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Old Formulas Collide with a New Reality

By Michael Lynch CFP®

Group exercises are fun, especially when they bring diverse people together into a shared experience. That’s why I always encourage the adult students that populate my financial planning classes to fill in the blanks to this admonition.

The formula to financial success our elders taught is simple. Get a good job and ________ it. Spend less than you ____________. Put the money in a safe ___________. When you retire, live off the ______________. Never touch the __________.

“How is that working for your today?” I ask, as I chuckle and then watch smiles turn to grimaces. The problem, my students note, is that there is no longer any interest. This is certainly true in a world where banks spend money to advertise “high interest” savings accounts paying 1.15 percent.

But I think this misses the point, as there’s nothing any of us can do to increase the interest on “safe” assets. The real problem, I assert to a room full of unbelievers, is that we are defining safety all wrong. Our grandparents’ safety is our risk.

If “safe” means principle can never decline, guaranteed by our fellow taxpayers, then we place ourselves at the mercy of the banking industry and purveyors of government bonds and products backed by them. But how safe are assets that increase at 1 percent when the government is committed to increasing inflation at a minimum of 2 percent? At best, these vehicles lose money safely, which is akin to other great oxymorons such as jumbo shrimp.

What we need, I assert, is to redefine safety in our minds to mean we have inflation adjusted income when we need it. So today, a dollar needs to be a dollar. But in ten years, assuming 2 percent inflation, that dollar must be $1.20. And this is just if you want to tread water. To make any progress, it must be greater.

It’s not that we don’t need some money in principled-guaranteed assets. We do. It’s just that the money we need in 5, 10, 15 and 20 years needs to be in assets that will grow both principle and income. This, I intone, must be your “new safety.” In other words, the only assets that will be safe for us in the future are Investments that, at the very least, have a fighting chance of delivering future income and asset returns that match, if not surpass, inflation. If not, like a swimmer treading water in a river heading to sea, you will soon find yourself adrift in the middle of a financial ocean where today’s dollar buy’s $.50 of yesterday’s goods.

It’s one of life’s great tradeoffs. Investments that guarantee principle allow income to fluctuate. Investments that allow principle to fluctuate, offer much more stable incomes and incomes that often increase over time.

Consider that the average interest rates on 6 month CDs collapsed 82 percent from 4.75 percent in 2007 to .85 percent today. This is catastrophic for people relying on safe money for income. By contrast he dividend paid on $100,00 of the S&P 500 owned in the SPY ETF increased from $1,900 in 2007 to $3,205 in 2016. The dividend dropped 20 percent in 2009. This was far less than the 43 percent drop in principle from March 2008 through February 2009. Both principle and dividends were surpassing 2007 levels by 2012.

Most people, as our grandparent’s financial success formula instructs, live off the income, not the principle. Therefore, for most of us, safe assets are not what we intuitively believe, government-backed bank CDs and bonds. These suffer wide fluctuation of income and near-certain depreciation of principle. Safe asses can only be dividend paying stocks, ownership in America’s and the world’s great companies, owned in a diversified portfolio of individual securities, closed end funds, exchange traded funds, insurance company sub accounts, or mutual funds. This, combined with income producing real estate, is our only chance of not going backwards over a 30-year retirement or a 90-year life. It means that we have to accept the fluctuation of principle, which at times will mean scary drops of 20, 30 and even 50 percent. But isn’t that preferable to a guaranteed loss of 25 percent, or even worse, over 30 years?

This article was prepared by Mike Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and is not intended as legal, tax, accounting or financial advice. Michael is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. He can be reached at or (203) 513-6032. The opinions provided above are not necessarily those of MML Investors Services, LLC. The opinions provided are for general information purposes only.