Letter to Our Clients - April 2004

April 2004


To My Friends and Clients:

The challenge is to invest in a way that gives the opportunity for the growth and/or income you need or desire, yet leaves you both financially stable and emotionally healthy if market fluctuations cause your accounts to drop.

Many people have goals other than retirement, such as financing education for children or grandchildren, buying a new or second home, starting a business, taking a dream vacation, or something similar. However, I do not know of anyone who does not also have the goal of retiring, or at least of attaining financial independence, where work is totally optional.

In the past many writers have told people they should reduce their equity holdings in retirement and build bigger bond portfolios. However, more and more commentators are now suggesting this advice may be dangerous. Two recent articles are available for me to send to you should you want to read more of this different philosophy. These two articles conform more to my belief about prudent investment management for or in retirement. Here are some of my thoughts.

  1. In your retirement, limit your spending as follows:
    1. Try to have 10% at least, and hopefully 20%, of your cash flow re-invested – not spent. This is critical to keep pace with inflation.
    2. Be sure to always keep a reserve account large enough to cover a significant financial challenge – new roof, home fire, sudden illness, etc.
    3. Do not count on spending less as you get older. While some people do slow down in their 70’s and 80’s and beyond, others retain their health and vitality and are as active in their 80’s as in their 60’s – or 40’s! The other side of the coin, however, is that a change in health for one or both can result in greater uninsured expenses, so that you may do less but actually spend more.
    4. Give serious study to long-term care policies. Not everyone is a good candidate for them, but everyone should look at the subject as carefully as you did life insurance.
  2. How to determine the size of one’s investment portfolio for retirement?

In order to afford the items listed above, most people find that Social Security or other types of pensions are not enough. This is why they save and invest prior to retirement.

Many people believe that they can spend down their principal in retirement, so that there will be nothing left when they die. This strategy is fine if they know exactly when they will die, and if they know their spending needs up to that point. It does not work if they live longer than their actuarial life, or if their expenses turn out to be greater than budgeted.

This is the reason most financial advisors now encourage, if at all possible, to do one of two things: Either a) limit spending in retirement to the withdrawals that can be made “safely” from accounts (we should discuss what that amount might be for you), or b) build up investment accounts so that they reach a point where there is enough to live the “good life” and still stay within the spending guidelines suggested on the first page of this letter.

How much is enough – in an ideal world? If there is enough money so that the income from a 3% or 4% portfolio of tax-free bonds will meet all living expenses, plus the 10% to 20% reinvestment, plus provide a very safe reserve fund, then all that is required is prudent management to protect principal while keeping pace with inflation. There are still traps that can threaten financial security, but the challenges are different and usually less stressful.

Using round numbers, to generate $50,000 a year in after-tax dollars of investment income, it would take the equivalent of $1,250,000 (in today’s dollars) of a tax-free bond portfolio, assuming a yield of 4% or better.

This creates two challenges for those not at these levels now: what to do now if you do not yet have that amount, and what will you do in retirement if you do not have the required amount then?

This letter has run long enough. I will address these two topics in future letters.

  1. If you are not yet retired, how can you invest today for a stable financial retirement tomorrow?
  2. If you are in retirement, what are prudent investment strategies which may be right for you?

2004 is my 22nd year in this industry. I think it is the most challenging investment environment I have faced, even more so than 2000 through 2003. The last 10 years have illustrated better than any textbook how critical—and difficult – it is to balance the desire for growth against the need to protect principal. There is also no way to guarantee the outcome of any strategy. This is frustrating for those of us who want certainty in our lives, but it is reality. Financial success requires patience and discipline, and an ability to adjust to changes in our lives and the world around us.

Please be certain to contact us to schedule an appointment if you believe your situation needs review and discussion. Thank you again for the opportunity to work with you.

Best wishes,

Robert K. Haley, JD, CFP®