By Dennis Miller
Eight percent is not good news. In my latest article I shared some reader feedback from our inflation survey, and in case you missed it, the Money Forever Reader Poll Inflation Rate is 8%. But what does that number really mean for us – seniors and savers trying to protect our buying power? It’s time to read the tea leaves and find out.
Up to Your Ass in Alligators
You may remember the old poster that read, “When you are up to your ass in alligators, it’s tough to remember the goal was to drain the swamp.” You may have felt overwhelmed during the last few years, as the investment options for your retirement portfolio changed. You might read about the benefits of gold and silver one day, then CDs, dividend-paying stocks, and annuities the next. It’s pretty easy to feel overwhelmed, particularly when you cannot afford to put too much of your life savings at risk.
One of our readers really drove home the challenges we all face:
“Anyone who has been living on SS [Social Security] checks since 2000 will tell you the same thing. They cannot live on those checks alone, and [have] depended on the interest they receive from their savings accounts or CDs. They cannot do this any longer. They now need to withdraw principal or redeem some CDs just to make ends meet. … [We are] on fixed incomes with no hope of getting a raise. These people understand the effects of inflation more than any other group. These people live with fear every day, understanding they have little control over their financial future, while watching their life savings slowly vanish every year.”
Of the readers who responded to our poll, 1.6% think the inflation rate is 2% or less. On the flip side, the remaining 98.4% must think the government is lying (or in need of a new statistician).
My dear friend Toots, whom I often quote, wrote, “Did we prove once again the world is not flat?” Perhaps, but there’s more to it. Certainly, I’ve made that point before, but that doesn’t negate the need to highlight these phony government numbers. We shouldn’t accept falsehoods with a nod and a wink; that’s how they become immutable “facts” of life in many people’s minds.
Some folks want to debate the methodology used by Shadow Government Statistics, but that misses the point. The bottom line is: 98.4% of us agree that the Real Inflation Rate is higher than the rate reported by the BLS. That is the reality of our readers – at the grocery store, the gas pump, and today at the flower shop (gentlemen, don’t forget roses for your sweetheart). Anyone living on a fixed income already knows this.
The real issue is that we are getting squeezed! At least, 98.4% of us think so. There’s no need to dwell on whether it’s 6%, 7% or 8%, etc. What really matters is how this affects your life. If the price of my favorite snack doubled, and the price of broccoli dropped 50%, my costs are rising. The price of broccoli could drop 99%, and I still wouldn’t buy it.
While planning for retirement, most of us planned for a 2% inflation rate and anticipated earning 6% on our portfolio. That was a nice retirement plan while it lasted, but it won’t do much good for anyone now.
Another old-line “rule” was: a retiree could safely use 4% of his portfolio every year to supplement Social Security, and still be fine for the rest of his life. Where did the math come from? If your portfolio grew 6% every year and you took out 4%, the remaining 2% covered any loss to inflation. It was really that simple, and it worked just fine for me in my early retirement years.
Live off the Interest
We have all heard the old rule, “Live off the interest and never touch the principal.” That is exactly what we were doing, while also protecting that principal from inflation.
Now comes the scary part. If the real rate of inflation is anywhere near the Money Forever Reader Poll Inflation Rate of 8%, how much can we take out of our portfolio every year without losing buying power? The math is still simple, but with a frightening answer: nothing, unless you earn more than 8%.
The problem is easy to understand, but the solution is tough to implement. If we want that same 4% to supplement our Social Security checks, we need to earn 12% on our portfolio every year – 8% for inflation and 4% for income. And this does not even factor in taxes. Those of us with a traditional IRA who are over 70 1/2 years old are required to take a minimum distribution, which can come with a nice tax bill.
Imagine that you have a $1 million portfolio, and your goal is to keep up with the Money Forever Reader Poll Inflation Rate and earn 4% income to supplement your Social Security checks. That’s $120,000. To maintain a somewhat conservative posture, we recommend 30-33% of your portfolio be in cash, which pays little if any interest; let’s assume cash pays 0% for the moment. That means you must earn 17.1% on the remaining $700,000 to reach your goal of $120,000.
That return can come in the form of an income check, dividends, and stock appreciation. Whatever the source, that’s a pretty tall order. And it’s particularly daunting when you consider that anyone close to retirement age should make minimal high-risk investments. We can’t bet it all on a speculative stock, hoping to catch the next Internet startup success story.
The Key is Regular Dividend Increases
The Money Forever team is on the lookout for solid companies that not only pay dividends, but also have a history of regular dividend increases. In the last quarter, three of the stocks in the Money Forever portfolio increased their dividends. It is highly unlikely that most of us will live long enough to see our dividends equal 50% of our investment (which is what Warren Buffett receives from Coca-Cola, according to what I’ve read). However, if a company is currently paying 4%, it won’t take too long to see an 8% yield. Once our dividend yield is at or above the inflation rate, we can factor in appreciation and start gaining ground on the inflation monster once again.
