BULLS & BEARS: A little market history can predict your future

A baby-boomer client told me the other day that his wife was concerned whether they were going to have enough money for retirement 20 or 25 years from now.

This couple’s retirement income concern is common and is one of the top worries boomers have, even ranking above their fear of sponge baths.

To address this fear, you could pay a financial planner a few hundred bucks to do a whiz-bang, multi-page retirement projection using “Monte Carlo” simulation.

The planner will present the results to you and use words like iterations, standard deviations and allocations. Halfway through the presentation, your eyes will glaze over like Ferris Bueller’s did as he listened to Ben Stein drone on about economics.

Instead of bothering with all those high-tech machinations, you could probably come to a similar conclusion using a pencil and a legal pad.

Money invested in the stock market doubles in value about every seven years. Of course, it doesn’t happen every seven years, but that’s the average growth over a long time.

The longest time it took to get a “double” was a 21-year stretch that encompassed the depression and World War II. The shortest was 1954 through early 1956, about two years.

The most recent double happened in 1996-2000. The last five years, we’ve been treading water-much of the time gasping for air-which is why you don’t feel so good about the stock market.

In my clients’ case, they have up to 25 years until retirement, which means they should get three doubles.

Their $500,000 account should double to $1 million, double again to $2 million, then do it again to $4 million.

By then, their portfolio should be able to squeeze out an income of $240,000 a year and keep them from having to be store greeters in their golden years.

If you have only seven working years left, your odds are better than average, about six out of 10, that you’ll at least double your money in the stock market. If you have 14 working years left, your odds of success jump to nine out of 10.

Many of you, though, can’t stomach having all your money in stocks, so you balance your portfolio with bonds. In a balanced account, you’ll just stretch out the number of years it takes-maybe 10 or 11-to double your money.

In my client example above, a balanced account would probably give them only two doubles instead of three, and $2 million instead of $4 million as a nest egg.

With $2 million, they could create around $120,000 in income. They’d still eat … just not as well.

That pretty much illustrates the old saying that if you want to eat well, buy stocks; if you want to sleep well, buy bonds.

As I mentioned above, the last double for a stock market investment has taken nine long and arduous years.

Historically, the long, tough, low-return periods have been followed by rip-snorting, short, high-return ones. This time won’t be different.

I might have 30 or 40 years left on this planet, and the way I figure it, old people don’t sleep too well, anyway, so I’m sticking with stocks and planning to eat well during my sponge baths.