Risk vs Utility – What Baby Boomers Need To Know

October 27, 2011 by · 6 Comments 

Let us say you are an average American Baby Boomer. You are thinking about retirement.You probably have $75,000 in assets available for your retirement per Fidelity. This is your dilemma.

What exactly does this mean? Can you really use this $75,000 for your retirement? What are you going to do:

  •    Consume your assets to supplement your other retirement monies?
  •    Only consume the interest (growth) to supplement your other retirement monies?
  •    Consume the asset and the interest it generates over a certain time period to supplement your other retirement monies?

Let us look at these three strategies which represent most of the strategies Financial Planners will recommend to you.

The Analysis:

Step 1

  1. What will it cost you to live after retirement?
  2. How much do you have coming in to support retirement?
  3. How much will you have to take from your $75.000 retirement assets to make up the difference?

1 – 2 = 3

It doesn’t matter which option the Financial Planner recommended, Step 1 is the reality. For example, if your maintenance is $100,000 and your annual retirement income is $50,000, then the very first year of your retirement you are going to need to deplete your retirement assets by $50,000. This will only leave you a little over $25,000 in your asset account.

You will be BROKE in six months. There is no Step 2.

So what are your REAL OPTIONS?

  1. Work until you die.
  2. Cut back your lifestyle (drastically).
  3. Move to another country.
  4. Grow that $75,000 to more than a million dollars.

If you really want to be able to retire without cutting back your lifestyle or moving out of the country, what can you do?

First you have to come to grips with the idea that your $75,000 has very little utility.

If the first option, “work until you die” is your only real choice, that $75,000 either represents something to leave to your heirs or something to consume to make your life more enjoyable. Since you are not going retire it is NOT retirement money.

If those choices aren’t that desirable, you might want to consider the fourth option: “Grow your $75,000 to more than $1,000,000.”

Therefore your utility for that $75,000 is quite low (you don’t really need it) , but your utility for one million dollars is quite high (you would really benefit from having it). Any risk is OK if it leads to your goal because your utility for the money put at risk is quite low.

Most Financial Planners and Advisers will tell you that as you approach retirement age you need safety such as bonds, CDs, and dividend stocks because these are your retirement funds. Just how wrong can they be?

You can now see the stupidity of that advice. “Safety” means a low return on investment (ROI). This strategy will probably get you a net return somewhere between 1% and 8% per year.

An ROI of 1% doesn’t even keep up with inflation. Maybe an ROI of 8% will keep up with inflation, but who knows?

What we do know is that 8% compounded will double your investment approximately every eight years. And the gain will be taxable unless it is in a ROTH IRA or tax-free bonds. Matter-of-fact the entire asset is probably taxable.

You figure it out, the longer you persue this strategy,the worse off you will be.

This isn’t a vehicle to take you somewhere, it is a merry-go-round. You keep riding but go nowhere.

If you want off that merry-go-round you need to change your attitude toward RISK. 

 The utility of that $75,000 is almost zero, but the utility of $1,000,000 (which just might allow you to actually retire) is quite high.

If you insist on LOW RISK, you will NEVER RETIRE. Keep your eye on the prize. 

Retirement can be achieved if you have enough assets. Your number 1 strategy must be to grow those assets.

Remember, if you lose that $75,000 it won’t affect your retirement choices, but…

If you grow your retirement assets to at least $1,000,000, you have affected retirement choices. It is a matter of   UTILITY vs RISK.

 Bill Roberts

About William

Bill has been a Licensed Real Estate Broker in Californnia since 1975. He has a degree (BS) in Business Management (Finance) from San Jose State University (1970). He is married and lives with his wife in San Diego. Bill's interests include sailing, travelling, economics, gardening, Fox Business Channel, old movies. All in no particular order. Oh yeah, and cooking too.


6 Responses to “Risk vs Utility – What Baby Boomers Need To Know”
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