The Elephant in the Farm Field – for Retirees

Big Appetites

According to SeaWorld, “Elephants eat between 149 and 169 kg (330-375 lb.) of vegetation daily.” That is up to 2,625 pounds per week or about 136,000 pounds per year. “Sixteen to eighteen hours, or nearly 80% of an elephant’s day is spent feeding. Elephants consume grasses, small plants, bushes, fruit, twigs, tree bark, and roots.” Most farmers don’t want elephants to stay in their fields. They want them to be as distant as possible.

In the world of investing, there are three primary invaders in your investing farm. The top three are income taxes, inflation, and any expenses related to your investment activity or the assistance you receive from advisors and fund managers. While you are growing your farm, and adding acres, there are costs that reduce the profit you get from your investment farm. The work you do in the first twenty years will greatly determine the size of your farm in years twenty through forty. You need to remember the elephant.

Increasing Your Investment Farm Yield

A recent article by Edward Jones (What to do with your cash right now), started by saying, “When your goals and your investments don’t align, you could end up taking either too much or too little risk. Ironically, taking too much and too little risk can lead to the same outcome: falling short of your goal.” If you are a farmer, and you don’t plant enough of good quality seeds, for crops that are in high demand, and neglect to fertilize or control pests and weeds, your yield will suffer.

To say that another way, if you think you are going to play it safe by holding on to a large position of cash and even high-yield CDs or money market mutual funds or bond funds, you might be ignoring the elephant. This may not matter to you today but think about the impact of the inflation elephant in retirement. The often-used withdrawal rate in retirement is 4%. So, for example, if you have saved $500,000 for retirement, it is assumed that you will withdraw no more than 4% in the first year. That would be $20,000. In order for you to be able to withdraw $20,000 in year two, your investments have to total $500,000 after withdrawals. But that $20K will be worth less due to inflation.

How Long Will Your Assets Last?

Depending on your starting balance and income needs, your retirement assets might last less than 25 years. The Edward Jones article went on to say, “Let’s look at a portfolio set up to supply retirement income. Assuming a 4% withdrawal rate and a 3% inflation rate, a cash portfolio has less than a 1% chance of lasting more than 25 years, while a 50% stock/50% bond portfolio has about an 80% chance.” (Source: Edward Jones estimates. Results using a Monte Carlo simulation, where portfolio is rebalanced annually, and withdrawals increased by 3% per year for inflation. The diversified portfolio includes cash (1%), U.S. investment-grade bonds (39%), U.S. high-yield bonds (10%), U.S. large-cap stocks (33%) and international large-cap stocks (17%). Expected returns based on long-term capital market expectations for cash of 1.84%, U.S. bonds of 2.34% to 4.47%, U.S. large-cap stocks of 5.44% and international large-cap stocks of 7.04%. This hypothetical example is for illustrative purposes only and does not reflect the performance of a specific investment.)

Growing Your Farm Output By Eight Percent Per Year

It is entirely possible and reasonable to shoot for eight percent growth per year on average. The last two years might cause you to doubt that math. If so, think back to 2008-2010. Investors in those years were thinking the same thing. But investors with a long-term investment farm mentality did not sell their farmland. Rather, they bought more land and planted more crops. They did not keep a huge store of investment grain in their silos.

The following illustrates this reality. If you examine the results in box 1, you will see that long-term investment farming is a productive farm technique. This is confirmed by the results during the same period for the S&P 500 and the Dow Jones Total Stock Market Index.

The MSCI ACWI ex USA (international stocks) picture (2) is far less rosy. While I do have international investments, I am very selective about these investments. The bond returns (3) over any timeframe are miserable.  

Remember the Elephant

When you are tempted to think short-term, remember there are over forty growing seasons for your investment farm if you start no later than 25 years old and don’t retire until you are 65. The elephant will be eating the entire time. Wise investors don’t avoid risk now to face much larger risks in the future.