁷Validity of global Buyers versus Sellers Ratio depends on the extent to which asset accumulation-drawdown patterns among the high-earning elderly outside the U.S. mirror the patterns observed among U.S. elderly. We have not explored this question empirically and include the global ratio only for interest and context.
⁸ See Appendix for a technical note on our choice of the Federal Reserve’s Survey of Consumer Finances for U.S. household financial asset detail.
⁹ U.S. household financial assets, as depicted in the Federal Reserve’s 2013 Survey of Consumer Finances, total $31 trillion across all age groups.
¹⁰ Source: Allianz Global Wealth Report, 2015.
¹¹ For color on U.S. DB pension plan asset allocations, see, for example, the OECD’s “Pension Markets in Focus” (2015) and Towers Watson’s “2014 Asset Allocations in Fortune 1000 Pension Plans” (2015).
¹² Source: NextCapital.
¹³ See “Demographic Changes, Financial Markets, and the Economy” (Arnott and Chaves / CFA Institute, 2012).
¹⁴ For simplicity, we assume that anyone who dies younger than age 65 bequeaths assets to a spouse of comparable age (i.e., no change in asset allocation) while those who die at or after age 65 bequeath assets to someone (presumably children) 30 years younger (i.e., a generation earlier in risk tolerance). We recognize that not every elderly person bequeaths assets to a younger heir; some assets are passed on to charitable organizations and friends or other family members of comparable age, for instance. We assume, arbitrarily, that 50% of financial assets are passed to younger heirs. Our general results are not particularly sensitive to changes in these assumptions.

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The article Outside the Box: 70 Is the New 65 was originally published at mauldineconomics.com.

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Why You Don’t Need a Big IRA to Enjoy a Lavish Retirement

Forget what you’ve been told, you do NOT need hundreds of thousands of dollars in your IRA to retire comfortably. Especially when the market is this volatile!  Download this free eBook and learn how you can turn a few hundred dollars into a lavish lifestyle starting right now…..for FREE. Hughes Perpetual Money Machine [pdf] Chuck Hughes, world renowned trading champion and inventor of Optioneering™ the science of creating option trades engineered to win big and eliminate losses. Reveals an obscure trading ‘loophole’ that spins out a big fat paycheck either every month or every single week. The choice is yours. After you read Chuck’s tell all eBook, then you can decide how often you want your paycheck to come. Hughes Perpetual Money Machine [pdf] I don’t blame you if you’re skeptical.  Most people are at first, especially with the market being so volatile. But real live brokerage statements don’t lie.  And Chuck included his actual account statements in this eBook so you could witness for yourself how perfect Hughes Perpetual Money Machine is for today’s volatile market. Imagine receiving a steady income week after week, month after month, year after year regardless of economic conditions. Isn’t this the sort of miracle you’ve been dreaming about your entire life?  I know I have. One can never be too rich, you know. As with most free stuff, this is a very limited offer.  So I’d encourage you to download your free eBook today, while you can.  See you in the markets, Stock Market Club PS. You’ll also get a rare opportunity to view Cornerstone for Monumental Profits.   Chuck says if it weren’t for the one secret revealed in this short video, he probably wouldn’t be the winningest trader in Int’l Live Trading history.  Doesn’t that sound like a secret you’d like to know?  Watch profit generating video now.

The Biggest Trade Ever....No Exaggeration

By Jared Dillian

I won’t keep you in suspense. The biggest trade ever is in demographics. In particular, our rapidly increasing life expectancy.

Quick story. My Coast Guard friends are retiring now. You get to retire after 20 years of service, but some of them have been taking advantage of early retirement and are leaving the service as young as age 40.
Oh my God, what a deal: At age 40, you can bring home about $50K a year and then start a whole new career on the side!

In the old days, you could offer that deal because military folks would die at 47. Now they will live to 100.
Paying out benefits for 60 years to retired military personnel doesn’t sound like a great deal for the taxpayer.
Of course, the military pensions are just the tip of the iceberg. To receive Social Security, you can retire at age 62 (or 67 for full benefits). Again, that’s fine when most people die before 62. The blended life expectancy (for both men and women) is almost 79 years and trending higher.

Or my favorite chart on life expectancy ever, also a rebuttal to those who don’t like capitalism.

If you pay attention to Silicon Valley stuff, you know that Google and Ray Kurzweil and some other folks are working on projects that will allow us to live to 150 or even beyond. That would involve doing a couple of things, first

1. Curing cancer
2. Curing heart disease
3. Curing Alzheimer’s disease

You do these three things, it increases life expectancy by another 10 years or more. And we are actually doing those things!

