Retirement Ain’t Cheap

Your monthly expenses fall once you retire. Or at least they’re supposed to.

But what if they don’t?

Standard financial planning assumes that your expenses in retirement will be 70% to 80% of your expenses during your final working years.

But a recent study by MoneyComb and Duke University suggests that the real number can be a lot higher. As in 130%.

That number might sound ridiculously high at first, but think about it. You might have massive expenses in retirement that you didn’t have in your working years, such as paying for your adult children’s weddings.

Plus, without work taking up eight to ten hours of your day, you have a lot more time to sit around the house and impulsively buy things on Amazon.

But before we get into any of that, consider where the old 70% to 80% rule of thumb came from.

In a simpler time, you might have bought a house at 30 and lived in it long enough to pay off a 30-year mortgage. So, you entered retirement without one of your biggest expenses – the house payment.

Today’s retiring Boomers are far more likely to have moved multiple times for jobs and possibly divorced once or twice. They’ve taken out new mortgages at each stop along the way, resetting the 30-year clock, and enter retirement with those debts left to pay.

That’s a very big difference from previous generations.

Otherwise, where else are big drops in spending going to come from? Your electric bill doesn’t magically drop once your paycheck stops. And you might spend a decent bit more on travel and leisure since you have the free time.

And let’s face it. Unlike their parents’ generation, which learned frugality during the Great Depression, the Boomers were never the most fiscally disciplined. Does that magically change in retirement?

I would take all retirement estimates with a large grain of salt.

As my friend Harry Dent has explained for years, retirement is not the spending breakpoint. Americans hit their peak spending years long before that, between 46 and 54 on average, depending on their income level.

Spending declines after that, but it does so gradually. And it doesn’t suddenly drop 20% to 30% at retirement (or soar by 30%).

As you do your retirement planning, I recommend you take an honest look at your finances.

Unless something is fundamentally changing, such as your mortgage getting paid off, your post-retirement expenses are going to look a lot like your pre-retirement expenses.

And you also might have large expenses you didn’t before, like your daughter’s wedding. Try to set that money aside and out of your regular investment or spending account. Consider that money already spent and not part of your retirement nest egg.

The Social Security Administration estimates that your Social Security benefits will only replace about 40% of your paycheck. That means the remaining 60% has to come from your investments.

That could be $50,000, $100,000, or even a lot higher depending on your lifestyle.

Let’s take a look at the numbers. The following table breaks down how much you’d have to invest in assorted income securities in order to generate $10,000.

I list traditional forms, along with my Peak Income service.



Amount Needed
to Generate $10,000

Savings Account



5-Year CD



10-Year Treasury



Utility Stocks



Peak Income



At today’s current average savings account rate, you’d need a ridiculous $11 million to generate just $10,000.

If you needed an extra $50,000 to top off your Social Security income, you’d need a nest egg of $55 million.

If you have that kind of money, there’s really no point in you reading this. You clearly don’t need my services.

The further you get down the scale, the numbers get a lot more reasonable.

You’d need $751,800 in the average five-year CD in order to generate $10,000 in retirement income, but “only” $325,733 or $304,878 in 10-year Treasury notes or a utilities index fund. That’s still a lot of money. You’d need a million dollars in savings to generate just $30,000.

This is why I write Peak Income. My current model portfolio sports a dividend yield of 6.77%, more than double what you’d get in utilities stocks.

You’d need $147,710 invested for every $10,000 in income. That’s a lot more doable than $304,878… or $11 million.

Bond yields are rising, but they’re still far too low to meet the retirement needs of most investors. And this is where Peak Income comes in handy.

I look for income stocks that are a little off the beaten path. Some sport monster yields over 10%, while others sport more modest yields of around 4%.

But all pay substantially more than what you’re going to get in traditional income investments.

Investing Tips From the Greatest Hitter Who Ever Lived

A few weeks ago, I wrote about the NFL lineman who was giving his teammates a lesson in compound interest.

