You’ve got to have discipline

LUCY:  "You've got to take direction. You've got to have discipline! 

[Editor's note: Does the above line sound vaguely familiar? If you are thinking Charlie Brown, you are correct! There seems to be a complete transcript of the famous Charlie Brown Christmas TV special here.]

Sometimes, financial advisers feel a lot like LUCY:

You got to save for retirement! You've got to have discipline! ...

But alas, our well healed boomer has just bought a top-of-the-line SUV, moved to a nicer neighbourhood across town, bought a cottage in the Muskokas and are putting their later-in-life extended family children through university.

Who has time for saving?!!!

Trust me on this one. You have to make time. If boomers want to keep their spendy lifestyles in retirement, you need to save money in order to spend money!

There’s more bad news for boomers too. We are going to live longer. A lot longer - and our retirement savings will have to last 30 or more years.

But back to stocks, bonds, retirement and discipline…

I found a fantastic illustration that tracks what a $1 million dollars invested in 1970 would have done over the years based on the type of investments* that were purchased. He uses five distinct portfolios and tracks their market value right through to the end of last year (2012). Important point; you are withdrawing 5% of your investments per year, every year. Don't have a million dollars yet? Replace the last comma of each figure with a decimal point and you will track what $1,000 did during all those time frames.

http://paulmerriman.com/wp-content/uploads/2013/07/Distribution-table-5.pdf

Source: Paul Merriman is a columnist for MarketWatch (a publication of the Wall Street Journal). 

Mr. Merriman illustrates five different investment scenarios:

1. 40%/60% combination of stocks and bonds

2. 50%/50% stocks and bonds

3. 60%/40% stocks and bonds

4. 100% stocks

5. 100% S&P 500 stock market index

Note: all stocks are global stocks except for the S&P 500 Index which is comprised of U.S. stocks.

It appears the theory matches reality although there are some surprises. In this illustration, over a long period of time, the more stocks in your portfolio, the higher the ending balance. However note the exception. The S&P 500 Index did significantly worse than the 100% Global stock portfolio or even the 60/40 Global stock/bond combination portfolio. The S&P 500 Index is a stock related index consisting of U.S. stocks.

Of particular interest, are the year-end market values from 1970 to 2012.  Note the fluctuations up or down from year to year. Despite the swings in market value, over a long period of time, look at the bottom line.  The $1,000,000 invested in global stocks in 1970 was worth $12,891,227 in 2012. You might be tempted to comment: So what?  It has grown only 12 times or so in forty years. True, but you also withdrew a total of $14,058,637 during those same years. Put another way; you invested 1 million, withdrew 14 million and still had about 12.9 million left in the account to spend or pass down to your heirs!

Generally, direct investment in stocks do pay off in the long run but you need to ride out the various crises of the last forty years or so. Lose your nerve along the way and your retirement savings could evaporate if you panic and sell out at inopportune times.  Therefore, it is essential to have a good adviser in order to keep you on course with a good mutual fund portfolio that is suitable for you, despite the continuous din of media noise.

For more information about accelerating your retirement plan and putting savings into high gear, drop me a line at gszlagowski@assante.com.

*global stocks indices http://paulmerriman.com/data-sources/