Concerns regarding the ability to retire comfortably after age 65

[HankDorsett]

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

New auto loans, mortgages and lines of Home Equity Credit often cost less than return rate for investment. A few years back you could have even used a personal loan when the Fed went a bit crazy lowering rates .25.

 

[BWV]

New auto loans, mortgages and lines of Home Equity Credit often cost less than return rate for investment. A few years back you could have even used a personal loan when the Fed went a bit crazy lowering rates .25.

Not the return on gov bonds or high rated corporates. Potential returns on risky assets, yes - but that is simply analogous to buying on margin

 

[Torbert]

I had the bad luck to get cancer in America. My health plan threw me off as soon as my costs exceeded my premium. This was legal. Medical bills took my house and all valuable possessions.
I have a 320 square foot dry cabin eight miles out of Fairbanks, Alaska. I can afford rent and food, my daughter has transportation. I will trade this internet connection for heating fuel come October.

My point is: Be prepared early for mishaps later or end up like this.

edit to add: I get social security benefits, that is the rent and food.

 

[f95toli]

Isn't part of the answer that that most people who are in their early 40s now (I'm one of them) will NOT be able to retire at 65? The official retirement age in the UK keeps going up, and is expected to be 68 when I retire.
I have a pretty good pension plan, but in terms of financial planning (for mortgages etc)I am still assuming that I will work full time until 68-69 and maybe part-time for a few years after that.

 

[Vanadium 50]

Except maybe for those 0% new-vehicle loans... although I've always been suspicious of those, figuring the cost of the loan is probably built into the principal.

Everything is built into the price at some level. But in this case, that's not primarily what is going on behind the curtain. The 0% loan incentive is designed to get people in the showroom, where the vast majority of the people will be told their credit isn't good enough for the 0% loan ... "but we can get you a 4% loan with an even lower monthly payment."

Isn't part of the answer that that most people who are in their early 40s now (I'm one of them) will NOT be able to retire at 65?

Yes. People retiring in two years in the US reach "full retirement age" at 66, not 65. The "problem", if you want to call it that, with all defined benefit plans is that people are living longer. That's a problem I don't think we want to "fix". When Social Security was established, life expectancy was 61. Now it's 75. (Better numbers are that in 1935 if you made it to 65 you could expect another 13 years. Today it's closer to 20.) If "13 years to go" were held constant, retirement age today would be around 74.

 

[NTL2009]

That would be all debt. No one can borrow at a cheaper rate than they can safely invest. You can borrow to invest in risky assets, but that is different. If you are retired, its stupid to own bonds and have a mortgage on your house.

I'll provide a little different perspective on this.

While it's true one can look at paying off a mortgage as "100% safe", and therefore say it must be compared to 100% safe investments, and that those safe investments aren't likely to be higher than the mortgage rate. But...

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

No, it's not a guarantee, but it is a really good bet, and one worth serious consideration before rejecting. If we look for guarantees on everything we do, we will do almost nothing, and probably suffer for it. I might die in a car crash going to my job, so I won't go to my job - how's that going to work out for me?

Here's one source:
https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Out of 100 20-year period samples, only 3 of them had 20 year returns less than 5%, and the lowest was 3.1% (1949, 20 years after the run-up to the Great Depression). So even the worst time in our history, you would not really be hurt much compared to a 3.5% mortgage.

Ahhh, I see they broke it down into deciles (lower right), far more useful - historically, 90% of the time the market returned more than 6.6% annualized over that 20 year period. The median was ~ 8.5%.

So if you want a guarantee, or are convinced the future will be far worse than the worst of the past 100 years, then OK, turn down this 'bet'. But I feel it is to ones advantage to take the good bets where and when we can find them. It's hard to find a better bet than 20 years in the market.

When you look for stats like this, be sure they are "Total Return" (including dividends), and not just stock/index prices.

 

[BWV]

I'll provide a little different perspective on this.

While it's true one can look at paying off a mortgage as "100% safe", and therefore say it must be compared to 100% safe investments, and that those safe investments aren't likely to be higher than the mortgage rate. But...

