The New Retirement Model
John Mauldin
March 19, 2005
The New Retirement Model
Money Can Buy Happiness
Unrealistic Retirement Expectations
Automatic Wealth
The Eight Habits of Wealthy People
Fishing, Business and Real Cheerleaders
It seems like every week I
get a letter from a reader asking questions along the following
line: "How can I make a lot of money so I can retire early
and/or live the lifestyle I want to live when I do retire?"
Most of them are phrased far more eloquently and with accompanying
questions and comments, but the bottom line is, "How can
I get rich?"
I'm especially touched by the very sincere letters from young
people who ask this most basic of questions about accumulating
wealth. They are not looking for get-rich-quick schemes but for
some guidance as to how to organize their lives. I've never really
been able to answer these letters with anything close to an adequate
response. In today's letter I'm going to draft a response that
we can use for all such future letters. I trust you will find
it interesting as we wax a little philosophical about how to
build wealth.
Today's letter is in part a reflection of two very different
items which reached my desk this week. The first is a rather
interesting survey on retirement from Merrill Lynch. The second
is a remarkable new book by my longtime friend Michael Masterson
simply entitled "Automatic
Wealth." Both of them got me to thinking about retirement
(not mine, of course!), and how the coming wave of baby boomers
entering their retirement years will have a massive effect on
all aspects of American society.
The New Retirement Model
Merrill Lynch released a new survey a few weeks ago called
the New Retirement Survey, wherein they polled 3,448 baby boomers,
both from the general population and the more affluent segment
about their views on retirement. I'm going to spend a few pages
summarizing the survey, and highlighting some of the more interesting
points. I should note that the survey was done for Merrill Lynch
by gerontologist Dr. Ken Dychtwald, who is the president of Age
Wave with the help of Harris Interactive. I must say that I thought
it was a very thoughtful and well put together survey.
The survey reveals that baby boomers plan an unexpected approach
to retirement in anticipation of increased life spans, labor
demographics and (what I perceive as a lack of) financial preparedness.
Interestingly less than 1/5 of baby boomers plan to stop working
for pay. 40% expect to cycle between work and leisure; another
16% plan to work part-time and an energetic 13% plan to start
their own business. 6% plan to continue to work full-time.
That is a long way from the model of our parents and grandparents,
who more or less expected to retire from work. Interestingly,
of those who expected to continue working, 56% of them said that
they intended to pursue a different line of work.
Not having enough money was only fourth on a list of fears about
the future. Number one on the list was being unable to afford
health insurance, with over half of those responding worried
about health insurance. Right after that was a major illness
and going to a nursing home.
Money Can Buy Happiness
The survey broke the respondents into two groups. Those who
were very or fairly well prepared for retirement and those who
are somewhat or not prepared. Those who are more financially
well-off were twice as likely to be looking forward to retirement,
70% more likely to be optimistic about the future and three times
as likely to describe themselves as successful. Coincidentally,
they expected to live longer, and were happier.
Those with less money were twice as likely to be stressed out;
50% more likely to worry about health care; much more worried
about losing their sex drive and three times more worried about
whether or not they would have enough money. Evidently, money
can buy some relative amount of happiness, at least among the
broad population.
The United States is currently in a great debate about Social
Security. We are basically ignoring the far larger and more contentious
issue of Medicare, and this survey tells us why. When asked the
question, "Do you believe that you and every member of your
generation are entitled to the full benefits of each of these
programs?" 89% of boomers believe that they are entitled
to Medicare. Social Security was only slightly less at 88% and
senior discounts scored 85%. 78% believe that we are entitled
to prescription drug coverage.
The Republicans have offered a plan whereby nothing changes for
the baby boomer generation, recognizing that trying to change
the benefits for those over 55 is a nonstarter politically. Given
the serious anxiety about health care among the boomer generation,
when we do get around to having to deal with Medicare the choices
are going to be few and difficult. But there is some consensus
about what those choices would and would not be.
