Who Needs to Be "More Than a Millionaire"?

By Scott Lummer
Chief Investment Officer, mPower

Here's a question that every person planning for retirement should consider.

I have heard of several percentages of your present wages being required for retirement, and also minimum nest egg amounts like $3 million. How would you evaluate these as true requirements?

Most of you probably know the TV show "Who Wants to be a Millionaire?" I actually had the opportunity last week to meet the host, Regis Philbin, through a friend who works on the show. Introducing me to Regis, my friend described what my company, mPower, does as "making millionaires the old-fashioned way, by investing their money." Although I really liked that line (in fact, I'm ordering bumper stickers), it is not entirely accurate. For one thing, if all we did were to make millionaires, we wouldn't necessarily be doing our job of preparing people for retirement.

Several factors are involved in deciding how much you will need to save before you can retire.

• How old are you?
• At what age do you want to retire?
• Will you receive any type of pension?
• Most importantly, how much money do you expect to spend at retirement?

But if you are 50, plan on retiring at 65, will get a $20,000 annual pension, and can live on $50,000 per year, you will need less than $1 million (Regis will be happy). On the other hand, if you are 25, want to retire at 55, have no pension and want $80,000 per year, you will need well over $5 million!

The nest egg figures I quoted are all in future dollars, accounting for the growth of inflation. They look smaller if cited in today's dollars. But the point remains the same -- your required investing plan is a function of your personal goals.

When it comes to figuring out how much you should put away each year to accomplish your goals, things become even more complicated. It depends on the factors listed above, plus issues such as the amount your company is matching in your 401(k) plan, and the return you will earn on your investment. Of course, no one really knows that return -- we can make forecasts, but forecasts can be wrong.

So how do you get the answer that's right for you? One way is to use a retirement calculator. These generally allow you to plug in the various factors, such as inflation (I assumed 3.5%), and the ever friendly estimated age of death (I assumed 87). Using a calculator like the one on this web site could help you gauge how much to put away in retirement.

But I'll let you in on a little secret. I personally have never used a retirement calculator to see how much to invest each year. The reason is that many of the assumptions, such as inflation, investment return, and the date of my eventual demise, are out of my control. So what do I do? I simply invest as much as I can. I max out my 401(k), try to live within a budget, and store away as much savings as I can. It means foregoing the daily pedicure and missing out on the Brittany Spears' concert, but I'm a little more comfortable about the future because of it. I figure I'll determine how much I'll spend in retirement as I get closer to receiving that gold watch (wow, Timex! Thanks, guys).

Hopefully this has given you some context for determining how much to save for retirement.

By the way, please don't hold the celebrity name-dropping against me. I'm an investment nerd, and usually the only well-known people I meet are other investment nerds. So when I meet a famous person who isn't an investment nerd, I'm starstruck.

Now, if I could just figure out a way to work Kathy Lee into next week's column...

On a different subject...about last week's market drop

The Dow Jones Industrial Average fell by 6% last Friday to close at 10,020. This means it's fallen 12% since its high earlier this summer. As an investor, you have a right to ask what's going on here.

First some perspective. If you invest in stocks, you need to expect some fluctuations in values. One out of every four years the market will lose money, and one out of every six years it will lose more than 10%. So why is it smart to be a long-term investor in equities? Volume! Volume! Volume! Specifically, investing a consistent proportion of your money in long-term stocks has provided an average return of over 10% per year since the mid-1920s. The word "consistent" is in bold for a reason. Investing an inconsistent proportion in stocks -- selling after the stock market has fallen and buying after it has gone back up -- has produced poor results. The point is, when you invest in stocks, you should do so with two intentions -- first that you have a long-term goal so you can ride out the dips in the market, and second that you will not sell your holdings after a market dip.

To reduce the risk, you should diversify your portfolio -- across types of stocks, across countries, and potentially into safer fixed income investments. For example, the average international stock fell by less than 1% today, and while U.S. stocks have fallen this month, international stocks are actually flat. However, realize that diversification will reduce the degree of daily fluctuations, but won't eliminate them.

Finally, realize that the market is up for the year -- including dividends, the average stock has risen by 2.5%. You may have wanted better, because the outstanding market returns of the past five years has distorted your expectations, but 1999 has not been an awful year.

Why has the market fallen of late? Mainly fears of inflation and rising interest rates, which depress stock values. Friday's decline resulted from two factors: a 1.1% increase in the producers price index last month; and Federal Reserve Chairman Alan Greenspan's comments that investors should be prepared to withstand sharp short-term fluctuations in stock values.

There is no doubt that increasing inflation will make stocks less valuable. However, the inflationary pressures are caused by a booming economy, which over the long run is a good thing. The Federal Reserve Board has been very diligent about trying to keep inflation under control. As long as they continue their efforts, the long-term effects of inflation should be minimal. Meanwhile, economic growth will continue to cause corporate profits to rise, justifying investments in the stock market.

For these reasons -- the overall economic outlook, the importance of maintaining a consistent investing strategy, and the long-term goals of retirement -- now is certainly not the time to panic. Your investment policy has probably made you a lot of money over the past few years -- don't abandon it because of a few rocky weeks.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Who Needs to Be "More Than a Millionaire"?