Today I want to talk about another sport: baseball. This was one of the few sports wherein I acquire pointsbet nj promo code and place my bets on my favourite players.

This wasn’t the best year for my hometown Texas Rangers, though I’m happy to see my fellow Texans, the Houston Astros, again advancing to the playoffs, which started this month.

That got me thinking about something I’ve written before, but want to share again — the investing lessons you can glean from arguably the best hitter in the history of baseball.

That’s Ted Williams. He was a trading expert and probably didn’t even know it.

The Boston Red Sox leftfielder finished his 19-year professional career with a lifetime batting average of .344 and an on-base percentage of an incredible .482, and this despite taking time off in the prime of his career to fight in World War II and the Korean War.

He also won the Triple Crown, meaning he led the league in batting average, home runs, and runs batted in… and he did it twice.

To put that in perspective, there’s only been 16 Triple Crown winners in the history of baseball, and two of those belong to Williams. And to cap it off, Williams was also the last Major League Baseball player to bat .400 in a season.

It’s safe to say that Ted Williams knew a thing or two about hitting a baseball.

And he was generous enough to share some of his secrets in his 1986 book, The Science of Hitting, which I strongly recommend for any baseball fan with an appreciation for history.

Interestingly, we can apply a lot of his same insights to investing.

To start, both baseball and investing are “sports” in which it pays to study.

Sure, Williams was probably born with better eyesight and better reflexes than you or me. But that’s not why he was the greatest hitter in history.

Williams was the best because he was willing the approach the game analytically, study his opponents and – perhaps most importantly – practice.

More than a half century before Billy Beane used statistical analysis to revive the struggling Oakland Athletics (as recounted in Michael Lewis’ book Moneyball), Williams might have been the first “quant” in professional sports.

Williams carved the strike zone into a matrix: seven baseball lengths wide and 11 tall. His “happy zone” – where he calculated he could hit .400 or better – was a tiny sliver of just three out of 77 cells. In the low outside corner of the strike zone – Williams’ weakest area – he calculated he’d be a .230 hitter at best.

The “happy zone” will vary from batter to batter, but Williams understood exactly where his was, and he wouldn’t swing if the pitch was outside of his zone.

Likewise, investors need to have the self-awareness to know when the market is favoring their specific trading style.

When it is, it makes sense to swing for the fences. And when it’s not, you don’t have to swing at all.

Williams was notoriously patient and disciplined at the plate, which is why his on-base percentage was so high.

He had control over his ego and his emotions and wouldn’t swing because the defense – or even the spectators – was taunting him. He finished his career behind only Babe Ruth in bases on balls (walks).

And in investing, it might be easier. You can watch pitches go by until you see one you like. As Warren Buffett famously said, there are no called strikes in investing.

While professional investors have enormous career pressure to look like they’re “doing something,” individual investors don’t have to worry about a boss firing them. They can afford to be patient and wait for a perfect trading setup.

Williams, an eventual Hall of Famer, was chastised in his day for talking too many walks by none other than the legendary Ty Cobb. Well, frankly, Williams could call “scoreboard” on Cobb.

Cobb finished his career with a slightly higher batting average (.366 versus .344) but his on-base percentage trailed Williams’ by a much wider margin (.482 versus .433).

But perhaps the best lesson from Williams is this:

If there is such a thing as a science in sport, hitting a baseball is it. As with any science, there are fundamentals, certain tenets of hitting every good batter or batting coach could tell you. But it is not an exact science.

While it pays to take a detached, scientific approach to investing, it is absolutely not an exact science. Given the role that human emotions play, it’s probably closer to a social science like psychology than to a hard science like chemistry or physics.

That’s why it’s always important to give yourself a little wiggle room when you invest, what Benjamin Graham called his margin of safety. Structure your trading so that being “mostly right” is good enough.

This piece first appeared on The Rich Investor.