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

Out of 100 20-year period samples, only 3 of them had 20 year returns less than 5%, and the lowest was 3.1% (1949, 20 years after the run-up to the Great Depression). So even the worst time in our history, you would not really be hurt much compared to a 3.5% mortgage.

Ahhh, I see they broke it down into deciles (lower right), far more useful - historically, 90% of the time the market returned more than 6.6% annualized over that 20 year period. The median was ~ 8.5%.

Well my point was holding bonds and cash relative to a mortgage - most people are not 100% stocks in their portfolio.
So, yes if you grant that over 20 year periods stocks beat mortgage interest rates, it looks like a good trade. The problem is that funds to service the mortgage have to come from the portfolio, so the path of the stock returns, not just the geometric mean matter. The annual debt service on a $200K mortgage @3% is about $13.5K - so you have to sell this amount of stocks every year (assuming any dividends are consumed by other living expenses). So you can come out worse with sufficient volatility even if the 20year annualized return beats the mortgage rate

 

[Vanadium 50]

If I'm holding a mortgage for 20-30 years, I can look at a market investment over 20-30 years, and those returns have almost always beat the low mortgage rates you might get today.

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

 

[BWV]

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

Yes, with the big difference being no margin call if the market tanks - which makes is a vastly preferable form of leverage

 

[Michael Price]

Hi everyone. Due to certain unfortunate circumstances, I had taken a bit too much debt and not put in my savings. I have some concerns about whether I will be able to retire comfortably after age 65 (I am in my early 40s now).

I was wondering if any of you have been in similar financial situations, and what strategies you had taken to improve your financial standing.
I appreciate any feedback you are willing to share here on PF. Thanks!

As some one who has just retired at 59, and spent a few months researching, let me share a few tips.
1) take control of your savings. If necessary take early retirement and cash out your pension plan. (You may have to pay tax on withdrawals.). Or else start saving. (That may be the difficult bit!) You can get much higher long term returns by accepting minimal short term risks,
2) don't listen to financial planners/advisors. I found out the hard way that their advice is awful.
3) invest in technology investment funds. You should be able get over 20%+ return per annum.
4) I assume you have the maths to handle compound interest, and can work out the jaw dropping implications of 3).
5) I know 20%+ sounds unbelievable, so here is a sample of some the funds I have - you can look up their historical returns over 5 , 10, 15 years. I'm a Brit so I shall give the London FTSE ticker codes.
Scottish Mortgage Investment Trust, London ticker code: SMT.L
https://uk.finance.yahoo.com/quote/SMT.Lhttps://www.ii.co.uk/investment-trusts/scottish-mortgage-ord/LSE:SMT (this is a very informative link)
And other examples (just the codes):
LTI.L
EQQQ.L
ATT.L
I could give other examples, but one of my portfolio websites is down for maintenance this weekend.

As they always say, though, do your own research!

 

[Michael Price]

A broad, globally diversified low cost stock index fund is the best option for most people with a longer time horizon

Absolutely. Don't even dream of putting savings in a bank, bonds or property. Much higher returns in equities, particularly technology stocks. Plenty of well managed technology investment funds, including trackers, are available..

 

[BWV]

Remember beating the market is a zero-sum game (and probably should not be recommending specific securities here)

SMT.L is a leveraged closed end fund, so carries higher risk than the market a whole, it has outperformed the market - in USD terms, 17.8% annualized for the past 10 years vs. 13.7% for the S&P 500 and 10.2% for the MSCI All-Country World Index (a cap weighted index of global markets, including the US). Its focused on tech stocks - with top holdings Amazon, Illumina, Tencent and Ali Baba. So, its buying FAANG (and BAT) stocks on margin) Been a great place to have been over the past several years, may or may not be going forward.

 

[NTL2009]

Well my point was holding bonds and cash relative to a mortgage - most people are not 100% stocks in their portfolio.
So, yes if you grant that over 20 year periods stocks beat mortgage interest rates, it looks like a good trade. The problem is that funds to service the mortgage have to come from the portfolio, so the path of the stock returns, not just the geometric mean matter. The annual debt service on a $200K mortgage @3% is about $13.5K - so you have to sell this amount of stocks every year (assuming any dividends are consumed by other living expenses). So you can come out worse with sufficient volatility even if the 20year annualized return beats the mortgage rate

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.