72% of respondents favored reducing entitlement levels of those
who are financially well-off. 63% opposed having everyone receive
a little less in the way of entitlements and 65% opposed raising
the age of eligibility to reflect higher life expectancies.
As an aside, I think this means we do relatively nothing about
Medicare until there is indeed a crisis, forcing a solution.
Given the above and some of the statistics below, I think it
is highly likely that the "rich" are going to have
to cough up (pardon the pun) more of their income for health
care for everyone else.
Unrealistic Retirement Expectations
Those were pretty much the general conclusions. I've found
some of the actual survey questions and responses to be very
interesting. 42% of baby boomers do not know how much money they
will need to be able to live comfortably in retirement. 60% had
less then $100,000 of total savings other than their home, and
46% had less than 50,000. Of course 7% were not sure how much
they had saved and 12% decline to answer, so it would be a reasonable
assumption to think that 70% had less than $100,000.
26% felt they would need between $25,000 and $50,000 annual income
to be comfortable in retirement, and another 27% would need as
much as 75,000. (23% were not sure what they would need -- so
much for financial planning.).
Let's look at that last group. To generate $75,000 of income,
with a reasonable degree of safety and adding enough to principal
to be able to take care of the effects of inflation, you need
a portfolio worth about $1.5 million, give or take $100,000.
Only 2% of the respondents said they had as much as one million.
Only 3% had more than $500,000 with another 5% having more than
$250,000. Less than 10% of the boomer generation had more than
$250,000, yet 70% said they would need more than $25,000 annual
income to live comfortably.
Even subtracting for Social Security and other pensions, there
are going to be a lot of baby boomers who are going to be disappointed
about their retirement if they have to live off their savings.
To our credit, we seem to recognize that. Thus, less than 20%
of us expect to be able to enter retirement without working for
pay again.
Nevertheless, we are an optimistic lot.
We as boomers like to think of ourselves as a generation that
defies categories, yet we sometimes fit into them so well. Dr.
Ken Dychtwald broke the boomer generation into five clear "profiles
of boomers and their likely retirement scenarios emerged. These
profiles provided further insight as to what the "next stage"
looks like for these boomer groupings; the personal, societal,
workforce and economic implications of their perspective. The
five distinct and different boomer segments are: the "Empowered
Trailblazers," the "Wealth-Builders," the "Leisure
Lifers," the "Anxious Idealists," and the "Stretched
& Stressed."
The next few paragraphs are direct quotes and descriptions for
these five groups from the survey. It might be interesting to
see into which groups you fit.
"For the Empowered Trailblazers (18% of boomers),
retirement will be a well- rounded, empowered and liberated period
of their lives. Rather than spending their retirement in passive
rest and relaxation, they will be traveling, exercising, taking
educational classes, spending time with family and friends and
embarking in new directions. Open to new ideas, retirement will
provide an opportunity to widen, not narrow, their horizons.
Generous with their resources, they plan on contributing time
and money to social causes and charities. 68% are looking forward
to next phase. More than half say 'self-confidence' and "open-
mindedness" completely describes them. 90% aspire to work,
67% plan to volunteer, and 79% plan to travel.
"The Wealth Builders (31% of boomers) are fueled
by their desire for material success and security. For them,
retirement will center around continued work and the achievement
(and enjoyment) of financial success and security. They are the
most likely of all groups to define themselves as workaholics
and are less likely to say they want to stop working for pay
in the next phase. About half of this group would say they are
primarily driven by their own personal financial gain,
while the other half is working to achieve financial security
and stability for their immediate family. In fact, they
are the most likely of all boomers to describe themselves as
family oriented, and in the next phase they plan to reap the
benefits of their hard work by spending more with their spouse
or partner, children, and grandchildren. 79% plan to work, but
only 28% say a sense of self-worth or identity is a very important
reason to keep working - it's the money that matters.
