A few years ago my friendly cardiologist told me he had good news and bad news for me. The good news: I was gaining only about 1 pound per year. The bad news: If I lived as long as my father, I would need a double-wide casket. Now generally we think of a long life as a good thing, but in matters of weight control and finances, it is a double-edged sword indeed.
For those of us who are depending upon our investments to help support our lifestyle over a very long retirement period, the question of whether we will outlive our financial assets is an important issue. So the fact that residents of Continuing Care Retirement Communities (CCRC’s) live five years or so longer than the general population makes the issue all the more critical for us, the lucky ones. Incidentally, my next-door neighbor just celebrated her 103rd birthday and doesn’t appear to have slowed down much in the two years we have been neighbors! Amazing!
So what can we do to minimize the chances we will not outlive our investments? The only practical solution I know is to invest in equities (stocks). Now I know what you’re thinking: Stocks are risky, volatile and unpredictable, all reasons we are told we should, at our advanced age, invest in bonds, not stocks. But a study of history shows a very different picture. In fact, a two-to-three-decade, two-person retirement must essentially be a battle to preserve purchasing power. Inflation is our primary enemy.
For example, if you require $100,000 (I’m just making the math easy) each year to maintain your lifestyle, and assuming historic rates of inflation (about 3% per year) are repeated, 20 years from now that $100,000 lifestyle will cost about $180,000. Ouch! But the good news is that for the past 80 years the dividends on the S & P 500 stock index (and its predecessor until 1957, the S & P 90), have been compounding at 5.5 percent. And that doesn’t count any appreciation in the value of the shares of those same stocks. Want to beat inflation? Look no further.
Now for the bad news. Stocks are volatile. For example, the diversified stock portfolio you own on January 1, at some point in time during an averageyear, will have decreased in value by 14%! Even in a good year when the market is up on December 31st, the intra-year decline may be 14%, and in some “bad” years the decline has been much more than 14%. (I think I can recount every one of those years in my 50 years of investing experience!)
The lesson here is: For the money you need in the next five years, you have no business investing in stocks (I’m not totally against bonds – short-term bonds really do make good short-term investments). But since the longest time it has taken for the stock market to “recover” in my lifetime is a bit over 4 years, the money you don’t need for 5 years or more should be in stocks, where you have a fighting chance of beating inflation and preserving your wealth for the next generation, or other worthy causes you wish to support with your legacy. And for many CCRC residents that “long-term” investment money may be the majority of their wealth.
So my advice is: See your doctor about that 1-pound-per-year weight gain, hit the gym, move away from the dinner table before you are stuffed, and put that long- term investment money into a widely diversified portfolio of stocks. No, your prosperity is not guaranteed, but you will have controlled what you have some power to control. Then you may as well rest easy. In my experience, worrying about what you can’t control has never been a profitable enterprise.