29 Nov S1 P2: A Solution to the Investing Crisis…Sort Of
S1 P2: A Solution to the Investing Crisis…Sort Of
November 29, 2017
[This is post #2 of Season 1. You can read last week’s post here.]
So, what’s your number?
It’s a line from a commercial that’s hokey, reeks of marketing, and is actually a pretty good question.
What is our number?
Or, specifically, how much do we need to have saved to retire comfortably?
Unfortunately, I fear most of us don’t know what that number is. And that’s not good.
It would be great to retire tomorrow and live on the beach. That’s why we got into trading in the first place. But how do we do it?
The first step is to know how much we spend each year. That’s super important because every answer stems from that amount. For this exercise, let’s say it’s $5,000 per month ($60,000 per year).
Now we need to know our liquid savings (savings accounts and/or trading accounts). Let’s say we have $100,000.
Can we retire today? Yes…if we only need money for a year and a half!
No, clearly we’re not ready to retire with those numbers. At this point, we need our money to make money. But how do we do that?
Do we buy random stocks? The experts say that is a losing strategy. Do we buy mutual funds? The experts say 99% of mutual funds underperform the market.
Then what do we do?
The experts say: Buy and hold Index Funds.
Index Funds track the market and have low fees. Therefore, we can never underperform the market. We are the market.
Okay, Index Funds it is. Let’s get back to our numbers.
Since 1950, the market has returned about 7% per year. Look, our money is making money!
If our money makes, on average, 7% per year, how much do we need to save to retire?
If our expenses are $60k per year, then we need just under a million dollars if we want to retire comfortably ($857,143 to be precise).
If we had about a million dollars saved and put all of it into an Index Fund, we could take about $60,000 out of our account each year and never see our nest egg drop.
Some years we’d make more than $60k, and some years we’d make less. But over time, we could take about $60,000 out annually and still have see around $860k in our account.
If those are our numbers, as soon as we get to $860,000 saved, we’re done.
Mission accomplished! The experts have saved us! To the beach!
But is that really the best we can do?
What if, and I’m just spit-balling here, we could make more than 7%? What would that look like?
What if we could make 14% (on average) instead of 7%? If we could do that, our savings would only have to be $429,000 to retire today. That’s quite a change.
Or what if, gasp, we could make 20% per year on average?
If we could do that, then our number drops down to $300,000. All of a sudden, retirement is not looking so far away.
But that’s just a pipe dream, right? That’s why the experts tell us to shove our heads in the ground and buy Index Funds.
Hoping for returns better than the market is a dangerous thing. Hope can drive a man insane. Hope has no place in the mind of a serious investor.
What if there was a trading strategy out there that had doubled or tripled the market over decades, even centuries?
There is such a strategy.
And we’ll talk about it next week.