"Anxious Idealists (20% of Boomers) see their retirement
years both as a time for new directions and better work/life
balance and as an opportunity to give even more of their time,
skills and money to worthwhile causes. They may not have a lot
of assets, but they are the most likely to say it's important
to them to leave a significant amount of money to their family
and to charitable organizations. However, because throughout
their lives, they have not tended to focus on practical matters,
they realize that they haven't put away as much money as they
should, and their lack of money is a serious and growing source
of worry and fear. 85% believe that it costs too much to retire.
"When asked what they are looking forward to, the Leisure
Lifers (13% of Boomers) are the most likely to list simplifying
their lives and having years of full time relaxation and play
among their top goals. Work is definitely not a priority for
them - and a large percentage never enjoyed their careers or
jobs. They are the most likely to look forward to stopping work
for pay completely and permanently, and the sooner the better.
They are more likely to say they will retire by their early 50s.
In fact, half of them are retired already. With low levels of
income and low levels of savings, if they were to anticipate
serious financial difficulties in the next phase, they are the
least likely to say they would go back to work to try to make
up for the shortfall. Instead, they are counting on government
entitlements and their savings to ensure a life of leisure in
the next phase. 78% are looking forward to having more time for
rest and relaxation, and 71% are looking forward to reducing
stress. 94% feel that they and every member of their generation
are entitled to full benefits from social security.
"The Stretched and Stressed (18% of Boomers) are
the least likely to describe themselves as successful, self-empowered
or optimistic about the future. They are on a bad path and they
know it. During the next stage, they will continue to work, not
because they want to, but because they will have to. Of all boomers,
they have the highest unemployment levels, have earned the lowest
levels of income throughout their lives and have taken least
advantage of available guidance or pension opportunities. There
isn't much they are looking forward to - they are least likely
to look forward to spending time with their spouse, most likely
to think financial issues and where to live will be major sources
of disagreement, and most likely to think they and their spouses
will be very unhappy in the next phase. Only 9% are looking forward
to next phase, and they expect lowest levels of happiness (5.8
out of 10). They expect to live the shortest - only until age
77."
Automatic Wealth
Looking at the data, it's easy to come away with the idea
that a substantial portion of my generation is living in denial
or has not planned or saved for retirement. But it is also true
that a significant portion has done very well and will be able
to retire in comfort. What's the difference? It's not necessarily
education or genetics or luck, although these don't hurt. It
has more to do with hard work, perseverance and a lifestyle that
allows for significant savings.
When someone writes to me asking how they can make a lot of money,
what they're really asking me, as a supposed expert in investing,
is "What are the secret investing techniques that the wealthy
know that I don't?"
And now I have to burst a lot of bubbles. There are no secret
investing techniques that will make you wealthy. The not-so-secret
answer is to save as much as you can and compound it as safely
as you can over time, and start when you are young.
I spend a great deal of my time analyzing hedge funds and money
managers. Some of these funds and managers provide above-average
risk-adjusted returns, but there are very few who will make you
rich simply by putting your money in their fund. And those who
do have such funds are probably closed to new investors. We all
know that putting $100,000 with Warren Buffett at the beginning
of his career would have made you fabulously wealthy. But who
knew back then? How many people had access to Warren Buffett
or even knew who he was in the 1960's?
The reality is that 80% of mutual funds managed by professionals
don't beat their respective indexes. Very few managers have consistently
provided 15-20% annualized returns over a decade of time, which
is a remarkable achievement.
Investing is about managing your assets in such a way as to have
them grow and compound. That implies you have assets to begin
with. This means that saving is more important than investing
in the process of accumulating wealth.
I know, I know, there are many examples of people who have in
fact gotten rich investing. They found Warren Buffett at the
beginning of his career or invested a significant portion of
their assets in Microsoft in 1982. If you start with 10,000 investors,
it is quite likely that you'll find 100 who have become wealthy
simply from the process of investing. As Nassim Taleb noted in
his brilliant book "Fooled by Randomness," that is
no more than you would expect simply from random events.