Why You Shouldn’t Put ALL Your Money into an Index Fund

Cliff Asness doesn’t have the name recognition of a Warren Buffett or a Carl Icahn. But among “quant” investors, his words carry a lot more weight.

Asness is the billionaire co-founder of AQR Capital Management and a pioneer in liquid alternatives. For all of us looking to build that proverbial better mouse trap, Asness is our guru. My own Peak Profits strategy, which combines value and momentum investing, was inspired by some of Asness’ early work.

Unfortunately, he’s been getting his butt kicked lately. His hedge funds have had a rough 2018, which prompted him to write a really insightful and introspective client letter earlier this month titled “Liquid Alt Ragnarok.”

“This is one of those notes,” Asness starts with his characteristic bluntness. “You know, from an investment manager who has recently been doing crappy.”

Rather make excuses for a lousy quarter (Asness is above that), he uses his bad streak to get back to the basics of why he invests the way he does.

As I mentioned, Asness specializes in liquid alternatives. In plain English, he builds portfolios that aren’t tightly correlated to the S&P 500. They’re designed to generate respectable returns whether the market goes up, down or sideways.

You don’t have to be bearish on stocks to see the value of alts. As Asness explains,

You do not want a liquid alt because you’re bearish on stocks or, more generally, traditional assets. That kind of timing is difficult to do well. Plus, if you’re convinced traditional assets are going to plummet, you want to be short, not “alternative.” In other words, liquid alts are a “diversifier” not a “hedge.”

You should invest [in a liquid alt] because you believe that it has a positive expected return and provides diversification versus everything else you’re doing. It’s the same reason an all-stock investor can build a better portfolio by adding some bonds, and an all-bond investor can build a better portfolio by adding some stocks.

I love this, so you’re going to have to forgive me if I “geek out” a little bit here. My professors pretty well beat this stuff into my head when I was working on my master’s degree at the London School of Economics.

When you invest in multiple strategies that aren’t tightly correlated with each other, your risk and returns are not the average risk and return of the individual strategies. The sum is actually greater than the parts. You get more return for a given level of risk or less risk for a given level of return.

Take a look at the graph. This is a hypothetical scenario, so don’t get fixated on the precise numbers. But know that it really does work like this in the real world.

Strategy A is a relative low risk, low return strategy. Strategy B is higher return, higher risk.

In a world where Strategies A and B are perfectly correlated (they move up and down together), any combination of the two strategies would be a simple average. If A returned 2% with 8% volatility and B returned 11% with 16% volatility, a portfolio invested 50/50 between the two would have returns of 6.5% with 12% volatility. That is what you see with the straight line connecting A and B. Any combination of the two portfolios would fall along that line (assuming perfect correlation).

But if they are not perfectly correlated (they move at least somewhat independently), you get a curve. And the less correlation, the further the curve gets pushed out.

Look at the dot on the curve that shows an expected return of about 8% and risk (or volatility) of 10%. On the straight line, that 8% curve would have volatility of about 14%, not 10%. And accepting 10% volatility would only get you a return of about 4% on the straight line.

This is why you diversify among strategies. Running multiple good strategies at the same time lowers your overall risk and boosts your returns. The key is finding good strategies that are independent. Running the basic strategy five slightly different ways isn’t real diversification, and neither is owning five different index funds in your 401k plan. Diversification is useless if all of your assets end up rising and falling together.

Rich Man, Poor Man Revisited

I don’t make a habit of taking financial advice from professional football players.

No offense to the gentlemen suiting up for Monday night football this evening, but athletes aren’t known for being paragons of financial virtue. Sports Illustrated reported a while back that 78% of ex-NFL players were either bankrupt or in financial stress within two years of retirement.

And it’s not just football players. Kareem Abdul-Jabbar, one of my favorite basketball players as a kid, lost everything after taking lousy advice from an unscrupulous advisor.

