Cash-Out Queen: A Royal Retirement Lesson
I recently discovered an article titled, “I Took All My Money Out of the Stock Market and It Feels Amazing”, by Roz Warren, a librarian and writer. It was first published in Money magazine, but with a title like this, it seems to have quickly found its way onto other sites. I recommend you read it, but I’d read it as a cautionary tale.
In the article, Ms. Warren tells how she inherited $50,000 in the early 1980's. At the age of 62 with her account having reached a balance that will, in her mind, provide her enough money to live on for the rest of her life, she got out of the stock market.
She declares, as if to shout from the balcony of her impending 30-year retirement, look what I did and look how great it feels. I must say that I respect and appreciate her willingness to share. It’s a bold thing she’s done, putting her decision out there for the world to see. But, is she cunningly strategic or blissfully unaware?
Let’s explore two royal miscalculations:
- Thinking about future expenses in today’s dollars
Ms. Warren indicates she’s not a millionaire but she’s accumulated a nice, six-figure sum from investing all these years in a Vanguard portfolio made up of 60% stocks and 40% bonds, her strategy a product of “research” she did upon receiving the inheritance. Given the information she provides, if we assume $50,000 invested for 35 years at 8%, that would have grown to about $740,000.
She doesn't mention adding anything to the inheritance, but since I’ve got my calculator out, I see that with even a modest annual savings over this period and with these assumptions, she’d have well over $1 million. One can only assume this didn't happen if she now only has a six-figure sum.
At age 62, the Social Security Administration estimates her life expectancy to be 86, but she’d be wise to expect a much longer life. With prices on the things we buy every day historically doubling about every twenty years (healthcare increasing much more), her current savings will then buy her less than half of what it buys her today.
Along with moving her money to cash and CD’s, she indicates having some allocated to Treasury-Inflated Protected Securities or TIPS to guard against inflation. These are low-risk Treasury securities that are indexed to inflation. I guess she adds this to somehow assure the reader that this risk has been fully considered. Unfortunately, a portfolio made up of these assets would, after taxes and inflation, likely earn a negative return.
Continuing to work at the library, writing, living a modest lifestyle with no debt and waiting until age 70 to max out her Social Security are all positive things Ms. Warren mentions as part of her retirement income plan. But remember, a 30-year retirement is a long time with many of life’s variables subject to change. Having no real provision or concept for how inflation impacts future prices is, unfortunately, an all too common retiree mistake.
- Having no appreciation or true understanding of how she got here
Interestingly, Ms. Warren attributes her wealth accumulation to one thing - the growth of the S&P 500, which upon receiving her inheritance, was valued at 208 and now stands, as of her writing, around 2600.
How and why this happened seems to have escaped her (hint: look at profitable inventions like the smartphone, 3-D printing, apps, etc). Instead, like someone sitting at a casino all night and having decided to take her chips off the table, she “cashed out.” Even after all this time and with her money having grown so much, my fear is that Ms. Warren deep down believes she’s been gambling all these years.
The Financial Markets are not a casino. They are a place where people expect a positive return on the capital they invest. Capital that gets invested in the innovation, entrepreneurialism, and the risk-taking efforts of thousands of great companies in the US and around the world.
Financial markets have rewarded long-term investors, but I don’t detect Ms. Warren having an enduring belief in the power of markets. In place of it lurks an unfounded fear of impending doom that the market must crash for any number of reasons (it’s too high, Trump, etc.). Investors never forecast market corrections. Traders, or gamblers, do that.
Ms. Warren claims she now has peace of mind because of cashing out. In fact, she claims to have optimism about the future, but not concerning the power of markets - the very thing providing the potential for her money to grow in a way that outpaces inflation. No, she’s optimistic about Social Security’s continued existence due to the power of the lobbying arm of the AARP. That’s an interesting place to park your faith for the future.
None of us can be totally objective or unemotional about our own money. We’re all prone to biases, to thinking we see things for how they really are, and to any number of mental miscalculations. This may be the most important reason why a person should seek professional help in managing their financial future. Ms. Warren is clearly, and sadly, choosing to go it alone.
Consider this: Your financial life ultimately has one of two outcomes – you outlive your money or your money outlives you. Ms. Warren is running full speed toward the former. Thankfully, even in her euphoria from cashing out, Ms. Warren says what she’s done may not be for everybody, a warning of which I'm in complete agreement.
Want to really feel amazing about your investments? Want to really live a royal retirement? Get help and stay invested.