Tuesday, October 27, 2015

What Individuals Should Do in Our Slow Growth, Low Interest Rate and Low Inflation Economy ... Too Much Money in Cash and Too LIttle in Stocks Is Not a Good Plan for Retirement Savings

We live in a low interest rate, low inflation and slow growing U.S. and global economy. For those who remember the high interest rate, high inflation and slow growing troubled world economies of the 1970s, things are certainly different. And so should be our individual approach to saving and investing.

Pension plans are fewer in number, and the IRA and 401(k) plans are and will continue to be the norm. Finally, Social Security is troubled financially, so individuals should plan accordingly.

Cash invested pays virtually zero and bonds aren't much better. Today cash dividends on blue chip stocks pay as much as or more than interest payments on government bonds.

Over time stock prices will increase and cash dividends will increase as well. That's not going to happen to any significant extend with either cash investments or government bonds. As an investment cash is trash, and bonds aren't much better.

Putting our savings to work by owning blue chip dividend paying stocks represents the winning formula for long term oriented savers and investors.

Baby Boomers Hugely Underestimate What They Need for Retirement says this about the dilemma facing too many soon-to-be-retirees:

"When it comes to saving for retirement, there’s a huge gap between what Americans say they want and what they’re doing to make it happen.

A new survey from BlackRock on attitudes about money and financial goals found Americans are holding nearly twice as much cash as they think they ought to in order to reach their retirement goals. Fewer than a quarter of them regularly set aside money into long-term savings or investment plans—yet 74% said they feel financially secure and “prepared to pursue their dreams.”

Baby boomers, who are retiring in droves, face a staggering shortfall. People ages 55 to 64 who responded to the online survey said they expected to have about $45,000 in annual income in retirement. But the amount they had saved would only provide an estimated $9,129—a potential $36,371 gap.

Even affluent retirees—those earning more than $250,000 a year—hadn’t set aside enough to generate the income they said they needed to meet their retirement expectations.
“The amount of money you need to generate a certain level of income is a lot higher than it used to be,” said Russ Koesterich, BlackRock’s global chief investment strategist.

Even if an investor has saved diligently for decades, the amount that a nest egg can generate is much smaller, especially with interest rates so low . . . .

The problem is especially acute for younger workers, who will likely spend decades in retirement–much longer than their parents or grandparents. . . .

The BlackRock survey . . . also suggests that the emotional scars of the financial crisis may be holding back some potential U.S. investors.

Nearly four in 10 people surveyed said they want to make sure they have enough cash saved as a security blanket for an emergency before they save for retirement. And the vast majority said they find it difficult to keep up with bills and save for retirement at the same time. . . .

More than a third . . . said investing money felt risky, and . . . a full 72% said they did not see investing as a way to help them reach their financial goals.

Millennials were especially concerned: Nearly half of people ages 25 to 34 agreed that “what you might earn investing isn’t worth the risk of losing your money,” the most of any other generation.

Two out of three agreed that “investing is like gambling.” And despite having decades to save for retirement, 70% of their portfolios are in cash or cashlike investments, according to BlackRock.

In an environment where cash is paying nothing, and bond yields are well below where they were for the past 40 or 50 years, Mr. Koesterich argued younger workers will need to embrace the volatility of the stock market if they want to generate the returns they need to live comfortably for decades in retirement.

“The math is what it is, and it’s hard to get around it,” he said."

Summing Up

Stocks outperform all other asset classes over time.

They always have and always will.

Time invested is the essential ingredient in successful long term investing.

So buy stocks early and keep putting cash in stocks, regardless of the many intermittent short term and highly volatile market gyrations.

It's the absolute best and safest way to prepare for a secure financial future.

That's my take.

Thanks. Bob.

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