Once you have a cure for all known diseases (attainable in my lifetime), then you have a different problem. Cells get old and die. The Silicon Valley folks are working on that too. Funny, if you don’t smoke, eat right, and get a little exercise, you will pretty much live to 80, no matter what. What happens beyond that is up to genetics, which we will solve one day. So what will the world look like if people live to 100, 150, or more?

It Looks Like Greece

Greece’s retirement age (to receive benefits) used to be 55 years. Again: retiring at 55, what a deal! I would only have 14 more years to go. People are pretty healthy at 55 (though maybe not the Greeks—they have the highest rate of tobacco use in the developed world).

So if people live way longer than the retirement age, the Social Security system goes kablooey. It just does. And yet people resist all attempts to reform it. We know Social Security is in trouble. George W. Bush tried to tackle it. For all his faults, it was the right thing to do. But he got laughed at.

The first thing we will do is to means-test the benefits, which will just make it more progressive but won’t solve the actual problem. You need to push back the retirement age, like, to 80.

But wait a minute. There aren’t even enough jobs for people to work until age 80.

I know…..

The World Was a Lot Simpler When People Just Died When They Were Supposed To

We’re going to look back at the 1940s-2000s as an exceptional period in economic history—with high, virtually straight line, uninterrupted economic growth. We had debt problems before, but biology has made them intractable.

In fact, the whole profession of economics is based on the very idea that there is population growth and inflation. What happens if birth rates decline? They are. Population growth rates will peak very soon. (By the way, the old Malthusian idea of overpopulation is being discredited.) What does the profession of economics look like with declining populations, people living longer, a dearth of unskilled jobs?

Is it nonstop deflation?

Many economists predict years of global deflation based on this premise. They say that you should buy bonds at any price. It’s a compelling argument. I think we’re going to learn a lot of really interesting things about money velocity in the coming years.

The Trade

Like tech in the ‘90s and energy in the 2000s, health care has been and will be the trade of the 2010s. You have the happy accident of huge technological advances and a government that seems willing, for the time being, to pay for it all. You hear some squawking about the cost of some treatments, but seriously, if you can cure cancer for $250,000, who is going to say no? Especially when that person’s chemotherapy, radiation, and hospital bills could easily exceed $2,000,000.

Lots of folks thought that Obamacare would tomahawk the health care sector. In classic market fashion, it has done the exact opposite. The insurers in particular have been the biggest beneficiary. You probably saw the recent Aetna/Humana merger.

People have tried for years to short biotech. Hasn’t been fun for them.

People have funny attitudes about death, you know. You ask someone if they’d like to live to 100, 120. “Noooooo,” they say. “I wouldn’t want to just sit in a chair.” Me, personally, I’d be okay with sitting in a chair. But the point of these treatments is that you can be active into your 100s. What then?

“I don’t know…” they say.

Are you kidding me? Forever young, my man. I’m 41, and I look a lot younger than my parents at the same age (sorry, Mom and Dad). I’m still DJing parties, for crying out loud.
Still don’t get the point of Snapchat, though.

Jared Dillian

The article The 10th Man: The Biggest Trade Ever (No Exaggeration) was originally published at mauldineconomics.com.

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Income Inequality? American Savers Treated Like Dogs

By Tony Sagami

One of the hot political topics these days is income inequality, but one of the groups of Americans that’s the most mistreated by Washington DC is the millions of Americans who have responsibly saved for their retirement.

When I entered the investment business as a stock broker at Merrill Lynch in the 1980s, savers could routinely get 7-9% on their money with riskless CDs and short term Treasury bonds.

In fact, I sold multimillions of dollars’ worth of 16 year zero coupon Treasury bonds at the time. Zero coupon bonds are debt instruments that don’t pay interest (a coupon) but are instead traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

At the time, long term interest rates were at 8%, so the zero coupon Treasury bonds that I sold cost $250 each but matured at $1,000 in 16 years. A government-guaranteed quadruple!

Ah, those were the good old days for savers, largely thanks to the inflation fighting tenacity of Paul Volcker, chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987.

Monetary policies couldn’t be more different under Alan “Mr. Magoo” Greenspan, “Helicopter” Ben Bernanke, and Janet Yellen. This trio of hear see speak no evil bureaucrats have never met an interest rate cut that they didn’t like and have pushed interest rates to zero.

The yield on the 30 year Treasury bond hit an all time record low last week at 2.45%. Yup, an all time low that our country hasn’t seen in more than 300 years!

