Your Investments: Questioning conventional wisdom

Here are a few myths that are taken as gospel in the financial media that I would like to dispel. Needing 80 percent of preretirement income in order to retire; drawing down 4% of your portfolio annually; or investing in a few hot stocks to “guarantee” a secure retirement.

November 21, 2013 02:07
4 minute read.
Day 2 of the Presidential Conference, June 19, 2013.

President Peres' speech 390. (photo credit: Twitter/President Peres)


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Often, people have a habit of accepting certain mantras as truth, without ever questioning the logic behind them. Then this idea gets repeated over and over again, becoming accepted by almost all people.

A few years ago I attended Shimon Peres’s President’s Conference. Global political leaders, influential businessmen from Israel and abroad and academics came together to try and figure out how to ensure Israel’s future for the next 60 years. Although I am generally quite cynical about these gatherings, this one in particular really got to me.

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This was because the conference centered on the myth that the only way to ensure both Israel’s economic and security future is through economic cooperation with our Palestinian and Arab neighbors. Even aside from the political issues involved, I noticed that no one bothered to challenge this premise, and it was treated as a given.

In fact, one could attack the conference’s basic premise on several counts. However, the two main arguments against it are that Israel has built a thriving economy under the constant threat of war, so why is the only way to economic growth in the future through cooperation? And secondly, why does living in peace hinge on economic cooperation? It isn’t just this conference, back when I was head of international personal banking for Citigroup, then vice chairman Stanley Fischer used to speak about the same thing. To this day, many Israeli politicians still toe this line.

I don’t want to get political; the main point here is that just because many people say something doesn’t automatically make it true. In fact, our whole tradition is based on challenging assumptions, as seen from the structure of the Talmud. Yet there are so many commonly held assumptions that continue to go unchallenged in our daily lives.

I wrote in my recently published book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing, “After nearly 20 years of sitting with clients, I find that those who followed conventional wisdom often suffered for it when it came time for them to retire.”

Here are a few myths that are taken as gospel in the financial media that I would like to dispel. Needing 80 percent of preretirement income in order to retire; drawing down 4% of your portfolio annually; or investing in a few hot stocks to “guarantee” a secure retirement.

More, not less

Spend a few minutes with Google searching for information on how much income one needs in retirement and inevitably you will get answers ranging from 75%-80% of your preretirement income. This is caused by lower tax rates, no more money being fed into retirement accounts and no more mortgage. Unfortunately for many retirees, especially those retired in Israel, this number has little basis in reality.

When a couple retires they will often find that their expenses are different. It is therefore important to sit down and make a realistic new plan based on these changes. I am a bit more cautious with my clients as I apply a basic equation: Leisure equals money spent. After retiring, people find themselves with more free time, and they may want to use it to travel, eat out or for other leisure activities. In fact, the more time that a person has available increases the chances that he will spend more money.

Then there is the other issue. We all know that “making it” in Israel isn’t so easy. Many retirees I sit with have an immediate goal of helping out their children as well. That help can take the shape of direct financial support or “Grandparents Tuesday” (the day that Sabba and Savta pick up their beloved grandchildren and buy them pizza, junk food, etc.)!

Income stream

Once you have a handle on your income needs, you should go ahead and create an income stream. Forget about the 4% drawdown rule. In many instances you can create a portfolio that will be able to generate the income you need without having to draw down principal. Floating-rate and international bonds are good ways to balance a portfolio and generate much higher levels of income than you will generate with US government bonds or certificates of deposits. Why draw down principal if you don’t have to?

Be careful

Searching for “hot” stocks is a recipe for disaster. Investors need to realize that markets can fall dramatically, and, if they are near retirement, a big market hit can put a major dent in their retirement plans. That’s why as investors get within five years of retirement they should become much more conservative and adjust their allocation to start creating the aforementioned income stream.

Don’t rely on conventional wisdom when planning your retirement. Sit down by yourself or with an adviser and start figuring out your goals and needs. Some solid planning will go a long way toward financial peace of mind.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

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