Retirement Investment Guidelines

Almost everyone is aware of the investment truths below, but they are very difficult to act upon as these strategies dramatically reduce the income Wall Street firms earn.  Therefore, Wall Street barrages us with contradictory marketing messages.  Follow below to act in your best interest, not Wall Streets!

Compound interest turns very small differences in annual net investment income into very large differences in money available to spend during retirement and to leave to your heirs. 

Asset allocation is the biggest determining factor of investment income 

  • From 1926 to 2019 large U.S. stocks earned an average of 10.2% per year vs 5.5% in long term government bonds (these averages include all the bear markets).  Over a 30-year time frame (representative of a typical retirement) this difference results in 270% more money. 
  • Stocks do experience larger temporary declines in value than bonds (that is the “price” one pays for the higher returns). However, if you hold for 30 years, stock returns have exceeded bonds in 98.5% of the 30-year periods between 1926 and 2019, with the minimum 30-year average annual return for stocks of 8.5% per year. 
  • Dividends on U.S. stocks have grown 4.9% per year since 1926 vs 2.9% inflation. 

Manage the risk of RUNNING OUT OF MONEY! 

  • Create an investment and spending plan to make sure you do not run out of money. 
  • Review results annually and make changes as needed. 

Diversification is vital to protect your annual income stream and capital balance 

  • Asset allocation – cash and low risk bonds are like insurance vs stock market declines. 
  • Diversification is one of life’s very few free lunches – Diversifying broadly in stocks greatly reduces risk while not reducing expected return. 
  • Periodic rebalancing maximizes the likelihood of achieving your plans.

Long term fundamentally sound investing in stocks creates the most value

  • Invest in fundamentally strong companies and target holding them forever – strong balance sheets, profitable, good growth prospects & reasonable valuations. 

Minimize taxes – Warren Buffett pays a lower tax rate than you!

  • Warren buffet pays a lower tax rate than you because he never sells his stock (tax rate on unrealized gains is ZERO!). 
  • Tax efficient stock investing over 30 years can result in a 192% higher ending balance. 
  • The federal tax rate for qualified stock dividends is lower than for bond interest income. 
  • The federal tax rate for long term gains is lower than short term gains. 

Expenses really matter 

  • Over 30 years, a reduction in your annual investment expenses from 1% per year to .5% can result in a 28% higher ending balance. 

Make a Plan!  Be sure you have the comprehensive skills to develop your plan.  If not, be absolutely sure your financial advisor has the skills and YOUR BEST INTEREST IN MIND!

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Source for all return data is “2020 Stocks, Bonds, Bills and Inflation Yearbook”, Roger G Ibbotson and Duff & Phelps. For our full disclosures, click here.