These low yields have made it increasingly difficult to earn a decent level of income from traditional fixed-income vehicles like money markets, CDs, and bonds.

Unless you’re content with near-zero return on your savings, you’ve got to adapt to the new era of ZIRP (zero interest rate policy). However, you cannot just dive into the income arena and buy the highest paying investments you can find. Most are fraught with hidden risks and dangers.

So to fully understand how to truly and dramatically boost your investment income, you absolutely must look at your investments in a new light, fully understanding the new risks as well as the new opportunities. There are really two challenges that all of us will face as we transition from employment to retirement: longer life expectancies; and lower investment yields.

Risk #1: Improved health care and nutrition have dramatically boosted life expectancies for both men and women. We will all enjoy a longer, healthier life, which means more time to enjoy retirement and spend with friends/family, but it also means that whatever money we’ve accumulated will have to work harder as well as longer.

Today, a 65 year-old man can expect to live until age 82, almost four years longer than 25 years ago; the life expectancy for a 65 year old woman is also up—from 82 years in the early 1980s to 85 today.

The steady increase in life expectancy is definitely something to celebrate, but it also means we’ll need even bigger nest eggs.

Risk #2: Don’t forget about inflation. Prices for daily necessities are higher than they were just a few years ago and constantly erode the purchasing power of your savings.

The way I see it, your comfort in retirement has never been more threatened than it is today, and it doesn’t matter if you’re 20 or 70.

The rules are different, and you only have two choices:

#1. spend your retirement as a Walmart greeter (if you’re lucky enough to get a job!); or

#2. adapt to the new rules of income investing.

Today, the new rules of successful income investing consist of putting together a collection of income focused assets, such as dividend paying stocks, bonds, ETFs, and real estate, that generate the highest possible annual income at the lowest possible risk.

Even in an environment of near zero interest rates and global uncertainty, there are many ways an investor can generate a healthy income while remaining in control. Income stocks should form the core of your income portfolio.

Income stocks are usually found in solid industries with established companies that generate reliable cash flow. Such companies have little need to reinvest their profits to help grow the business or fund research and development of new products, and are therefore able to pay sizeable dividends back to their investors.
What do I look for when evaluating income stocks?

• Macro picture. While it’s a subjective call, we want to invest in companies that have the big-picture macroeconomic wind at their backs and have long-term sustainable business models that can thrive in the current economic environment.

• Competitive advantage. Does the company have a competitive advantage within its own industry? Investing in industry leaders is generally more productive than investing in the laggards.

• Management. The company’s management should have a track record of returning value to shareholders.

• Growth strategy. What’s the company’s growth strategy? Is it a viable growth strategy given our forward view of the economy and markets?

• A dividend payout ratio of 80% or less, with the rest going back into the company’s business for future growth. If a business pays out too much of its profit, it can hurt the firm’s competitive position.

• A dividend yield of at least 3%. That means if a company has a $10 stock price, it pays annual cash dividends of at least $0.30 a year per share.

• The company should have generated positive cash flow in at least the last year. Income investing is about protecting your money, not hitting the ball out of the park with risky stock picks.

• A high return on equity, or ROE. A company that earns high returns on equity is usually a better-than-average business, which means that the dividend checks will keep flowing into our mailboxes.

This doesn’t mean that you should rush out and buy a bunch of dividend-paying stocks tomorrow morning. As always, timing is everything, and many—if not most—dividend stocks are vulnerably overpriced.

But make no mistake; interest rates aren’t rising anytime soon, and the solid, all weather income stocks (like the ones in my Yield Shark service) will help you build and enjoy a prosperous retirement. In fact, you can click here to see the details on one of the strongest income stocks I’ve profiled in Yield Shark in months.


Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Income Inequality? American Savers Treated Like Dogs was originally published at mauldineconomics.com.

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Here is the Ideal Year End Portfolio Fix

By Dennis Miller

Some years back, my wife and I embarked on a cross country trip in our first motor home. Driving a 40 foot bus was a bit frightening at first. I was poking along in the center lane of I-75 and big tractor trailers were whizzing past me. The bus came with a Citizens Band radio. I tuned in to channel 19, listened to the truckers, and sure enough they were complaining about my slow driving. So I announced myself, told them I was a rookie and asked for their patience.

There was a brief pause. Then one savvy old trucker came on and said in a deep southern drawl, “Son, there is only one rule you need to know to stay safe. Keep’er ‘tween the lines!” That’s precisely what my team and I recommend every investor do this month: keep your portfolio between the lines. One of the more popular investment strategies is to ride your winners and dump your losers. It’s hard to argue with that approach. You can buy 10 stocks, have five winners and five losers, and still make a lot of money.

