Retirement has always been a risky business

By DAVID MOON, Moon Capital Management, LLC
November 27, 2011

For most people, planning for the income part of impending retirement has never been easy. But it has never been more difficult than it is today.

In the old, old days, people worked until retirement age, then quit. They got a gold watch and a lifetime pension from their employer. Pretty simple.

Along came 401(k) type plans. As employees approached retirement they would adjust their portfolios somewhat. Ideally they would move enough money from stocks to bonds so that the bond portion would safely generate enough income to meet their immediate spending needs in the early years of retirement.

In those quaint, antiquated days, an interest rate compensated a bond or CD investor for the time value of her money, along with an adjustment for default risk, expectations about future levels of interest rates and anticipated future inflation.

If folks generally expected inflation to average about three percent annually, it was fairly common for ten-year Treasury bond rates to yield around nine percent.

Rates on ten-year Treasuries are currently 1.95 percent. That will likely not even compensate an investor for inflation.

Risk, however, is usually greatest when it isn’t evident.

The most popular time to retire within the past 50 years – especially to take an early retirement – was in 1999. The stock market had averaged an 18.5 percent return over the preceding 18 years. I saw projections prepared by advisors in 1999 that actually assumed 18 percent annual returns for retirees in perpetuity.

To most people, risk was not too evident.

Based on those kinds of projections, the Dow would have increased almost 70,000 points in the subsequent 12 years.

Instead it increased a grand total of 300 points, or about 25 points a year.

Although popular, late 1999 was actually the riskiest time to retire. The risks were two unanticipated, 40-plus percent declines that occurred within six years of each other. They defined a dozen years of zero stock market capital returns.

What seemed so easy in 1999, wasn’t.

In his poem “Ode on a Distant Prospect of Eton College,” Thomas Gray wrote “if ignorance is bliss, ‘tis folly to be ignorant.”

Great poetry. Terrible investment advice.

It was blissful ignorance of the now-obvious risks in 1999 that teased many people into an inappropriately early retirement and unrealistic earnings expectations. At the time, however, they were completely unaware they were about to walk into a decade-long minefield.

Investors are more concerned about risk today than they were a decade ago, but today’s risks are no more dangerous. They might even be less so.

Risk isn’t the thing that has already happened. Risk is that which is both unknown and unexpected.

If you can’t earn enough from fixed income investments to pay your living expenses, do you buy stocks, longer bonds, lower quality bonds, structured products or something else? Do you slash your expenses or sell your house? Can you even retire at all?

Retiring today seems daunting, fraught with risks. It is. But it always has been, whether people realized it or not.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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