People do indeed become rich by buying a two dollar lottery ticket.
It happens every month. It just doesn't happen to very many people.
People who get rich by random investing often resent it when
I suggest that they were lucky. I mean this as no disrespect.
As my less-than-sainted Dad often said, "I would rather
be lucky than good." But for everyone who chose Microsoft,
there were a lot of who also chose Wang. Both investors did their
homework, and initially, it looked like they were both going
to be successful. Things just worked out differently.
And I would point out that Buffett and Microsoft were risky bets
in the beginning. I mean, have you seen a picture of the 7 scruffy
kids who started Microsoft? This is a slam dunk?
Those who invested in Wang simply saw it as bad luck.
Those who invested in Microsoft believed in their own skill.
And I would admit there was some skill. But history shows us
that it is not a very reproducible skill. If it truly was a skill
then such a person would be choosing one Microsoft after another.
And that happens very rarely.
There are some 70,000 investors who trade a hypothetical $1 million
at the web site Marketocracy
run by California investor Ken Kam. Only 2% have records of beating
the S&P both long-term and monthly. Kam picks the top 100
managers to actually run a fund. However, last year, the fund
lost 4% while the S&P 500 gained 11%. It's a tough world
out there.
Listen to how Rich Karlgaard of Forbes describes these top 100
investors: "Few of Kam's top 100 attended Harvard Business
School. That's the point. Wall Street investment houses, says
Kam, recruit the wrong people. The top-drawer firms look for
high achieving, well spoken generalists from the best business
schools. But good investors, Kam says, tend to be savants with
a passion. They're nerds. They're freaks. They're too young or
too old. They eat junk food and stare at the monitor and perhaps
forget to bathe. They live and breathe stocks. They tend to be
sector specialists who know the underlying science, product cycles,
supply chains and buyer habits in their sectors."
In the very important book, "The
Millionaire Next Door," one of the things that is quite
common among millionaires is that they own their own business.
And I would suggest to you that most of the people that you and
I know who have gotten rich because of their investing have done
so because investing is their business. They are investment professionals
in one form or another. They may not have a "license,"
but they are professional none-the-less. They have devoted their
lives to it. I contend they would have been just as successful
in another business. It was their hard work, dedication and devotion
to their craft that made them successful. Investing was simply
a tool.
For 98% of the people who read this letter, investing in a passive
manner is not the primary way to get rich. You will have to do
something in addition to investing if you want to be able to
retire wealthy.
And that brings us to the book that I mentioned at the beginning
of this letter by Michael Masterson called "Automatic
Wealth - the Six Steps to Financial Independence."
It would be simple to say that from now on when I get a question
about how one can become wealthy I will refer them to "Automatic
Wealth." But the book is more about than some formula for
getting wealthy. It is to some degree a book about the philosophy
of wealth and money, as well as the role it plays in our life.
The Eight Habits of Wealthy People
Michael recognizes that money is not the most important thing
in life. As he notes, he knows a lot of rich people who are miserable.
However as the survey we just reviewed pointed out, not having
money is even more stressful. Money is simply a tool. And some
people seem to have the knack for accumulating it. Masterson
gives us eight habits of wealthy people.
A. Wealthy people work hard.
B. Wealthy people are good at what they do.
C. Wealthy people have multiple streams of income.
D. Wealthy people live in (relatively) inexpensive homes.
E. Wealthy people are moderate in spending.
F. Wealthy people are extraordinary at saving.
G. Wealthy people pay themselves first.
H. Wealthy people count their money.
Michael recognizes that there
are multiple ways to achieve wealth. It is possible to achieve
wealth by working for the other guy and getting paid a handsome
salary and save a good part of that salary. And he shows you
how to increase your salary and your personal value to your company.
But statistics show us that it is more likely you will achieve
wealth by owning your own business, investing in small businesses
and/or real estate.