If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

 

[NTL2009]

This is essentially the same as paying off your mortgage but investing on margin. (Only with less of a regulation safety net) This increases your leverage, allowing you to capture more gains. At a cost of increased risk, of course.

See my above examples - yes, there is a risk to this, but history shows that risk to be small. But if an individual has looked at that, and does not want to accept that risk, that is up to them.

I present it to try to demonstrate that the risk is small, to put it in perspective. I think many only think of the short term affect of a market crash/correction, and get scared by that, rather than looking at the long term. I think this looks even better for 30 year periods, but I'll leave that to the interested student :)

But I do have to wonder, if that 'bet' is too risky for someone, would they ever invest in equities? It seems to lead to saying that while you are in the growth/accumulation phase of life, and you have a mortgage, that all of your portfolio should be in cash/bonds, until that mortgage is paid off? That seems too conservative to me. And being too conservative is actually (historically at least) more of a threat to a retirement portfolio than being 100% stocks. History shows that at about less than 30% in stocks has more failures than a 100% stock portfolio. Inflation.

 

[BWV]

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.

If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

Yes but to my earlier point, if you arent 100% stock, you could do marginally better owning more stocks and paying off the mortgage. Your 6.7% return is a mix of 75% stock returns and 25% bond returns. Assuming bond returns < mortgage interest rate. So if you had $1M plus a 200K mortgage the comparison is between 75/25 and keeping the mortgage or paying off the mortgage and investing 800K at 95/5.

Also - your analysis above mixes past higher bond returns and yields with current low mortgage rates. You could not get a 3.5% fixed rate mortgage 20 years ago. 10 year Treasury yields were around 5.8% 20 years ago

 

[NTL2009]

Yes but to my earlier point, if you arent 100% stock, you could do marginally better owning more stocks and paying off the mortgage. Your 6.7% return is a mix of 75% stock returns and 25% bond returns. Assuming bond returns < mortgage interest rate. So if you had $1M plus a 200K mortgage the comparison is between 75/25 and keeping the mortgage or paying off the mortgage and investing 800K at 95/5. ...

Yes, but does that materially change anything about this?

I re-ran the numbers. putting all $200K to stocks takes you to 79.16% equiteies, I rounded to 80%:

$1M, 75/25 no mortgage 1998-2018 - $1,000,000 $3,668,174

$1.2M 80/20 mortgage payments 1998-2018 $1,200,000 $3,798,340

delta $130,166.00

... Also - your analysis above mixes past higher bond returns and yields with current low mortgage rates. You could not get a 3.5% fixed rate mortgage 20 years ago. 10 year Treasury yields were around 5.8% 20 years ago

Very true - and I would not recommend this in times of high mortgage rates. But for some time, we have had historically low rates. Is it possible the market does poorly in the 20 years following low interest rate opportunities? I suppose. But this 'works' for over 90% of 20 year period returns, so it sure does not seem 'cherry picked' in that sense. That would be interesting to evaluate. I would lean towards there being little correlation, but I really don't know. May look into it later, or hopefully someone else here beats me to it!

But just to make that clear after that added text - a low rate mortgage would not be available in all those time periods, those are just used to show what we might expect when we can get a low rate loan.

 

[BWV]

Yes, but does that materially change anything about this?

I re-ran the numbers. putting all $200K to stocks takes you to 79.16% equiteies, I rounded to 80%:

$1M, 75/25 no mortgage 1998-2018 - $1,000,000 $3,668,174

$1.2M 80/20 mortgage payments 1998-2018 $1,200,000 $3,798,340

delta $130,166.00
Very true - and I would not recommend this in times of high mortgage rates. But for some time, we have had historically low rates. Is it possible the market does poorly in the 20 years following low interest rate opportunities? I suppose. But this 'works' for over 90% of 20 year period returns, so it sure does not seem 'cherry picked' in that sense. That would be interesting to evaluate. I would lean towards there being little correlation, but I really don't know. May look into it later, or hopefully someone else here beats me to it!

But just to make that clear after that added text - a low rate mortgage would not be available in all those time periods, those are just used to show what we might expect when we can get a low rate loan.

