I never anticipated that I would reference a New York Times op-ed in an article, but columnist Joe Nocera recently dedicated a column to his experience with retirement investing as he approached his 60th birthday. He talked about how he made a ton of money during the tech boom of the 1990s when companies like AOL (AOL), Cisco (CSCO), and Microsoft (MSFT) reached absurdly high valuations. And then, Nocera offered this bit of reflection on the period that followed:
"The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That's where I stand today."
There's an old saying that goes like this: when you've dug yourself into a hole, the first rule is this: stop digging. Nocera's certainly not the only person who owned too many tech stocks in the late 1990s and got burned, and we have no idea what his wife was like, so we're not in a position to comment there. But what caught my attention was this: Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That is the kind of logic that I want to go to great lengths to avoid.
Sometimes we have to remember that perfect investing is the enemy of good investing. Just because we might realize that we'll never have a $1 million portfolio does not mean that we should abandon investing altogether. If a 240 pound man realizes that he'll never get his weight down to 180, that doesn't mean he won't be better off trying to get his weight down to 210. Good things can still happen, even if they're not ideal.
Let's say that a fifty year-old man realizes that he'll never earn the kind of money necessary to achieve financial independence. He can still invest in Exxon Mobil (XOM) or Johnson & Johnson (JNJ) by putting aside $300 per month for ten years. Instead of thinking about the failure to reach the $1 million mark or whatever it might be, he should think about the success he is accomplishing with each monthly contribution. Every $300 invested into Johnson & Johnson will get you about 4.75 shares. What does that mean? Every month, he is buying $11.60 of annual income that will grow at about 7-10% indefinitely. At the end of the year, you've got a $139 annual income stream that will grow on its own at about 7-10%. Hopefully he'll be able to do this with a Pepsi (PEP) or Procter & Gamble (PG) simultaneously. Is that adequate? Heck no, but it's better than Nocera's conclusion statement that his "faith-based retirement plan is all [he's] got left."
And to be sure, Joe Nocera is not the only person with this problem. He mentions this as well:
"Accord to the Employee Benefit Research Institute, for instance, only 22 percent of workers 55 or older have more than $250,000 put away for retirement. Stunningly, 60 percent of workers in that same age bracket have less than $100,000 in a retirement account. Ghilarducci told me that the average savings for someone near retirement in America right now is $100,000. Even buttressed by Social Security, that's not going to last very long."
Clearly, we're entering the realm of less than perfect situations. But here's the thing: the quality of your end of life is at stake here, and it's worth trying to mitigate the unpleasant circumstances as much as possible. If he can find a way to put aside $7,000-$8,000 per year into blue chip stocks and keep that up for 11-12 years, he ought to be able to put aside $130,000 or so by retirement time. If I were in that situation, my next course of action would be to buy a $130,000 house (and you can be darn sure I'd try to get the property and location right) and try to rent it for $8,000-$10,000 in somewhat dependable yearly income. Is this ideal? No. But if you stop digging the hole and give yourself something to work with, you'll be in a better situation than those who don't put money aside and end up in the Nocera situation of "having the faith that it will somehow work out."