Investing for a Lifetime

Managing Wealth for the "New Normal"

Richard C. Marston

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118900949
• eBook ISBN: 9781118918685
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Investing for a Lifetime is designed to make saving and investing understandable to the investor. Wharton Professor Richard C. Marston, 2014 recipient of the Investment Management Consultants Association's prestigious Matthew R. McArthur Award, guides an investor through the main investment decisions throughout a lifetime.

Investing for a Lifetime shows:

• how younger investors can set savings goals
• how both younger and older investors can choose investment portfolios to achieve these goals
• how investors can sustain spending once reaching retirement.

Younger and older investors alike should understand savings goals that will provide enough income to sustain spending in retirement. They should devise rates of saving that allow them to reach their goals by the time of retirement. Though retirement is often the main goal of investing, it's not the only one. Marston discusses how funding a child's education or saving for a down payment for a home affects overall saving.

Sensible investing is also necessary for savings goals to be realized. Investing need not be complicated, but Marston explains that a diversified portfolio should include a mix of different types of U.S. stocks, foreign stocks, real estate as well as bonds.He describes each of these asset classes and shows how they fit in an investor's portfolio. He shows how investors can monitor the performance of their portfolios by establishing benchmarks for each asset class to judge how well their investments are doing.

He focuses particular attention on those investors nearing retirement. In today's low interest rate environment, he discusses whether it is possible to fund retirement from interest and dividends alone.He shows how savings combined with Social Security can fund retirement spending. And he asks how the "New Normal" of lower returns might force investors to save more than in past decades, and to spend less in retirement than in the past.

Investing for a Lifetime is for investors who want to understand more about the savings and investment process, particularly those who worry about whether their retirement savings will last a lifetime.

PART One
Saving and Investing

CHAPTER 1
Introduction: Investing for a Lifetime

Investing for a lifetime is really hard. First, investors have to figure out a way to force themselves to save. It’s not easy because they have so many other things to do with their income. Savings often becomes just the residual after they have finished their spending. Yet savings are so essential if they are to enjoy a long retirement. This book won’t teach anyone how to save. But it will show them how essential it is to save throughout the working years.

What amount of savings is necessary? That depends primarily on how much an individual hopes to spend later on in retirement. Ideally, investors may want to maintain their current standard of living once they retire. It’s true that in retirement it may be possible to spend less than in their working years, but it’s best not to count on spending much less. Individuals vary widely in their savings level because their incomes differ so much. But savings rates, expressed as a percent of income, should not vary nearly as much. In practice they do. That’s because many Americans don’t save enough.

Second, investors have to figure out how to invest. That’s more complicated than it appears because there are so many pitfalls to successful investing. The most important pitfall is that investors can’t control themselves. They shift in and out of investments, and mostly at the wrong time. They chase after “hot” investments even though most investment fads end up poorly.

I believe that investing can be very simple. Investors should be able to pick a portfolio of stocks and bonds and stick with it. I will argue later that the portfolio should be well diversified with different types of stocks and bonds. But that doesn’t mean the investments have to be complex or difficult to understand.

Third, investors need a plan for retirement. That means assessing how much savings is needed for retirement. Then they have to figure out how to stretch their resources through retirement. That means having a spending plan that is reasonable given the wealth that investors have accumulated during their working years.

THE NEW RETIREMENT REALITY—WE ARE ON OUR OWN

This book is about investments. But it is also about saving for retirement and stretching resources during retirement. The primary reason people invest is that they need to fund their retirements. Of course, many people have other motives to invest. They may save for a down payment to buy a house. They may save to buy a car rather than to finance it. And they may also save to help pay for the education of their children. But the retirement goal is the primary savings goal for most people.

Some Americans are fortunate enough to have guaranteed pensions that provide them with a steady income throughout their retirements. These are the old-style defined benefit pensions that were once quite common in corporate America (and are still provided by most state and local governments). The pensions provide a guaranteed income to the employee and often to the employee’s spouse in the event of the death of the employee. Sometimes the income is indexed to inflation, rising with the cost of living during retirement. Today, the balance has shifted away from defined benefit pension plans to defined contribution pension plans, like the 401(k) plan, where workers contribute part of their salaries to the plan with firms often matching or supplementing the employee contributions. Figure 1.1 shows the share of private sector employees in each type of plan over the past 25 years.¹ There is a dramatic downward trend in defined benefit plans and a corresponding upward trend in defined contribution plans. Employees with the latter type of pension plan are, in a sense, responsible for their own retirement. If they save enough during their careers and invest wisely, they can enjoy a comfortable retirement.

FIGURE 1.1 Retirement Plans in Private Sector by Type

Source: Employee Benefit Research Institute, 2012.

How much is “enough”? That depends on how much they hope to spend in retirement and how much income they can derive from their portfolios. Later chapters will explore both investing and spending in retirement. Decisions that Americans make about investing and spending can make a big difference in determining how financially secure they are in retirement.

Most baby boomers will find the new retirement system quite challenging. It’s true that since the 1930s Americans have had a Social Security retirement system to help fund their retirements. But benefits are limited. Retirees typically receive much less in Social Security benefits than they earned in their working years. So savings are necessary if retirees are to come close to matching their preretirement income.

LONGEVITY

Many Americans don’t really understand how long their retirement may be. Life expectancy has increased steadily over the past 50 years at the same time that the age of retirement has fallen. According to the Labor Department, the median age of retirement for both men and women is less than 62 years of age.² That’s down from an average age between 66 and 67 in the 1950s. Americans at 62 can often look forward to 20 or even 30 more years of life in retirement. Yet few Americans have a coherent plan to make sure their resources will last that long. Savings are often inadequate and spending is often too high to be sustainable. Investment decisions, moreover, are often inconsistent with spending rates.

In formulating a savings plan for retirement, it will be helpful to know just how long our savings must last. Figure 1.2 presents some estimates of how long current 65 year-olds are likely to live.³ For a 65-year-old man today, the median age of death is estimated to be 83 years, with 25 percent of his cohort likely to live to be 89. For a 65-year-old woman, the median age is 86 and 25 percent are likely to reach 92. For a married couple at 62 years old, the relevant statistic is the life expectancy of the surviving spouse. The median age of death for the surviving spouse is over 90 years of age! So the nest egg accumulated for retirement must last a long time.

FIGURE 1.2 Life Expectancies of Today’s 65-Year-Olds

Source: National Vital Statistics Reports, 2011.

With lifetimes this long, investment horizons must be just as long. In fact, they need to be longer because individuals may live longer than the average person their age. Yet Americans entering retirement often choose portfolios appropriate for retirees of their grandparents’ generation wh...

Table of contents

• Cover
• Series
• Title Page
• Copyright
• Dedication
• Preface
• Acknowledgments
• Part One: Saving and Investing
• Part Two: Investment Choices
• Part Three: Wealth Management
• About the Author
• About the Companion Website
• Index
• End User License Agreement