Why does the smaller portfolio have a lower weight in stocks? It should be
$1.2M 75/25 (keep mortgage)
$1.0M 90/10 (less $200K mortgage payoff)

Also 20 year mortgage rates 20 years ago were about 7.5%. So instead of $14K in debt service, it is about $20K (and the 7.5% mortgage rate is higher than the overall portfolio return). Of course you could have refinanced at some point, mortgage debt has that advantage, but to my earlier point, Mortgage rates are NEVER below government bond yields of comparable duration.

 

[NTL2009]

Why does the smaller portfolio have a lower weight in stocks? It should be
$1.2M 75/25 (keep mortgage)
$1.0M 90/10 (less $200K mortgage payoff)

Also 20 year mortgage rates 20 years ago were about 7.5%. So instead of $14K in debt service, it is about $20K (and the 7.5% mortgage rate is higher than the overall portfolio return). Of course you could have refinanced at some point, mortgage debt has that advantage, but to my earlier point, Mortgage rates are NEVER below government bond yields of comparable duration.

I thought you were looking to model the case where you have an extra $200K to invest, because you took out the mortgage, so you put it all in stocks (beacuse you anticipate lower bond rates on the income side)? Am I misunderstanding?

As I said, I wouldn't be calling this a great opportunity with 7.5% mortgage rates. But bonds do more than just provide a modest return for you. Some need them as a bit of an emotional cushion, to 'smooth the ride'. And they *might* provide some smoothing or even gain with the annual re-balance (some buy low, sell high activity, but this is usually modest and sometimes even negative, selling too soon).

My point is that if you are 70/30 or 100/0, the historical 20 year market returns, even with a 3.5% mortgage drawdown, will almost always provide a positive outcome.

A quick search, I only found mortgage rates back to 1971, will check later if no one else does.

 

[BWV]

I thought you were looking to model the case where you have an extra $200K to invest, because you took out the mortgage, so you put it all in stocks (beacuse you anticipate lower bond rates on the income side)? Am I misunderstanding?

As I said, I wouldn't be calling this a great opportunity with 7.5% mortgage rates. But bonds do more than just provide a modest return for you. Some need them as a bit of an emotional cushion, to 'smooth the ride'. And they *might* provide some smoothing or even gain with the annual re-balance (some buy low, sell high activity, but this is usually modest and sometimes even negative, selling too soon).

My point is that if you are 70/30 or 100/0, the historical 20 year market returns, even with a 3.5% mortgage drawdown, will almost always provide a positive outcome.

A quick search, I only found mortgage rates back to 1971, will check later if no one else does.

The point was that on retirement do you pay off an existing $200K mortgage. If you were doing it the other way around, it still would not make sense to take out a mortgage to invest in stocks and hold lower yielding bonds, why not just skip the mortgage and buy more bonds with the stocks?

you only get one retirement -so the risk threshold for 20 year returns is low.

The S&P 500 returned -0.95% annualized for the ten year period from 12/31/1999 to 12/31/2009. If you took out a $200K 20 year mortgage at 3.5% in 2000 (so $14K annual debt service) - you only had about $10K left in 2009 (using the same link you provided) and were wiped out the following year. So a big zero due to the combination of the two 50% declines in the S&P 500 during that decade combined with a fixed outflow

 

[Vanadium 50]

Yes, with the big difference being no margin call if the market tanks - which makes is a vastly preferable form of leverage

Well, the SEC margin requirements are set so that if the market tanks you don't lose your house. No pun intended. Your proposal essentially adds home equity as collateral to allow the investor to be more highly leveraged. Is this a good idea? For some people, yes, and for others, no. But the investor needs to understand that this is a form of leverage, even if it may not look like one.

I would argue that if an investor wants to take on more risk, he or she should first figure out how much more risk they want, and then figure out the best way to make this happen. Is it via slow mortgage payment or would some other way be better?

Finally, there are tax implications for home mortgage interest and investment interest expense - they are treated differently by the (US) tax code. Someone thinking about this as a strategy should consider this.

 

[Vanadium 50]

2) don't listen to financial planners/advisors. I found out the hard way that their advice is awful.
3) invest in technology investment funds. You should be able get over 20%+ return per annum.

You do see the irony of providing investment advice yourself after point (2)?