While dividend-paying stocks will get us on the right track, there’s still more work ahead. Dividends alone are not enough; we also need stock appreciation. If you subscribe to our premium publications, it may be a good time to review our special report, Money Every Month, where we discuss this in great detail. As of today, over half of the stocks in our portfolio have double-digit gains. While we are proud of what we have accomplished to date, we also understand that the current market could change any minute. We have to remain vigilant. Stocks with a long history of increasing their dividends plus a good history of appreciation are hot tickets. Perhaps this is part of the reason why the stock market is doing so well in a tough economy.
Alternative sources of income can also help. Two of our recent Money Forever premium issues focused on annuities and reverse mortgages. Under the right circumstances, as we outline in our reports, these can be valuable alternatives for filling your cash-flow gap. Nevertheless, please consider all of the risks and cautionary tales included in our reports before purchasing an annuity or signing a reverse mortgage. One seemingly simple mistake – like neglecting to put your spouse on a reverse mortgage – can be devastating.
So can it be done? Can we really build a portfolio that will stand up against the current rate of inflation? Sure; but we have to stay on top of our investments and continue to educate ourselves. “Set it and forget it” won’t work.
From the Stadium to the Golf Course
For many of us, cutting back on expenses is very difficult. It can feel like part of our retirement dream is going up in smoke. We have friends who planned to take summer and winter cruises every year after they retired. They thought they had the money to do it, but now they have to cut back. They do not enjoy their driving trip to the local state park nearly as much as they do a cruise.
One of the respondents to our survey mentioned that he cut back on golf from three days to two days a week. Our good friend Phil addressed his golf situation in a unique manner. For several years he had volunteered during spring training for a major league baseball team. Then the local golf course advertised for part-time help. He inquired; the job sounded like fun, and he negotiated complimentary greens fees as part of his package. For him it is the best of both worlds. Now he has a little extra income, his golf expenses are radically reduced, and he still is able to golf regularly, something he really enjoys. And yes, the baseball team is going to have to recruit another free laborer. Somehow, I think they’ll manage!
I’m realizing we all have to come to grips with the reality described by our reader at the beginning of today’s article. While it may be difficult for all of us, we are old enough to know that putting things off only makes problems get worse faster. It’s like our own personal fiscal cliff, but we can’t keep running the printing press and ignoring the real problem.
My oldest daughter, also a baby boomer, went to a class on personal financial management about ten years ago. I asked her what she thought the biggest lesson was. Her response surprised me:
“The first thing to deal with is your expectations. If you want a lot of stuff, and currently do not have the income to pay for it, you must find ways to increase your income. If that is not possible, then you must learn to adjust your lifestyle and be happy with what you have, living within your means. Dad, they stressed that part of being truly happy is the realization that your neighbor may have more or less than you do and it makes no difference. Personal financial management is as much an adjustment of your attitude as it is an adjustment of your spending habits.”
In retrospect, that class had a major effect on her life. She is a grandmother now, and she and her husband have a truly happy family. I believe it was philosopher William James who said, “Human beings can alter their lives by altering their attitudes.” That sentiment certainly rings true.
OK, you get the point, but you may not like it. Neither do I, and neither do the millions of our peers in the same predicament. So what should we do? To start with, everything I just mentioned, which is quite a task. Become an active investor, learn, and adjust to the new market. We must protect our nest eggs and look for solid income opportunities. We must look at our spending habits and see where we can cut back. Every dollar we save takes a little pressure off our portfolio and the need for it to produce income.
Also, don’t discount finding other sources of income. Write the book you’ve been dreaming about – turn your hobbies into a profit. I have a buddy who worked in the auto industry. Dealers often sell a car they do not have in inventory if there is one at a nearby dealer they can trade for. He set up a business helping dealers move vehicles around. He loves it because he stays active, and he says he had to learn zero new skills. His comment was, “Where else can I get a part-time job where I get paid to drive around listening to a ball game?”
You, dear readers, drove home the point for me with your feedback to our survey. If we need 12% or so to protect our nest eggs, then we all have to accept that challenge. If we have a really good year, we can grow our nest eggs and increase our buying power. If we fall short, we must keep erosion to a minimum.
The last time I ran a retirement-planning computer program, it said I would be fine as long as I passed away before age 125. In a bad year that may slip to 115. We are all in this together, and I’m committed to making sure Miller’s Money Forever lives up to its name.
One final thought…
My overriding point is that we have to take control of our retirement finances. Like I said earlier, the days of “set it and forget it” are gone. The upside here is that we can actually secure our retirement. Together with thousands of subscribers we’re doing just that. One way to start is with our free Money Every Month plan outlining how to invest so you’re getting income every month.
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