Another popular strategy is to buy and hold, particularly larger companies that are big, profitable, and not likely to go anywhere. Those who recommend this strategy point to historical gains. That’s all well and good; but as Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” Many of my friends were punched square in the jaw during the 2007-2008 meltdown.

Many had recently retired, taken a lump sum out of their 401(k)s, and invested 100% of their retirement savings in the market. Talk about a right hook! You work for the better part of 50 years, diligently make projections with your financial planner, and then your life savings shrinks by half... almost overnight. Follow that up with a trip to your advisor who says, “Trust me. Don’t worry. It will come back. It always does.”

Don’t worry?

In this case, they were right, eventually. The market recovered in less than six years. Does it always do that? Should we just hold an index fund and ride it out? The answer to both questions is “no.”

Protect Yourself Against the Next Right Hook

Portfolio rebalancing can be a very effective strategy, particularly with money earmarked for retirement. No one can guarantee the market will come back quickly from a downturn. Retirement investors must protect their principal because they might not have time to recover from a 40-50% drop in their net worth. Rebalancing your retirement portfolio is a critical step in protecting your assets. Instead of trying to maximize gains with excessive risk taking, anyone approaching retirement age should look to avoid catastrophic losses so that their portfolio can steadily provide income if and when they stop working.

The Best Protection

At Miller’s Money, protection starts with our three investment category allocations: 50% in Stocks, 20% in High Yield, and 30% in Stable Income (cash account substitutes). Within those categories we’ve implemented significant asset class and geographical diversification. We also recommend holding no more than 5% in any individual investment.

Rebalancing is nothing more than readjusting your portfolio at least annually to keep’er ‘tween the lines.
If you start with a $100,000 portfolio, then allocate $50,000 to your personal Stocks category with no more than $5,000 in any single investment. If you have a good year and your nest egg rises to $120,000, you adjust your stock allocation to $60,000 with no more than $6,000 in any single investment.

We hope that every year our portfolio grows and we have to sell some stocks at a gain to rebalance. Our strategy is to ride the winners and cut short any losses, minimizing the potential for Tyson style punches to the mouth. Buy and hold may work for 30 somethings, but it can be a death sentence for someone approaching retirement age.

Mr. Market does not care if you are working or retired; at some point there will be another sizable downturn. Rebalancing is key to keeping your wealth in tact when that happens. And, if you’re wondering where (if anywhere) bonds fit in to today’s best retirements plans, you can download a complimentary copy of the new Miller’s Money special report, The Truth About Bonds here.

The article The Ideal Year End Portfolio Fix was originally published at millers money

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Straight Talk from Yogi Berra: 9 Ways to Retire Rich

By Dennis Miller

“In theory there is no difference between theory and practice. In practice there is.”—Yogi Berra

It’s October, AKA the major league baseball postseason. As a lifelong baseball fan, I take the wisdom of Yogi Berra seriously. And when it comes to planning for the autumn of life, Yogi is spot on.

It seems as though every day an article titled “5 Tips for Retirement Saving” or something similar hits my inbox. I scan for the author’s name, and I’m amazed by how often it’s distinctly contemporary—Jennifer, Brandon, or another name of that vintage. Jennifer’s title is something like “staff writer,” and I immediately picture a fresh-faced young person with a newly minted journalism degree. After work, maybe she jumps in her starter BMW and heads to a local watering hole with her friends to gripe about student loan repayments.

“Jennifer” means well. After all, she’s just doing her job. She recommends setting financial goals, getting out of debt, living within your means, and saving from a young age. I won’t argue with those recommendations. Jennifer’s grandparents probably did just that. If you can pull off following that advice to a T, chances are you’ll accumulate a good deal of wealth.

However, once Jennifer has tried to put her advice to practice for a couple of decades, she might understand that it’s neither simple nor easy, despite how it might sound. Most people know what they should do, but it’s often tough and painful to execute in real life.

During my 74 years I’ve met a lot of successful and rich retired friends who sure didn’t go about it Jennifer’s way. How many baby boomers do you know who married young, raised a family, put their children through school, and consistently saved in their 20s, 30s or even 40s? There are a few, but many—if not most—young families lived through a decade or more of “Why is there is so much month left at the end of the money?”
Several times a month a 50- or 60-year-old Miller’s Money subscriber writes in asking for help with how to accomplish a last-ditch push to save. Truth be told, most of my friends never got serious about retirement until after they’d raised children. It doesn’t mean they were right; it’s just the way it was. Should they have started earlier? Of course. But they didn’t. Some didn’t know how, some were overwhelmed by day to day expenses, and some overspent on stuff, stuff, and more stuff. Many got serious in the nick of time, but they did it.

