The TANSTAAFL Theory, Part 1

TANSTAAFL. Yeah, this is a real thing. It’s an acronym for the phrase:

“There ain’t no such thing as a free lunch.”

Amazingly, I see, hear, and feel this in conversations all the time. If you watch one of the cable news channels, the advertisements are loaded with free lunch topics. Cheap life insurance plans, above average returns on esoteric investments, gold-silver-gold, etc. No free lunch demonstrates “opportunity cost” which says clearly, to get one thing that we like, we usually have to give up another thing we like. You just can’t have it all!

Some others that come to mind is when I’m building financial plans, and more specifically, RETIREMENT INCOME PLANS. Last month I talked about the different types of risk. I focused on three in particular: market risk, inflation risk, and longevity risk.

People have told me they want:

• a reasonable rate of return, preferably equal to the S & P 500 Index
• no market risk or volatility
• to make sure they will never run out of money in retirement.

This sound about right to you? Well, you can’t have the first one without the second one, and the third one can be a challenge depending on how you spend your money in your later years and how inflation risk can eat away at your purchasing power. Needless to say, there are a lot of “financial myths” at play here.

To begin with, let’s say your risk tolerance score is a MODERATE INVESTOR, which means somewhere around a 60% equity/40% bond allocation. If you want returns equal to the S & P 500 Index, then that demands a 100% equity allocation, which doesn’t match your ability to stomach the volatility associated with it.

Secondly, you can’t have market returns without accepting some amount of risk. It’s impossible.

The average return of the S & P 500 over the last 20 years is 9.74%.

Nothing “soars or plummets” like the S & P 500 Index. 100% volatility. To illustrate this, the 2023 return was more than 26%, which was great. However, in order to get that return, you had to ride out the volatility from 2022, where you earned a negative -18.11%. (1)

Thirdly, in order to ensure that you won’t run out of money in retirement, should we look to other financial tools to accomplish that goal? Remember that quote from last month referencing an ad that said, “My life expectancy is age 87 but my money life expectancy is 82.”

One of my favorite organizations is The Alliance for Lifetime Income. It’s a consumer-friendly site that focuses on the need, want, and use of lifetime income strategies. They were one of the title sponsors for Elton John’s Farewell Yellow Brick Road Tour. Think they know their target market?

They’re also the purveyors of some amazing statistics surrounding retirement security and managing #3 on my list above: longevity risk, or the chances of running out of money in your retirement years.

According to their website:

• 4,100,000 Americans are turning 65 every year from 2020 to 2030
• More than 52.5% of Baby Boomers have less than $250,000 or less in retirement savings
• 14.6% have assets of $500,000 or less. (2)

In our parent’s generation, their retirement income came from three key sources: company pension plan, supplemental (not primary) retirement savings through IRAs and 401(k) plans, and finally Social Security benefits.

Today, given the low savings rates stated above, and the fact that company sponsored pension plans are almost non-existent, Social Security benefits have become one of the primary sources of retirement income. This in itself is a national problem. Especially when the threat of a reduction of these benefits is real and very possible.

So, can you see the dilemma here? As a demographic, baby boomers are way behind in their retirement savings, they’re also risk averse, and hate the volatility of the markets. I’ve said it before, and I’ll continue to say it. My role as an independent financial advisor is to exploit every legal and ethical option available to help my clients reach their goals.

There are a lot of facts referenced in this blog, and also a lot of emotions as well. If the fear of running out of money in retirement resonates with you, then I’m always here to provide the logic necessary to help me help you. Word count says it’s time for me to stop and I’ll do just that.

Part Two is forthcoming for July, and I’ve got a lot to share with you. As always, thank you for your kind words regarding my writing, both in my blogs and my book “Castles & Moats.” Summer is right around the corner!

(1) Investopedia.com
(2) ProtectedIncome.org

Many thanks,

Brian

**Investing involves risk, including the potential loss of principal. All examples are for illustrative purposes and may not be indicative of your situation. Your results will vary. It is not possible to invest directly in an index.