20% return per year over 20 years is a factor of 38. Are you really telling Statguy2000 that if he wants to retire with a million dollars 20 years from now, he can do this for $2100/month for one year and then he can stop?

20% return per year over 20 years is a factor of 38. This is a factor of 16 better than the S&P 500 did historically.

If you look at Morningstar's Technology Funds, of the 172 funds listed, the number that have hit 20% per year for 3 months is 58. The number that have hit 20% over the last year is zero. Over the last three years, it's zero and over five years, yet again zero.

Finally, your investment advice is predicated on the notion that technology stocks are systematically undervalued relative to the rest of the market, and will continue to be so for the next 20 years. I think we can all agree that that's quite a statement.

 

[Stephen Tashi]

The sobering fact is that a 65 year old male has a 22 year life expectancy. The max SS benefit beginning at age 66 is $34K annually. Subtract that from what you spend now and multiply by 25, that is about how much money you need in today's dollars.

Is that assuming your health holds up well enough so you can live independently till age 87? What are the statistics on how many people are in nursing homes by age 87?

 

[Michael Price]

You do see the irony of providing investment advice yourself after point (2)?

20% return per year over 20 years is a factor of 38. Are you really telling Statguy2000 that if he wants to retire with a million dollars 20 years from now, he can do this for $2100/month for one year and then he can stop?

20% return per year over 20 years is a factor of 38. This is a factor of 16 better than the S&P 500 did historically.

If you look at Morningstar's Technology Funds, of the 172 funds listed, the number that have hit 20% per year for 3 months is 58. The number that have hit 20% over the last year is zero. Over the last three years, it's zero and over five years, yet again zero.

Finally, your investment advice is predicated on the notion that technology stocks are systematically undervalued relative to the rest of the market, and will continue to be so for the next 20 years. I think we can all agree that that's quite a statement.

A 5 year return counter example:
Allianz Technology Trust. LSE code : ATT.L annualised return. 26%
There are a few others. Yes, I see the irony of 2) vs 3). Just giving you my experience and that's why I say, do your own research.

 

[Vanadium 50]

Yes, but a) ATT:LSE hasn't been around for 20 years, and b) the fact you can pick one fund after the fact that did well is a whole different kettle of fish from being able to pick one beforehand that will go up a factor of 38. This is painfully close to the advice, "Buy a stock and when it goes up, sell it. If it don't go up, don't buy it."

 

[Michael Price]

Yes, but a) ATT:LSE hasn't been around for 20 years, and b) the fact you can pick one fund after the fact that did well is a whole different kettle of fish from being able to pick one beforehand that will go up a factor of 38. This is painfully close to the advice, "Buy a stock and when it goes up, sell it. If it don't go up, don't buy it."

I don't have to convince anybody. Just saying what works for me. I have spread myself amongst about 7 or 8 investment funds, with a similar performance to Allianz Tech'. And the first example I gave (SMT.L 19.5% p.a. over 5 years) has been around for over a century.
https://en.m.wikipedia.org/wiki/Scottish_Mortgage_Investment_Trust

 

[Vanadium 50]

just saying what works for me.

No, that's not what you did. You told StaGuy2000 what to do. Had you said "I have had good luck with technology funds" I wouldn't have complained. But you decided instead to say "invest in technology investment funds. You should be able get over 20%+ return per annum."

 

[PeroK]

Let's take a real look at that.

Consider a 20 year mortgage, $200K @ 3.5% ('worse' than your 3.0% example), monthly payments are $1,160. $13,920 annual.

Before I continue, I'll point out that your "(assuming any dividends are consumed by other living expenses)" is double-counting. If you didn't have the mortgage, you would not have the $200,000 invested to provide divs for other living expenses either, so cross that, in both cases those expenses need to be paid out of other sources.

https://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Zooming in, I estimate year 2018 to have returned 6.67% ( 5% plus ~ 1/3rd of the next 5% line), the lowest in recent history. That conveniently puts us right on the border of the lowest 10% and 20% decile points, so that makes a pretty good 'bad-case' scenario; worse than ~ 90% of history.