By Scott Lummer
Chief Investment Officer, mPower

Here's a question that every person planning for retirement should consider.

I have heard of several percentages of your present wages being required for retirement, and also minimum nest egg amounts like $3 million. How would you evaluate these as true requirements?

Most of you probably know the TV show "Who Wants to be a Millionaire?" I actually had the opportunity last week to meet the host, Regis Philbin, through a friend who works on the show. Introducing me to Regis, my friend described what my company, mPower, does as "making millionaires the old-fashioned way, by investing their money." Although I really liked that line (in fact, I'm ordering bumper stickers), it is not entirely accurate. For one thing, if all we did were to make millionaires, we wouldn't necessarily be doing our job of preparing people for retirement.

Several factors are involved in deciding how much you will need to save before you can retire.

• How old are you?
• At what age do you want to retire?
• Will you receive any type of pension?
• Most importantly, how much money do you expect to spend at retirement?

But if you are 50, plan on retiring at 65, will get a $20,000 annual pension, and can live on $50,000 per year, you will need less than $1 million (Regis will be happy). On the other hand, if you are 25, want to retire at 55, have no pension and want $80,000 per year, you will need well over $5 million!

The nest egg figures I quoted are all in future dollars, accounting for the growth of inflation. They look smaller if cited in today's dollars. But the point remains the same -- your required investing plan is a function of your personal goals.

When it comes to figuring out how much you should put away each year to accomplish your goals, things become even more complicated. It depends on the factors listed above, plus issues such as the amount your company is matching in your 401(k) plan, and the return you will earn on your investment. Of course, no one really knows that return -- we can make forecasts, but forecasts can be wrong.

So how do you get the answer that's right for you? One way is to use a retirement calculator. These generally allow you to plug in the various factors, such as inflation (I assumed 3.5%), and the ever friendly estimated age of death (I assumed 87). Using a calculator like the one on this web site could help you gauge how much to put away in retirement.

But I'll let you in on a little secret. I personally have never used a retirement calculator to see how much to invest each year. The reason is that many of the assumptions, such as inflation, investment return, and the date of my eventual demise, are out of my control. So what do I do? I simply invest as much as I can. I max out my 401(k), try to live within a budget, and store away as much savings as I can. It means foregoing the daily pedicure and missing out on the Brittany Spears' concert, but I'm a little more comfortable about the future because of it. I figure I'll determine how much I'll spend in retirement as I get closer to receiving that gold watch (wow, Timex! Thanks, guys).

Hopefully this has given you some context for determining how much to save for retirement.

By the way, please don't hold the celebrity name-dropping against me. I'm an investment nerd, and usually the only well-known people I meet are other investment nerds. So when I meet a famous person who isn't an investment nerd, I'm starstruck.

Now, if I could just figure out a way to work Kathy Lee into next week's column...

On a different subject...about last week's market drop

The Dow Jones Industrial Average fell by 6% last Friday to close at 10,020. This means it's fallen 12% since its high earlier this summer. As an investor, you have a right to ask what's going on here.

First some perspective. If you invest in stocks, you need to expect some fluctuations in values. One out of every four years the market will lose money, and one out of every six years it will lose more than 10%. So why is it smart to be a long-term investor in equities? Volume! Volume! Volume! Specifically, investing a consistent proportion of your money in long-term stocks has provided an average return of over 10% per year since the mid-1920s. The word "consistent" is in bold for a reason. Investing an inconsistent proportion in stocks -- selling after the stock market has fallen and buying after it has gone back up -- has produced poor results. The point is, when you invest in stocks, you should do so with two intentions -- first that you have a long-term goal so you can ride out the dips in the market, and second that you will not sell your holdings after a market dip.

To reduce the risk, you should diversify your portfolio -- across types of stocks, across countries, and potentially into safer fixed income investments. For example, the average international stock fell by less than 1% today, and while U.S. stocks have fallen this month, international stocks are actually flat. However, realize that diversification will reduce the degree of daily fluctuations, but won't eliminate them.

Finally, realize that the market is up for the year -- including dividends, the average stock has risen by 2.5%. You may have wanted better, because the outstanding market returns of the past five years has distorted your expectations, but 1999 has not been an awful year.

Why has the market fallen of late? Mainly fears of inflation and rising interest rates, which depress stock values. Friday's decline resulted from two factors: a 1.1% increase in the producers price index last month; and Federal Reserve Chairman Alan Greenspan's comments that investors should be prepared to withstand sharp short-term fluctuations in stock values.

There is no doubt that increasing inflation will make stocks less valuable. However, the inflationary pressures are caused by a booming economy, which over the long run is a good thing. The Federal Reserve Board has been very diligent about trying to keep inflation under control. As long as they continue their efforts, the long-term effects of inflation should be minimal. Meanwhile, economic growth will continue to cause corporate profits to rise, justifying investments in the stock market.

For these reasons -- the overall economic outlook, the importance of maintaining a consistent investing strategy, and the long-term goals of retirement -- now is certainly not the time to panic. Your investment policy has probably made you a lot of money over the past few years -- don't abandon it because of a few rocky weeks.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.