‘Lifestyle Returns’ Will Help Your Money Outlive You

There’s a pervasive fear in America, greater even than that of death. It’s the fear of outliving our money.

Study after study reveals that Americans have great anxiety about retirement. An April 2014 Gallup poll on financial concerns shows 59 percent of Americans are “very or moderately worried” about not having sufficient money for retirement. According to the AARP, among Americans ages 50 and up, the fear running out of money is second only to failing health in their retirement years.

In May, new research findings from the Insured Retirement Institute revealed that 66 percent of baby boomers and 88 percent of generation Xers have “weak or no confidence” that they have done a good job preparing financially for retirement.

And in a just-released Bank of America study of financial concerns and behaviors of affluent consumers of all ages reveals 55 percent of wealthier Americans fear they will not have sufficient money in retirement. It’s their biggest fear of any kind.

Big problems can occur

It’s a legitimate fear, as the financial crisis of 2007-08 made abundantly clear to so many investors. In a year and a half, from peak to bottom of the crisis, the Dow Jones, S&P 500 and Nasdaq indices all lost more than half their value, a brutal blow for numerous retirement accounts.

However — and this is no way downplays the tremendous financial pain caused by the crisis — over time, historically, the market has grown. There are ups and there are downs, but over the long term, the stock market has gone up and investors have benefited.

Little problems also add up

Historic financial crises and dramatic bull markets aren’t the only threats to retirement and financial well-being. The gradual but dependable rise in the cost of living, inflation, can be just as pernicious. We commonly measure inflation with the Consumer Price Index, which quantifies the movement in the price of things and is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” There are consumer price indexes on specific goods and services — shelter, electricity, food, airline fares and gasoline, to name a few.

In May, the 12-month change in prices for all items indexed by the Bureau of Labor Statistics was 2.1 percent. That means the cost of all goods and services we used was 2.1 percent higher in May 2014 than in May 2013. The price of some essentials — such as food, gas and shelter — grew at even higher rates: 2.5, 2.3 and 2.9, respectively. The bottom line: On average, it costs 2.1 percent more to live today than it did a year ago.

A calculus of loss and gain

What does all of this mean for the average investor? We have to earn a return on our assets to protect the value of our savings. Inflation means a dollar will buy more today than it will buy next year. If we aren’t growing our assets at rates above inflation, we are losing ground.

If you become fearful of the stock market, for example, and move your long-term investments from stocks to a money market fund, the value of your savings is actually going down because money market funds aren’t beating inflation. The five-year U.S. Treasury note currently yields about 1.7 percent, which is below the rate of inflation.

With so many asset classes earning low, single-digit returns, investors can find themselves struggling to maintain their lifestyle. All investors should be concerned about earning a rate of return that is above inflation and that also provides the extra needed cash flow to support their lifestyle. We call this an investor’s “lifestyle return.”

Goal is to earn lifestyle returns on investment

Growing your wealth is much easier said than done. Unquestionably, economic trends are difficult to predict. The point of this column is certainly not to chide anyone for past investment decisions. The point, rather, is to get you thinking about earning lifestyle returns on your investments. Your goal and that of your financial adviser should be to grow your money ahead of inflation, above the market’s ups and downs over the long term, and in front of your spending habits and lifestyle choices.

If your money doesn’t stay ahead of these, even if you’re earning positive returns, you’re ultimately losing.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.