We can back test this here:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults
This shortened link shows you that a 75/25 Asset Allocation (pretty typical for someone in the accumulation phase of life, and accepts your premise that most people are not 100% stocks) returned ~ 6.38% annualized (with annual re-balance), in-line with our market return estimate of 6.67%: http://bit.ly/2Zd0LNG

The tool let's you adjust for deposits/withdrawals, so here is a short link with a monthly $1,160 withdrawal (fixed, no inflation adjustment to match a fixed rate mortgage): http://bit.ly/2ZeoAVc

At the end of 20 years, the mortgage is paid off, you both have 100% equity in the house, but the mortgage holder has $100,098 additional money in their portfolio. And this is a 'bad-case' scenario. 90% of the time periods in history were better, many far, far better. And the worst ones were not so far down from that.
N
If I take a recent 'good-case' (but far from the best - it looks to be close to median returns), 1994-2014, the mortgage holder ends up with an astounding $460,535 additional money in their portfolio!

This is dangerous nonsense. There are fundamental issues with your analysis.

First, what does "risk" actually mean? It means simply that things may not turn out as forecast. On the one hand you imply that these forecast figures are almost guaranteed - with even the "worst case" scenario showing high annual returns. Then you mention "risk" but it never seems to enter your analysis as something that might actually happen.

In the UK, for example, "endowment" mortgages were very popular, with exactly this idea. Instead of repaying the debt you invested, with the projection that your investments would eventually be enough to repay the debt and give you these wondrous sums of money left over. It ended with many people abandoning this amidst acrimony over poor returns and mis-selling.

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more.

Finally, there are statistically bound to be funds that have done well over a period of time. But, that is no guarantee that those funds will continue to do well. So quoting that fund X has done such and such over the last Y years means vety little. Especially if you believe that no one can accurately predict future economic outcomes.

 

[Michael Price]

No, that's not what you did. You told StaGuy2000 what to do. Had you said "I have had good luck with technology funds" I wouldn't have complained. But you decided instead to say "invest in technology investment funds. You should be able get over 20%+ return per annum."

I also said, do your own research. And, of course, the returns are variable; some years will be good, some bad.

 

[NTL2009]

This is dangerous nonsense. There are fundamental issues with your analysis. ...

I'll agree the analysis is flawed, it isn't trivial to take everything into account, it is far from perfect. But to say it is "dangerous nonsense" is going a bit too far I think. It is meant to provide some perspective for consideration, that is all.

...

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more. ...

Look at the chart, even the lowest 20 year period had returns of 3.1%. So if one had taken out a 3.5% mortgage at this time (if they were even available in 1929?), one would not have been hurt so very badly. This is why I'm saying that based on history, it's a pretty good bet (not a guarantee). There is mostly upside, and only a little, limited downside.

...

Second, you are fond of quoting that stocks beat whatever 90% of the time. But what about the other 10% of the time? If stocks crash one year in 10 that can wipe out your 9 years gains and more. ...

So quoting that fund X has done such and such over the last Y years means very little. Especially if you believe that no one can accurately predict future economic outcomes.

We agree that we can't predict the future, but I don't think that means reviewing and considering the past has no merit.

As I've said all along, I'm just trying to provide some perspective to the discussion. If you look at the data, and you still don't like that chance of it going upside down on you, then don't take that bet. I see absolutely nothing wrong with that, it is for each person to decide.

And it isn't a do-or-die decision. While I feel it has a very good chance of enhancing my portfolio, and I choose to take the bet, not taking it isn't going to automatically doom someone to a retirement of cat food and a van by the river. I'm talking about a 'reasonably' sized mortgage, like the $200K and a $1M portfolio we've discussed. That, IMO, is not an out-sized risk, nor is it likely to pay off in life-changing amounts either. But I think our portfolio (and lives in general) are enhanced when we take some risks, and strongly consider those risks that appear to have an attractive risk/reward profile.

 

[PeroK]

Look at the chart, even the lowest 20 year period had returns of 3.1%. So if one had taken out a 3.5% mortgage at this time (if they were even available in 1929?), one would not have been hurt so very badly. This is why I'm saying that based on history, it's a pretty good bet (not a guarantee). There is mostly upside, and only a little, limited downside.

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression.

If their and your analysis concludes investors during this period comfortably saw returns of at least 3.1%, then forgive me for being sceptical.

