Wednesday, February 29, 2012

Suze Orman's Advice to a 75 Year Old Couple

The more you have in bonds and the less in stocks, the more conservative you will need to be, given that your investment returns will likely be lower than a more aggressive portfolio. - Suze Orman, The Costco Connection, March 2012

This was part of a response to a couple aged 75 who wanted to know what a "safe withdrawal rate" should be in retirement.

So what happens in the unlikely event that stocks do even worse than bonds?

The couple spends money aggressively to match the expected aggressive returns. The aggressive returns never materialize. Therefore, they are as f***ed as the typical pension fund.

I'd really like to know why financial experts feel that we can "safely" ignore unlikely events, especially when those unlikely events could ruin us financially (think Lehman Brothers or Long-Term Capital Management).

"I have a million dollars in the stock market, because if I lose a million dollars, I don't personally care." - Suze Orman, March 2007

Suze Orman didn't share that tidbit of useful insight with the 75 year old couple of course. That million dollars was just 4% of her liquid net worth. Go figure.

Let's do some casino math.

There are 37 numbered (0 to 36) pockets on the roulette wheel. The green zero pocket is a guaranteed loss if the ball lands there. If I distribute my entire retirement nest egg evenly between all numbers greater than 1 then it is extremely likely that my investment returns will be higher than a more conservative portfolio. Apparently that's all that matters.

In fact, there is a 94.6% chance (35 out of 37) that I will earn a 2.9% return (36/35). Instantly!

There is only a 5.4% chance that something will go wrong. It is so unlikely. Seems like a safe bet to me. I'm doing it! That means that I can instantly spend 2.9% more money each and every day for the rest of my life. I'll start spending the money right now and place the bet tomorrow. Woohoo!!

I'm not really going to do that of course. It does lead me to the question of the day though.

Do you think there is at least a 5.4% chance that something will go seriously wrong with this economy again?

I think you already know what I think.
  1. How has Japan's economy done since their housing bust in the 1990s?
  2. What is the price of oil doing to our economic recovery?
  3. Where are the jobs of the future going to come from?
  4. What's going to happen to the stock market when the baby boomers decide to embrace less risk in retirement (as I have done)?
  5. When are we going to fix our unsustainable trade deficit?
  6. When are we going to stop borrowing money from our grandchildren to fund our current standard of living?
  7. Will something unthinkable happen?


Mr Slippery said...

I think Suze is mostly in muni bonds, which may not work out as well as she expects. (e.g., Stockton) But she can afford to lose a lot and still be fine.

Some days, like today, I look at the MF Global debacle, I look at central bank balance sheets, and I am dumbstruck by how The System holds together. A few dudes sit in a marble building and create more money each month that it would take a million lifetimes of a ditch digger to earn, then they pass it out to whomever they wish and everyone seems to be OK with it.

What kind of money system is this, and how can it persist?

Stagflationary Mark said...

Mr Slippery,

Suze says her money is 100% safe because it's insured.

1. Nothing bad can ever happen to insurance companies.

2. Serious inflation can never appear again. Ever. So she's safe there too. 100%.

Enough sarcasm for you? Here's some bonus material.

What kind of money system is this, and how can it persist?

A fantastic one and it can persist with insurance. We're too doomed to fail! ;)

fried said...

To MF Global add the Japanese AlJ fund, which held pension money for a number of Japanese firms, in all 800,00 pensioners approximately.
Now gone. Really. Vaporized. There seems to be a trail that leads to the Cayman Islands, but no further info available at this time.
I echo the question..."what kind of money system is this"?

Stagflationary Mark said...


I echo the question..."what kind of money system is this"?

This kind of money system?