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Why you won’t have enough to retire.. and What to do about it

23 April 2008 5 Comments

Unfortunately, most 20-somethings have a bleak financial future ahead of them. For many people who may or not be planning for retirement, the math simply doesn’t add up. You won’t have enough money to retire. Let me explain why.

Retirement Killer #1: Inflation / Currency Devaluation

Our government is addicted to economic growth and has made it its policy to ‘stimulate’ growth at all costs; even if we destroy the value of the U.S. dollar in the process. The recent years of Fed action to inject more and more money into the system has created a destructive inflationary environment. The result is higher prices and a devalued U.S. dollar. Basically, each dollar you save is worth less and less as time goes by.

With the current political system of politicians only caring about self serving goals that lead to re-election, it is unlikely that anybody will take hard action to reverse the trend of devaluing the U.S. dollar. What does this mean for you? You will need more money than you think when you retire.

Retirement Killer #2: Higher Taxes

The wealth redistribution rhetoric is at all time levels of intensity. Many popular politicians want to penalize those who actually prepare for the financial futures and save money. They will tell you that it simply isn’t fair that you have accumulated wealth over the years by working hard and being financial responsible. Our tax system is as progressive as it ever has been in the history of our country and the trend is likely to continue. Bottom line: we need to factor in the possibility of higher taxes when planning for retirement.

Retirement Killer #3: Incorrectly Assuming “Historic Market Returns”

It seems every piece of advice for young people trying to save is nothing more than to put your money into stocks because the market historically averages 10% returns. I believe that this is an over-assumed figure for several reasons. First, the 10% figure does not factor in trading costs, taxes or inflation.

Second, an analysis of historic P/E ratios gives us insight into the possibility of severely lower returns over the general stock market in the years to come. From 1920-1990, the average P/E ratio of the S&P 500 ranged between 10-20. Since 1990, we have been consistently over 20. Many factors contribute to the higher multiples in recent years including lower interest rates and lower capital gains taxes. However, what if these factors change, and P/E ratios begin to compress towards historical averages? Stock returns will surely take a hit.

While it is definitely a possibility that P/E ratios stay high, it is irresponsible to assume that just by having money in stocks, you will average a 10% return. With that said, I believe there are ways to achieve that return and higher; it just takes a little more work.

Secure Retirement Option #1: Beat the market with this portfolio strategy

  • Diversification is key to successful investing, but you should avoid over-diversification. I like to focus on what I call “Selective Diversification.” Your goal should be to create a portfolio of 8-10 strong companies that I like to call your portfolio pillars. Growing your positions in these pillars is your #1 goal as an investor; however, before you can grow these positions, you must identify your pillar companies. This process requires significant research and may take you years to identify. Do not settle for average companies. With your pillar companies, you should have global exposure in a variety of industries. These companies should have proven management with a rock solid long term strategy – we’re talking 20, 30 years. This highly selective group of assets should make up 85-90% of your investment portfolio and only extreme events or circumstances should warrant you selling these positions.
  • The remaining portion of your portfolio (10-15%) should be used to take advantage of short to medium term moves based on your comfort with risk and your experience. Any gains you make in this area of your portfolio should be used to grow your pillar positions. To start, your goal should be to participate in a bull market and preserve capital in a bear market. As you gain experience, you will find ways to take advantage of certain market trends, and potentially, even make money during a bear market. Remember, this can be rather risky and is why we delegate this to only a small portion of your portfolio. You should not attempt to build wealth using these methods; your pillar investments are what will build you real wealth.

Secure Retirement Option #2: Save More

While this is unthinkable in our consumer driven society, it is possible to save more. While I am not here to tell you that instead of buying a latte each day at Starbucks, you can save $5 a day; there are ways to save more. Here are some strategies to put more away for your future

  • Partake in the things you enjoy, and cut back in other areas. If you like expensive clothes, then buy expensive clothes. You should attempt to target an area of your life to cut back and sock more money away. Maybe you want to splurge on clothes and cut back on eating out. This will be different for everyone.
  • Reduce your automobile expenses. The bottom line is your car is the biggest investment in your life that you’re guaranteed to lose most of your money on. Don’t try to keep up with your friends. Think of your car as a mode of transportation and nothing more. While you tell yourself that people think you are hot stuff because of your car, trust me, they don’t care about your car.
  • Don’t be house poor. With the recent real estate boom, people everywhere bought real estate they couldn’t afford. If you can’t afford to buy, then rent somewhere affordable and put money into your Roth IRA. Don’t buy into the argument that instead of paying $1200 in rent, you should be putting that money towards a mortgage. The reality is that owning a home will cost you much more than you think. You will be better off if you think of your home as your place of residence, not an investment vehicle.

Secure Retirement Option #3: Beat the market and save more

The more you save and the more time you put into selecting the right mix of investments will help ensure you a bright future and a very real retirement. Be proactive and take control of your future now.


  • Dividend Growth Investor said:

    Do you really believe that everyone can beat the market? Throughout my investing and trading career I have seen many people fail at trading. In fact statistics from major brokerage houses tell you that during the boom of the 1990’s when stocks rose 20% on average, most investors achieved 6% per year..
    I also doubt that 10 pillar stocks which have had stellar 20-30 years of prior experience is enough for diversification purposes.
    The best way for most investors to save for retirement is to have a proper asset allocation mix stocks ( small, large, mid) both foreign and domestic, real-estate trusts, and some bonds ( I would not put my clients into bonds untill they are 15 years away from retirement). Even though bonds do provide 0% inflation adjusted returns, they are helpful during a depression and deflation environments ( think the 1929-1933 crash)

  • kevin duffey said:

    Can everyone beat the market? No. I believe it can be done however. The biggest mistake most make is that despite believing in the idea to buy low and sell high, most do the opposite. With regards to your stat in the 90’s, most investors put money in AFTER most of the gains had been made. To beat the market, buying long term positions at true buying opportunities is crucial. Buying tech stocks after they’ve made their run is both the wrong investment (in most cases) and the wrong time to buy.

  • Dividend Growth Investor said:


    It is possible to beat the market. But sometimes while waiting for the perfect buying opportunity you might not be fully invested when the market comes out roaring ahead. I think the reason why people can’t outperform the market is because they forget that the market consists of living breathing individuals, who get greedy or scary at times. Just my opinion.