Many investors during this period were wiped out and lost everything.

I do not know how this is reconciled with the data, but I suggest that "dangerous nonsense" is not too far from the truth.

 

[NTL2009]

The data you referenced is from 1919 until 2018, which includes the stock market crash of 1929 and the subsequent great depression.

If their and your analysis concludes investors during this period comfortably saw returns of at least 3.1%, then forgive me for being sceptical.

Many investors during this period were wiped out and lost everything.

I do not know how this is reconciled with the data, but I suggest that "dangerous nonsense" is not too far from the truth.

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

 

[Stephen Tashi]

Many investors during this period were wiped out and lost everything.

Is it also true that many investors who were wiped out had bought stocks "on the margin"? - effectively borrowing money to buy stocks.

 

[PeroK]

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

View attachment 248620

Taken at face value, your analysis implies there is essentially no risk investing in stocks. I'm highly sceptical. The moral that stocks can go down as well as up would appear, in the long term, to be false. They must, in your analysis, double every 20 years?

My guess is that an element of hindsight bias has crept in. With hindsight the prudent investor would have done X, Y and Z over the years. And A, B and C are considered mistakes.

In other words, the strategy you propose has been tailored to the specific stock market conditions of the last 100 years. A strategy that would have looked equally viable at the time but would have lost money has subsequently, with hindsight, been deselected.

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth. Amazon was not a company in 1919, so at some point stocks need to be swapped in and out. This costs money and not everyone can buy stocks at exactly the same time etc.

The third point is how charges and fund management fees are accounted for.

Fourth, I suspect there is an element of averaging here. The average investor may get 3.1%, but that does not mean that everyone gets exactly 3.1%. Some investors do very well, some okay, some break even and some lose money. That is the nature of "risk". Unlike fixed returns where everyone gets the same.

The first research I would do is to determine how the raw stock market growth equates to the returns that an individual investor can expect.

I can well imagine that if I invested a sum in the stock market and came back 20 years later I would have doubled my money or better. But, I can also imagine (perhaps wrongly) that I might not and that I might even have lost money.

 

[BWV]

I always welcome skepticism, I've been known to be wrong a time or two! :) It's part of the learning process.

However, if you don't like my data, please present some of your own. Here's another source (cfiresim.com), and it shows the prudent investor/retiree would not have been "wiped out and lost everything". I entered a start year of 1929, with a 75/25 AA, a 3.5% initial withdraw rate, adjusted for inflation each year ($35,000 on a $1,000,000 portfolio). So while this was a scary ride, he was far from being "wiped out". The $1M stayed above $500,000 in buying power. It dipped again by the end of WWII, and then took off. Thirty years later, he has a portfolio with more buying power than he started with, even though he withdrew an inflation adjusted $35,000 for 30 years!

If this appears to be contrary to your sense of the Great Depression, it is seldom considered that this was also a period of high deflation. Your (limited) money bought much more, I even recall my Father telling me that if you had cash, you were a King in those days (sadly, my family had only land, poor dirt-farmers). This chart is shown as adjusted for inflation/deflation.

And even this chart overstates things. This really represents someone who "won the lottery", and suddenly has $1M appear out of nowhere, and put it all in the stock market at one time, (and was one of the worst market-timers in history!). In reality, the much more common, and more realistic scenario is someone who was earning and investing for ten or more years prior to retirement. So they also benefited from the big rise in the market in those early years. You could re-run this for the accumulation scenario for the previous 10-20 years, and I think you'll find this retiree would have been thrilled with the > $500,000 portfolio at it's trough - he put far less than that into it!

View attachment 248620

I don’t believe those numbers, the stock market lost 90% of its value between 1929 and 1933

Also your inflation-adjusted fixed withdrawal will wipe you out in the 70s where the stock return for the decade was actually worse than the 30s if you adjust for inflation (aggregate prices declined during the Depression)

 

[Stephen Tashi]

I'm also sceptical about how one tracks the indexes and to what extent these are a true reflection of long term stock market growth.

Some forum members agree with the late John Boogle and are vocal advocates for investing in "index funds". Of course, I don't know if projecting this strategy back to years ago is realistic.