I've known Michael for over 20 years. He is one of the smartest
businessmen that I know, and is a true marketing genius. (I don't
say that lightly.) Watching him analyze a business or marketing
strategy can be a very humbling experience. During the time I've
known him, he has started dozens of small businesses and ventures.
Most of them have been successful and some of them have been
wildly successful. Michael has a knack for understanding what
it takes to make a small (or large) business work. This book
gives us the accumulated wisdom that he has learned in the past
almost 40 years.
But this book is not to just about starting small businesses.
I happen to be a serial entrepreneur, but there are many people
who simply don't want to run their own business. I can respect
that, but it doesn't mean that they are locked into a life of
less wealth. Michael gives us many other ways to go about accumulating
wealth.
I am a relatively successful businessman. While reading this
book, I learned a great deal about the basics of business and
organizing my life. I took away a lot of notes and added to my
"things-to-do" list. The four hours I spent reading
this book will repay themselves many times over. Moreover, the
book is written in such a style that it has me positively excited
about making changes that I know will be difficult.
So if you're starting out and looking to accumulate wealth or,
if you're already down the road and would like to fine tune or
add to your knowledge, I suggest you go to Amazon and pick
up "Automatic Wealth." I really think you'll find
the $16.47 (and four hours worth of reading time) price tag to
be a bargain.
Masterson and his staff also write a daily newsletter called
"Early to Rise." The e-letter is full of ideas and
articles about not only business but how to make your life in
general better. I find it a valuable read, and always try to
at least scan it for the articles that I know I need to think
about. I've arranged for my readers to get a free trial by going
to http://earlytorise.com/freetrial.htm.
Fishing, Business and Real Cheerleaders
We are going to take my youngest son fishing tomorrow, although
it may scar him for fishing. I am the world's unluckiest fisherman.
I can sit in the middle of 20 people catching fish, use the same
lures or bait, throw my line in the same place and come up empty.
It is uncanny. I have been known to jinx professional guides.
Some of my friends have banned me from their camps. Of course,
Trey will probably only remember the time his Dad took him fishing
and not that all they did was drown worms. At least, that is
what I hope.
Thankfully, I do not make my living fishing. What I do is analyze
hedge funds and investment managers. And since we are talking
about small business and the need to market, let me in the way
of a commercial mention that I write a free e- letter for high
net worth investors.
I am instituting some new policies and procedures for my free
Accredited Investor E- Letter, which we will announce soon. It
is a letter on hedge funds and private offerings. In the meantime,
if you are an accredited investor ($1,000,000 net worth or more)
and would like to get my thoughts, you can go to www.accreditedinvestor.ws and register. Basically,
I work with Altegris Investments to be able to offer investors
access to a select group of hedge funds, private offerings and
commodity funds. The website explains how we work, as well as
outlines the risks involved. Feel free to write if you have more
questions.
I wish I could make the offer more universal, but the rules do
not allow me to do so. I hope that at some point in the future
Congress will decide there should not be two classes of investors,
but until that time the rules are quite clear. (In this regard,
I am the owner and a registered representative of Millennium
Wave Securities, LLC, an NASD member firm. See more disclosures
on the web site and at the end of this letter.)
I am often disdainful of stock market cheerleaders. Usually,
when I get a little over the edge, someone writes and points
out that I should not disparage REAL cheerleaders. They are right,
of course. I have four daughters, all of whom were involved in
competitive cheerleading. It is a lot of work and effort. One
of my daughters (Amanda) was an All-American. Tomorrow morning
she will be in Dallas cheering for ORU at the women's NCAA tournament
as ORU takes on the University of Texas in what on paper a mismatch.
But in March, upsets sometimes happen. That's why they play the
game.
It's time to hit the send button, as it is late and I have to
get up early. Enjoy your week.
Your 'not planning on retiring' analyst,
John Mauldin
email: John@frontlinethoughts.com
Mauldin Archives
Copyright ©2005
John Mauldin. All Rights Reserved.
Note: John Mauldin is president
of Millennium Wave Advisors, LLC, a registered investment advisor.
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