Retiring Rich When You’re Under the Wire

Whatever your age, fretting about what you didn’t do is futile. Start making the needed changes today.

The best place to begin is to define “rich.” For our team, rich means having enough money to choose whether or not to work and enough money that you control your time. Rich means you live comfortably according to your personal standards. If you’ve lived a middle class lifestyle, a rich retirement means you can maintain that same lifestyle without worry.

Ten days out of high school, I was on a train to Parris Island, South Carolina. One of the best teachers I ever had was SSgt. Thomas R. Phebus. He was an archetype—the ideal combination of common sense and straight talk. I’m going to take a page out of his book and share some straight talk on how to make a rich retirement your reality.

The 9 Step Program

#1—Saving money is a bitch! When I entered the work force, every major company and most government agencies offered some sort of pension plan. The bottom line: come work for us at age 25, stay for 40 years, retire at 65, and we’ll continue to pay you until you die, normally another 20 years or so.

Pension plans are no longer the norm. Corporate America just couldn’t do it. Some filed for bankruptcy and broke their promises. Either way, in the private sector, 401(k)s are the new norm. They’re optional—no one makes you contribute.

Now local governments are filing for bankruptcy, many unable to fulfill their pension promises. No matter whom you work for—a big or small corporation, a government agency, or yourself—if you want to retire, be damn sure you’re saving… no matter what you’ve been promised.

#2—Plan to work your tail off. I don’t know anyone who’s accumulated even modest wealth working 40 hours a week. If you want to work for 40 years and pay for 60 plus years of life, chances are you’ll have to do more than that.

When you work, you trade your time, talent, and expertise for money. When you retire, you trade your money for time. In theory, you can work 60 hours a week, live off two thirds of your income (40 hours’ worth), and invest the remaining one third (20 hours’ worth). However, if you start saving early, perhaps saving income equal to 10 hours of work will be enough. Your savings will have more time to accumulate and compound, and you’ve bought yourself extra leisure time along the way.

If both spouses are working hard outside the home, which is the norm today, work toward living off of one paycheck and investing the other (or using it to pay off debts and then start investing). Many of our retired friends did just that.

#3—Don’t complain when others have more. Someone always will.

This one saddens me. We have a few friends who chose to work 40 hours a week for most of their working lives. They felt it was important to spend more time at home with their families, and there’s nothing wrong with that choice. Still, it’s a trade-off.

I look at it as though they enjoyed mini slices of retirement time when they were young. If that’s your choice, don’t begrudge others who chose a different path and worked and/or saved more. They don’t owe you anything.

#4—Get out of debt and stay that way. Virtually every wealthy friend I have only started to build wealth after eliminating debt, including home mortgages. Some theory-loving pundits suggest taking out a low-interest mortgage and investing the money with the hope of earning more than the mortgage interest. Oh really? Most people’s investments don’t perform that well.

The chart below highlights how poorly the average investor stacks up:

Sure, some beat the odds, but even professional fund managers struggle to do so. As of mid-2013, 59.58% of large-cap funds, 68.88% of mid-cap funds, and 64.27% of small-cap funds underperformed their respective benchmark indices, according to Aye M. Soe, McGraw Hill financial director.

If the big boys have a hard time and the average investor earns just 2.1%, one better secure a darn low mortgage rate before borrowing to invest.

One of the top ways to blow your nest egg is to stop working while you still have a mortgage. Downsize if you have to. Your personal home is not an investment; it’s part of the cost of living.

#5—Get smart while you get out of debt. Commit some of your time to financial education long before you plan to retire. Part of the reason the average investor earns just 2.1% is that many, if not most, haven’t taken the time to learn. If you want to out-earn the average investor, start by investing in education.

Understanding the markets is an ongoing process. The investment world is constantly changing, and if your interests lie elsewhere, it can be a challenge to keep up. A little commonsense scheduling goes a long way, though. Record your favorite programs and watch or listen at night when you’re tired. Then find an hour a day when you are fresh and devote it to more focused study. An hour-long television show has 15-20 minutes of commercials. You can bank that much study time by hitting fast forward.

#6—Set realistic objectives. Get some professional help and a thorough financial checkup so you can set sane targets. With those in place, you can build a realistic plan. The sooner you go through this exercise, the less painful it will be to make any necessary lifestyle adjustments.

