Retirement Investment Options

As with the fairy tale involving the three little pigs and the big bad wolf, much of the outcome is based on the priorities we establish during the building stage of our financial lives.

But let me be clear. When I say "retirement investments" I’m not talking about investment categories or choices for those who have already retired. Rather, I’m talking about the choices we make in the years (and decades) leading up to retirement, the ones that help determine what kind of retirement we're going to have.

Retirement Investment Options - #1 - Straw

We may not set out to live in a straw house, but when we have little or nothing put away, there’s not much choice – a straw house is all we can afford. And the net result is usually some combination of a second (or third) class standard of living along with continuing to toil long after we should be taking it easy.

And the most frightening aspect of all is the realization that what little we do have can be taken away at any moment.

Retirement Investment Options - #2 - Sticks

The brittle sticks of this house are made both of good intentions and conventional investing advice. For U.S. investors it goes pretty much like this: "Max out your IRAs and fully participate in your 401K up to the point of the company’s matching contribution, and then invest all that for the long term in a basket of broadly diversified mutual funds."

This is clearly the mainstream path and the one on which most individuals who are actually planning for retirement find themselves.

Unfortunately, as you near retirement and begin to do the calculations, unless you've really managed to put away an impressive amount of money, you will most likely realize that your nest egg isn’t nearly big enough to provide you with the comfortable life you were planning on enjoying for the next three decades.

Again, the result is either a scaled back lifestyle or the unpleasant necessity of having to find some additional source of income to close the gap. Although a huge improvement over straw, building with sticks is still significantly flawed.

I am highly critical of this kind of conventional investing wisdom. To be blunt, this is the kind of crap advice that mass media outlets like CNN, Money Magazine, USA Today, etc. use as filler to sell advertising space for--you guessed it--fund administrators and the professional money management industry.

If you have no interest in or aptitude for how investing really works or how to recognize a truly great business in a sea of OK, mediocre, and even poor businesses, then House #2 really is your best bet.

And maybe that does end up being the majority of the investing public, but I still find it incredibly cynical and condescending for the John Bogle types to suggest that every individual investor falls into that category.

I've discussed in greater detail elsewhere my aversion for this advice (see the related site article: Investing in Index Funds: 3 Major Drawbacks, but let me make one additional comment:

Index, ETF, or sector investing casts too wide of a net – it’s like fishing in a heavily polluted waterway. Sure you may find something edible when you pull in your net, but God help you if you're hoping on eating everything else that you dredge up.

So why not "invest" via an actively managed mutual fund? Due to overtrading, fees and expenses, and the short term mindset of fund managers who simply have too much money to manage to ever excel over the long term, in any given year, the majority of all mutual funds underperform even the indexes.

Translation: in up years, you'll make less than the market and in down years you'll lose more.

In a nutshell, the problem with the nest egg model is that it promotes the unrealistic notion that all you need for a comfortable retirement is to divert a certain percentage of your wage or salary income into inferior investment products and everything will be just fine.

Right – no wonder that model also assumes you’ll be drawing down a certain percentage of your life’s savings each year after you retire.

Unless you have a particularly high income and you're able to sock away a ton of money during your working years, your nest egg typically won’t be large enough to generate enough income on its own without you having to cannibalize it.

How did this model ever become the preferred retirement plan - hoping that you die before your dwindling savings are all gone?

Retirement Investment Options - #3 - Brick

The key word here is "investment." I’ve addressed the What is Investing? question more thoroughly elsewhere, but in a nutshell it’s this: using your personal resources to participate in the capitalization of a commercial endeavor that provides value to a paying public and getting monetarily rewarded for doing so.

Investing is not an abstract concept. It’s not an account somewhere that you just keep putting money in. True investing is your financial participation and ownership stake in a real business with real customers who pay real money for that company’s real products or services. And the more of that company you own, the more profits you're entitled to.

Think about it – if you spend your financially productive years accumulating ownership in individual, consistently profitable, structurally advantaged businesses, your profit and income stream will increase on two fronts:

• as you continue to invest new money into such profitable ventures
• as the underlying businesses (and their profits) grow over time

If, for example, someone facing retirement today had spent the last 30 or 40 years accumulating shares in dominant, stable, consistently profitable companies like Coca-Cola, Procter & Gamble, and McDonald’s, not only would that retiree’s dividend stream be significant, it would continue to grow throughout retirement.

So instead relying on government assistance (straw) or worrying about whether you’re going to outlive your retirement savings (sticks), the brick approach results in an empire that keeps growing and generating more and more cash as time goes by.

When you live in a brick retirement house, the longer you live, the wealthier you become.