How to make retirement less scary
by Doug Brodie
One of the joys of the interweb-thing (name guaranteed to wind up your millennial kids) is the ability to listen to KWHL 106.5 in the middle of the night, despite it being based in Anchorage (Alaska), or to listen to the daily weather forecast for Hawaii (Hurricane Preparedness Week 19-25 May), and have the New York Times on demand, on your phone or mac or pc.
The NYT website is like having a Sunday paper every day of the week, and they have a current article on something we had not come across before – making a retirement mission statement.
Often we talk to clients about working out objectives to enable a budget to be created, however the mission statement takes a different, more holistic view. This is important; because we are spending every working day talking with people at/in/planning retirement we have learned some key elements on how retirement affects people – you spend Monday to Friday for forty-six weeks a year for forty years with your life governed by the accepted work/family routine – tramlines that you and I follow, that determines our daily routines, for a long, long time. Then suddenly it stops, those guide rails are no longer there and you discover yourself watching Homes under the Hammer and other daytime TV padding.
The mission statement helps get round the ‘How much will I need?’ question, bearing in mind that in the US the cost of healthcare can completely de-rail retirement plans. ‘Enough’ therefore depends on health. The message is that it is easy to get caught up in the arithmetic of retirement before knowing what you actually want out of this phase of life.
Here’s what the author’s mission statement for retirement looks like after he’d ditched the idea of buying out his local bagel shop, or buying a private lake in Minnesota: it starts with objectives that are then distilled into the statement.
I want to live somewhere beautiful and close enough to my kids to be able to help them often and be involved in bringing up my grandchildren.
I want to read for hours every day.
I want to be excellent at the piano.
I want to cook for my wife, who might not retire at the same time I do.
I want to run, slowly.
I want to be useful to friends, family and strangers.
Simplifying the statement:
Seek joy by doing things, not having things.
Live in a comfortable home with minimal maintenance and maximum protection from climate change.
Give time to others, to see how much good I can do even as my energy decreases.
Be generous with myself – occasionally and responsibly – by splurging on once-in-a-lifetime experiences with the people I love most.
Have money left over so I do not become a burden.
https://www.nytimes.com/interactive/2024/05/09/magazine/retirement-mission-statement.html - Ron Lieber and Giacomo Gambineri.
/1. Debt – hitting countries not people.
The giant US investor Alliance Bernstein has written last week that the persistency of the US deficit poses issues for growth. The US debt total is often talked about, however it is the annual budget overspend – the deficit – that they see as an issue.
The US has a sticky 6% budget overspend.
It is the higher spending on infrastructure and other pre-pandemic priorities that has kept government spending at pre-pandemic levels whilst tax cuts have reduced government revenues. The Congressional Budget Office sees this as continuing for the next decade.
The ratio of debt to GDP is over 100% today so this is only going to get worse. It’s not thought to be a near term issue, however the cost of repaying that ever-growing debt is soaking up money that could be spent on more productive investments.
The eurozone has a deficit of around 5.3% per year, and a total debt/GDP ratio of 88%, both of which – you may remember – breach the Brussels determined Stability & Growth Pact which stipulates that countries must deliver 3% and 60% respectively to be allowed to join the Euro club (hence the 2011 Greece debacle).
And the UK? Well, Alliance Bernstein sees the stats from the Office of Budget Responsibility pointing to a deficit of 1.5% in 2026, though accompanied by 93.2% debt/GDP.
/2. Monte Carlo or Bust – trouble with random stats.
Peter Cook, Tony Curtis, Terry Thomas, Eric Sykes, Susan Hampshire, Jack Hawkins… phew!
There’s an oft-used method of financial prediction called Monte Carlo analysis; what it does is to map multiple potential outcomes in a given investment scenario (say, UK large cap annual share price returns) to enable upper and lower bounds to be identified and a middle set of returns. In financial calculations you will normally see 10,000 outcomes mapped together, all random.
The website towardsdatascience.com summarises the technique better than I ever could:
Monte Carlo (MC) methods are a subset of computational algorithms that use the process of repeated random sampling to make numerical estimations of unknown parameters. They allow for the modeling of complex situations where many random variables are involved, and assessing the impact of risk.
This is what a Monte Carlo output looks like (from mathswork.com)
We have two problems with this:
It’s hopeless at telling a retiree what income he will have next year (“Income madam? Well, might be lots or might be very little, no idea really.”)
A dartboard random score is calculated at <12.83 out of 20, ergo 64% of the maximum available (quora.com).
We believe liability matching is the only rational way to design prudent investing to deliver pension income simply due to predictability. Our research covers the last 50 years of retail returns, our asset success rate is 97% and portfolio success rate is 100% measured from 1986 onwards using investment trusts.
/3. Does my company look big in this?
Like cholesterol in our bodies, debt doesn’t show on the outside. You might raise a slightly envious eyebrow at a neighbour’s new car and palatial home, however you don’t know if the car’s leased or the house is mortgaged.
The same applies to companies – unless you are ‘in the industry’ or have an unnatural interest in balance sheets, you can’t see which companies are swimming with no costume on. Often for good reasons – companies borrow to grow and to invest in themselves, however like the national deficits above, companies need to be mindful of annual deficits. Unlike countries, their debt/revenue can go high enough to make them insolvent, bust, bankrupt.
Sweetgreen is a salad restaurant business listed in the US – it has a market cap of $3.7 billion, q1 revenue of $158 million yet still lost $26.1 million in that three-month period. The business was started 17 years ago and has never made a profit, and here’s why:
There are over hundreds of Sweetgreen restaurants in the US, however, with a built-in structural deficit of 17% of everything it sells, it does make you wonder if it’s a business that is simply handing out free money?
/4. Chancery Lane in the Financial Times
There’s a kerfuffle going on with how investment trust charges are displayed. We have long decried the gibberish that the regulator has instructed be printed in illustrations and other documentation of retail financial investments, including pensions.
For example you won’t know that Hargreaves Lansdown pocketed £132,000,000 in interest from client accounts in just six months last year and is not required to declare that to you as a charge or a cost.
Investment trusts suffer from Brussels-imposed disclosure rules that the FCA still enforces. We think that’s barmy and should end now.
Doug Brodie, Moira O’Neill, FT 11 May 2024.