So, imagine my surprise when I caught a video of Tampa Bay Buccaneers defensive end Carl Nassib standing in front of his former Cleveland teammates explaining the power of compound interest.

In language any red-blooded American male would understand, Nassib explained that he wanted to buy a new Rolex to try and impress pop princess Taylor Swift. But after considering what that money would be worth if he let it compound for 40 years, he thought the better of it.

Now that’s a tightwad after my own heart!

Miss Swift would have likely been more impressed with Nassib’s knowledge of compound interest than with a flashy watch. She’s reportedly worth over $300 million herself and is considered to be a savvy businesswoman and investor.

All of this reminds me of a classic written by the late Richard Russell titled “Rich Man, Poor Man.”

Russell, who penned the Dow Theory Letters for nearly six decades, was one of the most respected financial writers in history, and “Rich Man, Poor Man” is his most influential piece. I plan on making both of my sons memorize it once they’re old enough to understand the basic math.

Russell used the example of two young men. One started contributing $2,000 per year to his IRA at the age of 19 and stopped investing new money at age 25. He never invested another penny after turning 26. The second young man started contributing $2,000 per year at age 26 and continued to do so for the following four decades. Both enjoyed 10% annual returns. At the age of 65, guess which one had more money?

Almost incredibly, the first young man – who started at 19 and stopped at 25 – amassed a larger fortune than the second young man once you subtracted the initial investment… despite the fact that the second young man invested nearly six times as much money over a much longer period of time.

If you don’t believe me, open a spreadsheet and do the math. (Or just look here.) I didn’t believe it the first time either.

Just for grins, I wanted to see if the numbers still work today. When Russell first wrote the article, IRA contributions were limited to $2,000 per year. Today, the same two young men could invest $5,500 per year.

Now, the amount of the contribution doesn’t affect the outcome. Whether both invest $2,000, $5,500 or $5.5 million per year, the young man who started earlier always finishes ahead under Russell’s assumptions.

But are the assumptions themselves realistic? Can someone investing today really hope to earn 10% per year over the next 45 years?

I have my doubts. So, let’s see what the numbers like if we assume 7% per year.

Rich Man, Poor Man

 Investor A Investor B 
AgeContributionYear End ValueContributionYear End Value
Less Total Invested:(80,000)(14,000)
Net Earnings:893,704930,641
Money Grew:11-fold66-fold

(To view Richard Russell’s original tables with my new additions see Rich Man, Poor Man Tables.)

Assuming a 7% annual return, the young man starting at 19 would need to contribute for an additional couple of years in order to come out on top. But he could still quit investing at the ripe old age of 29 and beat the young man who started at 26 and continued to 65.

Playing with the numbers, the young man that started investing his money at age 26 made four times his money. But the young man that started investing at 19 multiplied his original investment by a factor of 17.

It pays to start early.

The lower the assumed rate of return, the longer the 19-year-old has to contribute in order to come out on top. For example, lowering the assumed annual return to 5% would mean the 19-year-old would have to continue contributing until age 32.

But the lesson is clear: Time is your greatest ally in accumulating wealth.

By age 40, you’d need to invest $24,367 to make up for that $5,500 contribution you didn’t make when you were 19 (assuming 7% annual returns). By age 50, the number jumps to $47,934. And it just goes up from there.

Of course, that knowledge doesn’t do you a lot of good if you’ve already got a little gray in your hair. You can’t go back in time and force your younger self to invest.

But you can sit down with your children or grandchildren and explain to them how compound interest works. Do the math. Show them what the money they want to spend on that new PlayStation game or music download would be worth in 20 or 30 years if they invested it instead.

This article first appeared on the Rich Investor.

The Next Ten Years of My Life

There’s no dignity in a groin pull.

You can’t walk without limping, and there’s not much you can do about it other than sit with your legs propped up with an ice pack on your crotch.

I ponder this as I sit at my desk with my leg propped up (minus the ice pack).

