Sometimes you can judge a book by its cover. Co-authors Frank Armstrong and Paul Brown have one of the timeliest titles on the shelves right now. Save Your Retirement: What to Do If You Haven’t Saved Enough or If Your Investments Were Devastated by the Market Meltdown is exactly what it promises to be. Armstrong is just the sort to go with an unambiguous title. The president and founder of Investor Solutions, Inc. in Coconut Grove, Florida is an accomplished, plain-spoken, gold mine of financial advice. He and I spoke on Friday.
What’s your advice for Canadians in today’s economy?
Save liberally, start early, avoid consumer credit, control your expenses and control your taxes. That’s a general overview. In terms of the market performance during the last two years, clearly that’s been a disappointment. It’s an outlier. It shouldn’t convey to anyone that they should abandon the market. Even the best strategy will occasionally produce bad results. That’s not a reason to abandon a good strategy and do something that’s inappropriate. If I took your family’s fortune to Las Vegas and put it all on the red and I won, is that a strategy that you would endorse? Compare that to a long-term strategy in the world’s equity markets that are going to have variable results, but that have proven to be the greatest wealth-generating mechanism the world has ever seen. There’s no reason to abandon a sound strategy to do something just because you had an occasional bad result. You have to accommodate in your investment strategy that markets are variable – have enough liquidity to ride it out both emotionally and financially – and build the appropriate asset allocation to meet your particular needs. Just because we’ve been bruised, doesn’t mean that equity investing is over and that we should retreat to the safety of sovereign short-term debt.
What about those who are five or fewer years from retirement?
My advice is the same as it would have been two years ago, which is to say: have the appropriate asset allocation plan. Let’s say we had an appropriate asset allocation plan two years ago, and you’re just about to start retirement. I would tell you: “We are 40% invested in bonds. You’re going to withdraw 4% per year. That means that even if the bonds don’t earn a penny, which is highly unlikely, we’ve got 10 years for the market to recover before we even have to consider your long-term investments. Let those long-term investments do what they’re supposed to do, which is grow over a long period of time and provide you the growth that you need. Don’t focus on the last one-year return, focus on the long-term returns that we expect and that you need to meet your investment objectives.”
Not everyone has the right plan in place.
You can delay retirement. Save more for the next several years and perhaps recoup all or part of where you should have been, depending on how desperate your situation is. But we know that people haven’t saved enough, both in the U.S. and in Canada. Recently we’ve seen a spike in U.S. savings rates, but they’ve gone from zero or below zero to only half the historical norms. They’re half or less of what we need in order to achieve financial independence and security. That would basically tell me that people are paying down credit card debt and mortgages. Hopefully that’s going to be a long-term event. But it’s only been a few months in the making. We don’t know if that’s a blip – because people are scared and then they’re going to go back to their bad habits – or if in fact they’ve heard the wake-up call and they’re going to reform.
What do you think?
It’s hard to tell. Beginning in about 1993 in the U.S., the savings rates eroded rather dramatically and consumer debt got out of hand. Then later, spending on housing got out of hand. People began to finance their vacations by refinancing their homes, so they don’t have any equity in their homes even if they bought quite some time ago. People have learned a very painful lesson, but they may or may not have learned something that changes their lifestyle.
Which should come first, paying down debt or saving for retirement?
You’ve got to clean up the personal debt. Consumer debt is just so ugly. It’s got to be kept under control. I’m a boater. I always say if your boat is leaking at 36% (your credit card), and you’re bailing at the very best 10% (long-term market returns), you can see inevitably that you’re going to sink. The first thing you’ve got to do is get your lifestyle under control.
Do you advise paying off a mortgage before saving for retirement?
No. But if you systematically refinanced your home, and you have no equity at all and/or the value of your home is smaller than the value of your mortgage, then you have to make some tough choices. Whenever you leverage yourself, you have to keep that level modest in comparison to your net worth and financial situation.
Is the traditional idea of retirement at 65 evolving?
I think it is. I’d be very surprised if total retirement at age 65 became the norm looking forward. There are several reasons for that. One is, people are living longer and they don’t have the financial resources to generate the lifestyle they’d like for the next 30 or 35 years. So there’s the financial pressure to continue to work. The other is that at age 65, they’re really not ready for the scrap heap. They’re not ready to sit on the front porch, have a last cup of coffee, stare off into space and die. Many of them are healthy, fully engaged and active. They’re looking for ways to make contributions and to participate. They’re still engaged. You’ll see people going in and out of the workforce, doing second, third and fourth careers. I’m surrounded by people in their 70s who are having a great time continuing to work. They’re attorneys, or they own businesses or whatever. They may be scaling back a little in their activities, or not. Some of them are going full tilt and they just can’t stop because they enjoy doing what they’re doing so much.
There’s more going on here than the downturn.
I’m the investment advisor for the College of the Marshall Islands. One of the professors out there showed up on a round-the-world cruise on a small sailboat. He got to the Marshall Islands, and he said he found extended cruising on the Pacific rather boring. So he was convinced to join the college. That’s sort of it. Here’s a guy that set off to go around the world, and retire forever and he just couldn’t do it anymore.
It isn’t fun out there. I’m not saying that you should have enjoyed this past couple of years. But you should have positioned yourself to endure it. It’s not a six sigma event. It’s not the black swan event. It’s not the end of the world. It’s a perfectly predictable event. The timing was never predictable, but you know you’re going to have times like this. So you should plan your strategy to accommodate it.