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June 26, 2008 Personal Investments: Larger Source of Retirement Income
- Old rule: As you approach retirement, you assign an increasing percentage of assets to fixed income or cash-like investments. This idea has been outmoded for years.
- What is the new truth about funding retirement?
Today’s topic is Role Reversal: It’s my belief that 21st Century Income will require new ways of thinking, new ways of positioning and organizing investments… and many “Old Rules” will be discarded or even turned inside out.
New rules are reversal of old ones
One of these is the idea that as you approach retirement, you assign an increasing percentage of assets to fixed income or cash-like investments. This idea has been outmoded for years. Almost everything that made it work has changed and the changes have created a new, significantly different reality. The new formulas will be a reversal of the old ones.
Three generations ago, “retirement” was a fairly exotic concept. For the last generation (those in retirement today), retirement became an expectation. Social security and corporate pension plans combined in a new system for supporting retirees.
Personal investments were a distant third as a source of retirement income. With life’s basic needs provided for, protection and predictable income took precedence over growth in personal portfolios.
Most factors that drove that conservative process have changed. As people today approach retirement, institutional sources of retirement income are diminishing to insignificance!
To heighten the rate of change, life expectancy is extending the number of years that require retirement assets. The cost of living well—especially the cost of quality healthcare—continues to escalate.
Individuals must be own pension fund managers
So, what’s the new truth about funding retirement? In a role reversal, individuals must now assume the responsibility for providing the bulk of retirement assets. They must be their own pension fund managers and pursue returns via the same strategies used by institutional investors.
This means multiple income drivers…a fancy way of saying income from many sources… interest, dividends, rents, oil, gas, etc.—all non-correlated, all diversified, and many having built-in inflation protection.
You’ll need to provide a consistent growth rate that is substantially higher than the rate of inflation to protect against outliving your money.
How do we do this? By thinking in units of currency, as opposed to Dollars, “New Money” in the 21st century. That is our next discussion.
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