#7—Get a grip on your expenses. Investments appreciate (at least that’s the plan). Cars, televisions, and most other stuff depreciate.

Some years ago I read that around 90% of top of the line Lexuses and Mercedes were financed. I live in a community where most of the homes have three-car garages. I shake my head as I drive down the street in my Toyota and see three luxury cars in a garage. I wonder how many of them are financed. It’s easy to have well over $150,000 invested in rapidly depreciating automobiles. With so many long-term auto loans available today, it’s also easy to owe more than the car is worth fairly quickly. Once you get on that treadmill, it’s hard to get off.

All cars are not created equal. I’ve owned my share of luxury autos and can share from personal experience that a routine oil change can cost 10 times more than it does with a Toyota or the like. Is the added prestige of a luxury automobile really worth the extra cost?

#8—Put yourself first. Another common way to blow your nest egg is to spend too much money on others. Your family should not expect you to support them in adulthood, pay for your grandchildren’s college education, or help with major purchases. Take care of yourself and your spouse before anyone else. In time, your family will come to appreciate your self-sufficiency. If not, too bad.

#9—Take advantage of free money. I cannot fathom why such a large percentage of workers with 401(k)s do not maximize their contributions. In addition to the tax benefits, many employers match a percentage of those contributions; it’s free money.

If your employer doesn’t offer a 401(k), maximize your IRA contributions. And if you’re over age 50, don’t forget the catch-up provisions that allow you to save even more. This is low-hanging fruit, so run and grab as much of it as you can.

Retiring rich requires a series of choices; they are often difficult. A comfortable retirement is not a foregone conclusion, even if you lived comfortably in your working years. Since WWII, we have enjoyed one of the most productive economies the world has ever seen, yet many seniors are broke. When you reach retirement age, you don’t have to be one of them.

Start mapping your own path to a rich retirement by reading Miller’s Money Weekly, our free weekly e-letter where my team and I cover pressing money matters and share unique investment insights for seniors, savers and other income investors—all in plain English.

Click here to receive your complimentary copy every Thursday

The article Straight Talk from Yogi Berra: 9 Ways to Retire Rich was originally published at millers money

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What You and Monica Lewinsky Might Have in Common

By Dennis Miller

Collateral damage can assume many forms—and though some may be more newsworthy than others, the latter are no less real, nor any less frightening.


On Tuesday, controversial radio talk show host Rush Limbaugh called Monica Lewinsky “collateral damage in Hillary Clinton’s war on women,” saying that President Bill Clinton and his wife destroyed the former White House intern “after he got his jollies, after he got his consensual whatevers.”

Last month, Jeremy Grantham, cofounder of GMO, a Boston based asset management firm that oversees $112 billion in client funds, dubbed savers “collateral damage” of quantitative easing and the Federal Reserve’s continued commitment to low interest rates.

Would it be worse to be known as the “president’s mistress” for more than a decade and, as Lewinsky claims, to be unable to find a normal job? Maybe. But it’s no laughing matter either to find yourself penniless in your “golden years.”

Signs of Monetary Collateral Damage Among Seniors

 

The 55-plus crowd accounts for 22% of all bankruptcy filings in the U.S.—up 12% from just 13 years ago—and seniors age 65 and up are the fastest growing population segment seeking bankruptcy protection. Given the wounds bankruptcy inflicts on your credit, reputation, and pride, it’s safe to assume those filing have exhausted all feasible alternatives.

But even seniors in less dire straits are finding it difficult to navigate low interest rate waters. Thirty seven percent of 65 to 74 year olds still had a mortgage or home equity line of credit in 2010, up from 21% in 1989. For those 75 and older, that number jumped from 2% to 21% during the same timeframe—another mark of a debt filled retirement becoming the norm. With an average balance of $9,300 as of 2012, the 65 plus cohort is also carrying more credit card debt than any other age group.

While climbing out of a $9,300 hole isn’t impossible, the national average credit card APR of 15% sure makes it difficult. For those with bad credit, that rate jumps to 22.73%—not quite the same as debtor’s prison, but close.

None of this points to an aging population adjusting its money habits to thrive under the Fed’s low interest rate regime.

Minimize Your Part of Comparative Negligence

 

A quick side note on tort law. Most states have some breed of the comparative negligence rule on the books. This means a jury can reduce the monetary award it awards a tort plaintiff by the percentage of the plaintiff’s fault. Bob’s Pontiac hits Mildred’s Honda, causing Mildred to break her leg. Mildred sues Bob and the jury awards her $100,000, but also finds she was 7% at fault for the accident. Mildred walks with $93,000. (Actually, Mildred walks with $62,000 and her lawyer with $31,000, but I digress.)

