No, I'm not referring to the recent tragic floods that hit the East Coast earlier this year, but rather an inundation of another type. The holiday mail catalog season is upon us.
This flood has already hit our family with a vengeance -- Harry and David, Victoria's Secret, and Williams-Sonoma are only a few of the better-known culprits. There are also spice catalogs, linen catalogs, flower catalogs, and -- one of my favorites -- "The Territory Ahead: Clothes for the Journey." The execs at Dow component International Paper (NYSE: IP) must be salivating.
Every so often, in weaker moments, I actually open one of these mailings and take a peek. I recently succumbed to a publication called "Wireless, a catalog for fans and friends of public radio." (And I thought my contribution during the last pledge drive only got me on the Democratic Party fundraising list!)
There it was, listed on page 9, nestled among other indispensable gifts like the Lake Wobegon Welcome Mat, the book Haiku for Jews, and a T-shirt proclaiming "What if the Hokey-Pokey is really what it's all about?" I'm referring to "The Retirement Countdown Clock."
The Retirement Countdown Clock is a remarkable timepiece that "will keep track of the days, hours, minutes, and seconds until you are free from the daily grind!". You can set the clock for up to 50 years from your retirement date (that's more than 18,000 days, by the way). The clock then ingeniously shows the exact time remaining until you can wave farewell to your boss forever.
Ah, true ecstasy when that day arrives!
But for many of us Fools who are fortunate enough, or who have planned well, this Retirement Clock is inadequate. Our retirement date may not be fixed in stone. Rather, the actual date may depend on how much we have saved, as well as the growth of these savings.
Viewed in this framework, the performance of a stock portfolio influences not only one's net worth, but also dictates how soon one can retire and live blissfully on those gains. A well-incubated nest egg can lead to an earlier retirement date, rather than the static date suggested by the Retirement Clock.
But what if all doesn't go as planned? What if the markets go into a tailspin, making a significant dent in our stock portfolios right out of the starting gate? How much money do we stand to lose?
I prefer to look at this question from another point of view. Since many of us are investing for retirement, let's see how a loss in a portfolio affects a potential retirement date calculated by our new and improved Retirement Clock.
To do this analysis, we have to make some assumptions. We'll assume that by a certain starting age, we have amassed a specific amount of assets, and all these assets are invested in stocks. For our long-term investments, equities certainly seem the Foolish place to be. We'll also assume a rate of return on these investments of 11%, about the average return for stocks this century (although we Fools certainly hope to do better).
Finally, we'll assume a fixed monthly investment until retirement, and ignore capital gains taxes, trading costs, and other real-life nuisances. We'll also assume that a nest egg of a million dollars will be a sufficient amount to meet our retirement needs. This cool million will allow us to withdraw $50,000 the first year, or 5% of our nest egg. (See Retiring with BSP and this article for more information on Foolish retirement planning.)
Granted, these assumptions may not be realistic for any particular individual, and many of us might not have the initial resources assumed or be able to invest the amount specified. But complicating our model probably doesn't change the overall conclusions much, and we'll show you at the end how to tailor the scenarios.
Let's ask the following question: How would a sudden decline in a stock portfolio affect the time it takes to reach retirement?
The following table demonstrates the time it will take to achieve a retirement goal of one million dollars, based on a few simple scenarios. I've included a variety of starting ages, initial savings, and monthly contributions. The "time to retirement" column shows how long it will take to reach this goal, depending on the performance of the market the first day we start our investment career. For instance, the column "10%" assumes our portfolio drops 10% the very first day we invest. Ouch!
Time to Retirement
Starting Amt. Monthly (yrs/mnths) if Port. Drops:
Age Saved Contribution 0% 2% 10% 20%
25 $5,000 $400 28/1 28/1 28/2 28/3
40 $50,000 $700 19/7 19/8 20/0 20/4
50 $100,000 $1,000 15/3 15/4 15/9 16/2
64 $900,000 $1,000 0/11 1/1 1/9 2/8
How much longer would our hypothetical 25-year-old investor have to work if, on the first day of his investment career, his portfolio suffered an immediate decline of 20% -- a veritable bear market?
Another two months.
Our 50-year-old investor would have to keep punching the clock for almost a year should he invest on the very first day of this bear market. You'll notice that a sudden drop in the value of one's portfolio will have the most effect on our 64-year-old, who is almost ready to retire. If such a portfolio drops 20% from the outset, she's left with an additional 21 months of work, compared to only two months for our 25-year-old.
Notice the effect that more modest changes in the portfolios would make. A loss of 2% for the day would drop the Dow about 220 points, surely enough to elicit bold-faced headlines the world over. Depending on our investment scenario, such a 2% drop would barely register on our retirement clock. A better headline might proclaim, "Dow Drops One Month Today!" Sure, if you're 40 or older, maybe you'd have to work an extra month or two. But if this extra month of work really was such an unbearable drag, then it might be time to reconsider why you're working in such a job to begin with.
Of course, our analysis doesn't include any potential upside that might benefit investors should a portfolio take a sudden turn for the better. A quick gain of 10% for the portfolio would mean that our 50-year-old could retire five months earlier than otherwise projected, and our 64-year-old could retire almost immediately!
Or, instead of a sudden gain in a portfolio, what if one's portfolio gains an average of 15% a year instead of the historic average of 11%? Our 50-year-old could then reset his retirement clock ahead by more than three years. But the time savings become even greater the younger one starts. Our 40-year-old can retire four years earlier than projected, and our 25-year-old would save about six years. That's a lot of extra tee-offs, if you're into that sort of thing.
As we've seen, when it comes to retirement planning, the old aphorism "Time is money" gets turned on its head. In reality, "Money is time."
Sure, some of us love our jobs and would keep working even if we won a state lottery jackpot, no matter how unlikely that is. That's great! To paraphrase the first riddle I ever learned (courtesy of Bennett Cerf), these fortunate souls can just throw their retirement clocks out the window, and really see time fly!
To play your own home version of Who Wants to be a Millionaire? and run these and other scenarios at the Quicken financial site, click here. Who knows, one day you may even be able to afford the Victoria's Secret 10 Million Dollar Millennium Bra, complete with over 2,000 diamonds and sapphires, set in platinum.
Which reminds me of another question that's been on my mind a lot lately: What if the Hokey-Pokey really is what it's all about?
Beating the S&P year-to-date returns (as of 11-09-99):
Schlumberger (NYSE: SLB) +35.6%
Kimberly-Clark (NYSE: KMB) +19.3%
Campbell Soup (NYSE: CPB) -16.5%
Ford Motor Co. (NYSE: F) -4.7%
Bank of America (NYSE: BAC) +8.6%
Beating the S&P +8.5%
Standard & Poor's 500 Index +11.1%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +25.2%
S&P 500 +17.5%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $178,000
S&P 500 $79,100