It seems that playing a Labor Day dads vs. sons soccer game with a bunch of hypercompetitive Brazilian, Colombian, and Venezuelan families without warming up or stretching properly beforehand was a phenomenally bad idea.

It’s OK. I’ll live.

But being laid up has given me time to think about a few things.

To start, at 41, I’m not getting any younger, and I have no business playing soccer with South Americans.

But apart from finding new hobbies to occupy my free time (something low-impact like golf?), I can’t help but think it’s time to reevaluate my goals for the next 10 years of my life.

I think this is a useful exercise for anyone else, too.

While my job is to tell other people what to do with their finances, my own goals have been somewhat nebulous.

At 20, looking ahead at the next decade of my life, I expected to graduate from college, find a job and maybe go to graduate school.

I also figured I’d be married before 30 and might even have a kid or two.

And, naturally, I assumed I’d be rich.

Well, I accomplished most of those goals.

I graduated, got that first job and then took a break to get a master’s degree in finance. I also managed to see a good bit of the world, traveling through three continents.

I failed, however, to find a wife or have kids and I sure as hell didn’t get rich.

I didn’t really have defined goals for my 30s. That decade just sort of happened, and most of it is a blur at this point.

I got married, had two kids, bought a house and even managed to start my own business. But none of that was really planned ahead of time.

Most of it was spontaneous and driven by the emotions of the moment. It was great. But it was also total chaos.

Meanwhile, I still didn’t get rich, and my finances actually went backwards for a few years while I struggled to make the business work.

I made some phenomenally poor decisions, throwing good money away on bad projects, and failing to take advantage of a lot of good opportunities that would’ve made me some serious money.

Yet despite making every mistake there is to make, I did manage to play the long game phenomenally well in one critical way.

With the zeal of a religious fanatic, I maxed out my Roth IRA and 401(k) every year, even when the shekels were tight.

Even when it meant foregoing a new car or a nicer apartment.

Even when it meant having to look my wife in the eye and tell her that I couldn’t afford to buy her a new purse she really wanted or a nicer stroller for the kids.

It wasn’t easy. It wasn’t fun. It caused me a lot of stress, and it took a toll on me physically.

But because I did that, I now have a respectable nest-egg. It’s not enough to retire on today. (Alas, not even close.) And I still have to get up and work for a living.

But it is big enough to take care of me in my golden years.

If I stopped adding new savings today and simply let the nest egg grow on its own for another 20 years, I’ll be in good shape, even with conservative assumptions.

Of course, I’m not going to quit saving any time soon.

A leopard doesn’t change its spots, and I’m hardwired to be a frugal tightwad. But now I no longer feel the pressure to save and if I want to blow a little money on a vacation or something frivolous for the wife and kids, I can. I’m in a good spot.

This brings me back to my goals for the next 10 years of my life.

We’ll go ahead and keep “getting rich” on the list. Perhaps the third decade will be the charm.

Even though I don’t “need” to, I’d like to continue maxing out my 401(k) every year. And by the time you read this, I will have maxed out the full $18,500 401(k) contribution for 2018. If nothing else, this sets a good example for my sons.

I’d also like to have my mortgage paid off and my children’s college tuition mostly prepaid. I like the idea of being 100% debt free by 50.

I need to avoid spoiling my children. They’re enjoying the benefits of seeds I planted more than a decade before they were born, and I can’t let them take that for granted.

And naturally, I need to find new hobbies that don’t result in pulled groin muscles. I’m open to suggestions!

Take a minute today and write down a few goals for the next 10 years of your life.

If you feel you’ve gotten behind, don’t beat yourself up.

As you can see from my examples, I didn’t meet all of my goals on schedule either. Few people do.

And, as I say here and my Peak Income readers know, there is a way to catch up to your retirement goals if you know where to look.

But going through the exercise of making goals gives you something to aspire to and helps you focus.

Though if you’re over 40, I would advise against adding competitive soccer to the list.