Comparative-negligence rules exist because when a bad thing happens, the injured party may be partly responsible. For someone planning for retirement, the bad thing at issue is too much debt and too little savings. Through low interest rates, the Federal Reserve is responsible for X% of the problem.

Though ex-Fed chief Bernanke doesn’t seem to see it that way—in a dinner conversation with hedge fund manager David Einhorn, he asserted that raising interest rates to benefit savers wouldn’t be the right move for the economy because it would require borrowers to pay more for capital. Well, there you have it. And there’s nothing you can do about that X%. You can, however, reduce or eliminate your contribution.
In other words, you don’t have to be collateral damage; you can affect how your life plays out.

Money Lessons from Zen Buddhism

 

This might sound like a “duh” statement, but it bears repeating from time to time. Inheritance windfall from that great-aunt in Des Moines you’d forgotten about aside, there are two ways to eliminate debt and retire well: spend less or make more.

Rising healthcare costs, emergency car repairs, and the like are real impediments to reducing your bills. Costs rooted in attempts to “keep up with the Joneses,” however, are avoidable. Those attempts are also futile. A new, even richer Mr. Jones is always around the bend.

Instead of overspending for show, make like a Buddhist and let go of your attachment to things and your ego about owning them. Spring for that Zen rock garden if you must and start raking.

One of the wealthier men I know drove around for years with a gardening glove as a makeshift cover for his Peugeot’s worn out, stick shift knob. It looked shabby, but this man wasn’t a car guy and had no need to impress. As far as I know, the gardening glove worked just fine until he finally donated the car to charity and happily took his tax deduction. Maintaining your car isn’t overspending, but you catch my drift. Dropping efforts to show off can benefit us all.

That said, keeping up isn’t always about show. You may feel pressure to overspend just to be able to enjoy time with your friends and family. Maybe you can no longer afford the annual Vail ski week with your in laws or the flight to Hawaii for your nephew’s bar mitzvah. Maybe your friends are hosting caviar dinners, but you’re now on a McDonald’s budget and can no longer participate.

Spending less in order to stay within your budget can mean missing out on experiences, not just stuff. If you’re in this camp, there’s no reason to hang your head. As I mentioned above, you can spend less or you can make more. The latter is far more fun.

An Investment Strategy to Prevent You from Becoming Collateral Damage

 

While it’s tempting to start speculating with your retirement money, resist. If you have non-retirement dollars to play with and the constitution to handle it, carefully curated speculative investments can give you a welcome boost. However, if all of your savings is allocated for retirement, just don’t do it.

Unless you’re still working, how, then, can you make more money in a low-interest-rate world? At present, my team of analysts and I recommend investing your retirement dollars via the 50-20-30 approach:

• 50%: Sector diversified equities providing growth and income and a high margin of safety.
• 20%: Investments made for higher yield coupled with appropriate stop losses.
• 30%: Conservative, stable income vehicles.

No single investment should make up more than 5% of your retirement portfolio.

Whether you’re designing your retirement blueprint from scratch or want to apply our 50-20-30 strategy to your existing plan, the Miller’s Money team can help. Each Thursday enjoy exclusive updates on unique investing and retirement topics by signing up for my free weekly newsletter.

Don’t let the Fed’s anti-senior and anti-saver policies unravel your retirement.  

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The article Collateral Damage: What You and Monica Lewinsky Have in Common was originally published at Millers Money

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Retirement Guard Duty 101

By Dennis Miller

I was just a kid—barely wet behind the ears. At two minutes before midnight, the sergeant of the guard and I marched onto the runway tarmac. Following protocol, I formally relieved the previous guard of his post.
This was mid-July at the Marine Corps Air Station in Yuma, Arizona. For the next four hours, dressed in combat fatigues, I carried an (unloaded) M-1 rifle.

I was left with nothing but my own thoughts: it was hot, and I was glad I’d filled my canteen. I tapped my boot toe in the asphalt expansion strips and it splashed like mud.

My mentors were grizzled WWII and Korean War veterans eager to instill lessons and habits that might someday keep us young marines alive. Falling asleep on guard duty was subject to court martial. During wartime, you could find yourself in front of a firing squad. A lot of people depend on the guard to do his job.

Fortunately, the only enemies I encountered were a few cockroach brigades—I stopped counting after eliminating over 300 or so. It’s too bad the Marine Corps doesn’t issue Truly Nolen weapons of mass destruction. That would have been much more efficient than the toe of my boot.

