Join the Club
One of my favorite classes in college was statistics which is defined as the science of collecting and analyzing data for the purpose of inferring proportions to draw outcome conclusions. While not the most exciting subject for some, I valued the logic of mathematics to project outcomes, which has been a trait valuable to our Buchanan Street investment activities. Today, we are inundated with statistical analysis and its hypothetical correlated outcomes.
Last month I had the pleasure of celebrating my birthday. This was not just any birthday, but my 65th and a key metric in any statistician or population demographer’s arsenal. Aside from enjoying a celebratory dinner, the date coincided with a barrage of solicitations and prompts regarding exercising Social Security and signing up for Medicare. The latter of which has more on and off ramps than a commute to downtown LA, given the countless Medicare consultants offering program access with a myriad of Medicare choices.
No doubt, the menu of AARP benefits is extensive if you’re seeking a senior meal or grooming discount. Unfortunately for me, none offered to pay my daily bills although the National Park senior lifetime pass and free tuition from select colleges did catch my attention. All these offerings reminded me of the importance of the proper construction of an investment portfolio offering predictable cash flows aligned to an individual’s customized goals, dreams, and realities.
Like me, today’s US population is approaching a landmark which is sometimes referred to as “Peak 65”. Beginning next year, 12,000 people per day will turn 65 and by 2030 all Baby Boomers (roughly 20% of the overall population at that time) will be older than 65. The associated business and service options to address this demographic evolution are mind-boggling and so are the statistical projections of the needed retirement savings or investment capital enabling you to comfortably enjoy this next chapter.
Informationally, Social Security was designed to provide only 40% of retirement income. Unfortunately, the National Institute of Retirement Security found that social security benefits are the sole income for 40% of retirees and that almost 40 million households have no retirement savings at all. Further, the latest report from the trustees of the Social Security fund calculates that in nine years, monthly benefits will have to be reduced by 21%, when the trust fund is depleted. As a result, many Americans will lack sufficient, reliable, and protected income to live out the rest of their lives.
Solving for retirement gets easier if you can predict how long you will live, your evolving future lifestyle habits and associated expenses, your investment returns going forward and how much you’d like to leave to your estate and philanthropic causes. Of course, these projections are not possible to predict with any real accuracy. Further complicating the equation is adding the variable of capital needed to make lifetime memories. To this point, I recently read a book entitled Die with Zero written by Bill Perkins, a philosophical guide on how to get the most out of your money and life by placing experiences ahead of making more money in your so-called golden years.
Aside from my central themes and gating questions referenced above, most financial advisors would abide by a standardized approach to their clients’ financial planning. To fine tune the customization of investor portfolios, they might further incorporate the questions below:
The 60/40 rule, advocated by the larger asset gathering firms still speaks to the historic allocation of stocks and bonds. Others would suggest building a portfolio into buckets with targeted outcomes for future proforma objectives. These buckets include cash for near-term expenses, a second for fixed income and yielding equities for handling intermediate expenses, and a third bucket of growth stocks to enable your portfolio to beat inflation and possibly provide additional growth.
Select advisors, based upon their client’s financial wherewithal, might strongly advocate for a fourth bucket of alternative investments, providing a hedge against the volatility of equities while allowing for the potential of outsized returns. These assets might include private credit, private equity, venture, and hedge funds to name a few.
For myself, I have always followed a disciplined investment allocation, but not surprisingly, an overweighting to the latter bucket given my day job in making alternative investments and knowledge of their investment profile and varied characteristics.
Specifically, I have found the diversification of my alternative allocation has provided for select current returns, certain liquidity off-ramps, after-tax return advantages, the opportunity for enhanced returns and lastly, an asset profile that can take advantage of value discounting for estate transfer purposes vs public securities. Certainly, this bucket may take on more risk, but properly constructed can be managed with volatility mitigation within the overall allocation. To further navigate risk, I have utilized this bucket’s ability to “pour-over” performance and balance to other less risky investment allocations within my portfolio.
Yes, as you can see, turning 65 brought with it a mark in time, a chance to reset, and to balance the books. While I appreciate the statisticians’ use of math and probability to interpret and support projections and recommended outcomes, I have learned to lean into life experiences, give equal weight to intuition and skill, while acknowledging the importance of maintaining relevance with a continued purpose.
While “Peak 65” is certainly a benchmark for demographers, I’m putting off the company watch gifting and retirement ceremony as I continue to enjoy my job at Buchanan and the opportunity to mentor and advise clients in real estate investing.