What should I do to make it count?
The question: I am 62 years old and I received capital from my pension plan. It’s what my spouse and I need to live on for our remaining lives (other than social security). What should I do with the money?
The answer: If you’re like most of us, you really don’t have a choice. If you’re married and healthy, chances are you and your spouse probably have a combined life expectancy of three to four decades. During this time, you will need your money to grow at least in line with taxes and inflation in order to simply buy the same amount of items you would buy today.
If you assume that 1% of your investments go to taxes and 3% per year goes to inflation, you would need to more than double your money in less than 20 years just to maintain your purchasing power. If you need to grow the funds, you will need more than 4%. And, if inflation kicks in, you’ll need an even higher return just to break even.
You can’t get there with money. At best, cash generates a negative return after tax and inflation, especially with the current ultra-low yields of money market funds and short-term bank CDs. This is the price to pay for being liquid.
Fixed-income securities (longer-term loans of money to businesses and governments) typically pay close to the cost of inflation and taxes, but like cash, ultra-low rates are currently driving losses. purchasing power with fixed income investments more likely than in the past. . Additionally, the low interest rates currently being paid on fixed income securities suggest that it will be incredibly difficult to break even in purchasing power with fixed income securities for some time to come.
The only liquid asset class that has historically outpaced taxes and inflation by at least a few percent a year is stocks. It’s reasonable to assume that this behavior will continue, but you also need to understand that I mean it happens over long periods of time. It’s very hard to find a 15-year period in the last 100 years where you would have lost money with a simple buy-and-hold technique. This strategy involves you using discipline and diversification.
What about other options? Real estate is something to consider. Owning rental property can be a good way to diversify and can have reasonable returns. However, real estate is illiquid, has annual carrying costs and is time consuming. Doing well in real estate is usually something that only happens over long periods of time.
A small business is an option if you have the interest and expertise to do so. However, the chances of success in most small businesses are dismal. And business, like real estate, has annual ownership costs and takes time. You may not want this in your retirement years.
Investing in someone else’s non-public small business is incredibly risky. I have seen many people lose their money and I have yet to see anyone succeed in this behavior.
In summary, assuming you want your money to (at least) keep up with taxes and inflation, you have little choice but to grow it in the stock market. The percentage of your portfolio that should be in stocks is a very individualized process. Good luck to you in retirement!
Steven Podnos is a paid financial planner in Central Florida. He can be contacted at [email protected] and at www.WealthCareLLC.com.