The lessons I learned on guard duty still hold up over half a century later. I regularly hear from loyal subscribers. I must admit, it feels wonderful when they write to thank us for a profitable recommendation. It also drives home the enormity of our responsibility—our subscribers are paying for our advice and investing right along with us. Just like my days as a young marine, I hope a lot of people are sleeping well while our team vigilantly stands guard.

As your guard, I have to warn that a storm may be approaching. I recently combed through my reading pile and selected a few of the most poignant warnings:

In “12,000 Stocks to Sell Now,” published in the February edition of The Casey Report, Terry Coxon warned that we should expect Federal Reserve tapering to have a negative effect on the market. Terry writes:

“By the current price/sales ratio, stocks look considerably more expensive. …

Stocks have been living on QE. What happens to them when QE runs out? …

The economy and the markets are in the hands of physicians who have decided to bleed the patient, but have only the roughest notion of how to tell when they have bled him enough. The therapy may or may not turn out to be deadly for the economy, but you should expect it to continue long enough to damage the stock market, because the governors of the Federal Reserve now have no option but to choose a lesser evil over a greater one.”

Andrew Huszar, former member of the Federal Reserve and former managing director at Morgan Stanley, echoed Terry’s thoughts in an interview for King World News. Huszar, who implemented QE1 for the Federal Reserve, said:

“The volatility in the markets will be a rollercoaster ride. If the Fed really sticks to its guns, I think we could see a 20% - 30% sell off in the U.S. (stock) market pretty easily in the course of a few months. …

But there is a larger issue, which is that… there are people within the Fed who have market experience, but these are not professional traders. And now the Fed has really expanded its involvement across the credit curve in the largest bond markets in the world.

That requires a level of expertise they don’t have. ... So there is a real question as to whether the Fed really is qualified to be playing this role, and whether it is going to be able to manage exiting what is the most ambitious experiment in financial market history.”

Just how much of an experiment is Huszar talking about? The editors at Zero Hedge have an answer: In 2013 the Federal Reserve bought more of our debt in than all foreigners combined.

Zero Hedge followed that tidbit with a post that China sold $48 billion in U.S. Treasuries in December 2013.
While Belgium came to the rescue in December, what happens if China continues its Treasury dump? Who will buy the debt? If and when no one is left raising his paddle, will the Federal Reserve continue its plan to taper?

China has been reducing its Treasury holdings for some time now… and buying gold. A quick scan of the chart below from the Wall Street Journal paints a sobering picture.

So I ask, what happens when the rest of the world decides holding gold is much better than holding US dollars?

For the most part, my family and friends consider me an upbeat, positive person. Nevertheless, I occasionally receive a note asking if I am a member of the “doom and gloom club.” My answer is: No! Frankly, I don’t like harping on about all of the things that could go wrong… But it’s part of “guard duty” to warn you of real threats.

How can we keep these threats in perspective? It took 25 years for the stock market to come back to its previous high after the crash of 1929. We all remember the Internet boom and bust years later: the NASDAQ closed at $5,046.86 on March 11, 2000; on October 9, 2002, it closed at $1,114.11, having lost 78% of its value. Then from 2007-2009, the stock market tumbled again. The S&P peaked in October 2007 at $1,565.15. It bottomed at $676.53 in March 2009.

For baby boomers, previous market booms and busts happened during their working careers when they had time to recover—until now. 10,000 baby boomers will retire every day for the next 17 years. Boom and bust cycles take place all the time, and retiring does not create a blanket of immunity from these cycles. Actually, it exposes one to greater risk. There is no guarantee the economy will snap back within a few years after the next bust.

Our team takes these threats much more seriously than I did the cockroaches in the Arizona desert. The potential for catastrophe is far too great for us not to.

Simon Black has said, “There are two ways to sleep well at night, be ignorant or be prepared.” Preparation, however, is only step one. The Marine Corps takes it one step further: You can be well prepared; however, if you are asleep without sufficient warning, much of your preparation may go for naught. Vigilance adds security.

As you have read, the Miller’s Money Forever team takes guarding its subscribers’ portfolios very seriously. There’s nothing more important to our team than providing readers with direction on how to get real returns while mitigating risk. And we’ve done so successfully, with real returns that have safely provided real income for our subscribers. You, too, can employ our team in guarding your nest egg. And you can do it today for half the price.  

Act now to learn more about Miller’s Money Forever and our Bulletproof Income portfolio.

The article Retirement Guard Duty 101 was originally published at Millers Money