The Boulevard to Financial Independence

By Matt

I recently attended a presentation from a leading Certified Financial Planner on retirement planning myths. These 6 retirement myths are focused on investing:

1. Money market funds are always a safe bet
   The annual return on short-term cash (30 day bills) is not even 1% above inflation if you look at the time period from 1927-2005. This is no way to grow your retirement savings.
2. Inflation is a recent occurrence

Looking at the Consumer Price Index (compounded annually):
1940-1950 5.4%
1950-1960 2.2%
1960-1970 2.5%
1970-1980 7.4%
1980-1990 5.1%
1990-2000 3.0%
Presently, inflation in the US is hovering around 3%.

3. Greater Risk = Greater Reward
   More dramatic ups-and-downs may mean that your average return is higher, but your average compounded return is significantly lower because the “down” years take a proportionally larger chunk out of your “up” years. Take, for example, two portfolios, the second portfolio having half of the gains and losses of the first more volatile portfolio…Portfolio A: $100,000
   Year 1 +50% $150,000
   Year 2 -40% $90,000
   Year 3 +30% $117,000
   Year 4 -25% $87,750
   Year 5 +20% $105,300
   Average Return 7.0%
   Average Compound Return 1.0%Portfolio B: $100,000
   Year 1 +25% $125,000
   Year 2 -20% $100,000
   Year 3 +15% $115,000
   Year 4 -12.5% $100,625
   Year 5 +10% $110,687
   Average Return 3.5%
   Average Compound Return 2.1%
4. I can time the market
   Big gains often come on just a handful of days. Consider this……from between 1991 to 2003, the total annual return from the S&P 500 was 11.9%. If you missed out on the 10 best says, your return would have been knocked down to 7.9%. If you missed the 20 best days, you were stuck with 4.8% and by missing the 30 best days, you would have ended up with only 2.1%. Bummer.
5. The news is too scary to invest nowMaybe not. Consider how the S&P 500 did over 10 year periods that included the following events:
   • Pearl Harbor/WWII (1942-1951) +17.3%
   • Korean War/Red Scare (1950-1959) +19.4%
   • Watergate/OPEC (1973-1982) +6.7%
   • Iraq I/Dems Win (1991-2000) +17.5%
   • Tech bubble/9-11/Iraq II (1996-2005) +11.4%
6. I’m too close to retirement to take any risk
   Actually, you’re still pretty young. If you’re 60, you have an average life expectancy of 85. So if you retire in 5 years, you’ve got to plan on 20 years of retirement income and from the first myth we know that conservative short term bills are not the right vehicle for optimizing your retirement savings.

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