The Retirement Rules of Money Have Changed

This article covers long-held retirement rules of money that people have heard for decades.

Unfortunately, these rules have drastically changed. The 10/5/3 rule: says that you can always average a 10% rate of return in stocks; 5% in bonds; and 3% in short-term cash. For the first 15 years of this century, years 2000-2015, one’s average return in the S&P 500 stock index is about 2 to 2.5%. If one looks at the Bloomberg US Corporate Bond Index, 3.33% is the effective yield. The Muni Bonds 30 Year Yield is 2.73%. US Treasury securities have been used as a proxy for cash and the 6-month Treasury has a 0.43% yield and the 12-month Treasury has a 0.61% yield. If we look at what major banks are paying in the Phoenix area for $100,000 invested in a 1-year CD: Wells Fargo pays $50 and Chase pays $10 annual interest. If these low returns that you have experienced in recent years continue, few will be able to retire and spend anywhere close to what was spent during their working years.

You should save 10% of your income: is not enough. Thirty years ago, the average US savings rate was 6% and in October, 2015, it was 5.5%. If one earns $100,000 annually for your last 25 years before retirement (ages 40 to 65) and only saves 5.5%, that annual $5,500 savings, if one earned 2%, would become $188,713. If one earned 2% on this total, you would receive $3,774 of annual income to supplement your Social Security (which was a monthly average $1,294 in 2014 and $1,335 in 2015). Tell me how an extra $314.52 of montyly income from your life savings will change your life. The reality is that the median family income for the last 20 years has been around $50,000. One has to save at least 20% for one’s last 35 years of work life (such as from age 30 to 65). If one saved $10,000 annually for 35 years, and earned 2%, one would accumulate $520,943 at retirement.

My only choice for investments is Wall Street assets.

Today, one has the choice of: a volatile stock market; low interest rates in bonds; or ridiculously low interest rates on money deposited in the bank. For many, you need to look at alternative investments. For many years, I was a member of the largest real estate investment club in the Phoenix area. I know that most people will never own rental houses, because they are afraid of these 3 factors: tenants, trash, and toilets.

However, depending on what part of the cycle one is with single-family rental houses, one can lend to professional fix and flippers at anywhere from 8-10% interest. In many cases one will have a first mortgage to secure your investment. A good rule of thumb is to lend no more than 70% of the after-repaired value of the house. The professional fix and flippers normally follow this formula: buy a house for $130,000; put $25,000 into repairs; and plan for the house to be worth $200,000 after the fix-up process. You would want to lend no more than $140,000 and insist that the fix and flipper have at least $15,000 of his own money into the deal.

Conclusion: the old rules of money no longer are no longer accurate guidelines by which we can plan our retirement future.

Please contact Dr. Wong for a consultation at (480) 706-0177