Yesterday, Allan asked me to tell him — “in a couple of paragraphs” — why I thought stock market returns would be a lot lower these next 18 years than they’ve been the last 18 . . . and what to do about it.

My plan was to do all this in two curt paragraphs. Here was the first:

1. “Why [do you expect] lower returns?”

–Because price/earnings ratios have been expanding for 18 years and interest rates generally falling. This cannot go on forever, and even if it just stopped, let alone reversed, the rates of return would be lower.

I was all set to move on to the second part of the question, and the second curt paragraph, when I decided that . . . hmmm . . . some of you might appreciate a little elaboration.

Before I knew it, millions of perfectly good electrons had been sacrificed to this end. So lengthy was my elaboration that it broke the server (apologies if you got a stale Q-Page delivery or saw an endless unformatted version) and, once it was finally fixed, put a large percentage of you to sleep and caused at least one of you to be late for work and lose her job. For this I am profoundly sorry.

So today — briefly — Allan’s second question:

2. “What should we do about this, particularly those of us who are planning to retire soon (‘don’t’ may be good advice but it is so depressing!)”


Oh, OK, go ahead and retire if you’ve really thought it through. But there are strong arguments for working a bit longer — or transitioning to semi-retirement, enjoyably supplementing your income as a consultant or part-timer or running a bed and breakfast as you rock on the porch.

Argument one is that retirement kills. Staying busy, needed and involved (although not necessarily drawing a paycheck) keeps you healthy.

Argument two is that we have a shot at living a lot longer than most people used to, so prudence suggests that we should earn some more, while we can, to provide for those extra years.

In playing with retirement “calculators,” it all comes down to the rate of return you guess you may earn on your money. If you assume 15%, you can retire by Tuesday and live comfortably off your investments for another 100 years. But I would urge you to assume something much more modest, like 5% (to net out the effect of inflation), or even less when you need to plug in an “after-tax” return. Perhaps this will prove too conservative. Wonderful! I’d much rather you be annoyed with me because you have too much money supplementing your Social Security 20 or 30 years from now, rather than too little.

Beyond that, here is some very general, brief advice. Obviously, one size does not really fit all. But . . .

1. Especially as you grow older, a portion of your assets should be someplace relatively safe. That’s one reason I like Series I Savings bonds — they are backed by Uncle Sam, they protect you from inflation, and they grow tax-deferred. Visit

2. You might want to add to that a portfolio of fairly long-term high-grade municipal bonds, especially if you live in a high-tax state. If you buy “GOs” — general obligation bonds — you won’t have to worry about becoming an expert. They will be safe. And these days, municipals offer a good rate of return for people in high tax brackets. The only risks are, first, that interest rates will rise — leaving you wishing you had waited to get the higher return. And, second, that interest rates will fall — and your bonds will be called in early. So carefully check the “call” provisions of the bonds you buy. If you do buy municipal bonds, you can always sell them (at a loss, if rates have risen, at a profit if rates have fallen). But plan to hold them to maturity, because selling municipal bonds usually subjects you to a haircut. Your broker will likely offer you a fairly rotten price because he knows you have little convenient way of shopping them around to others. As for buying municipal bond funds, I would skip that. Why give up some of the income in annual expense fees? If you buy GOs, there’s no need to pay for diversification — they’re safe.

3. But even though you are retiring one day . . . and even though I doubt the next 18 years will offer nearly the same stock market returns as the last 18 . . . keep a good chunk of your dough in stocks — the simplest, best way for most people being though index funds (both US and international). And if you can, plan to keep adding the same $1,000 a month or $2,500 or whatever you’ve been adding all along. Because even if stocks don’t do spectacularly, there’s a good chance that, over the long run, they will do well, as they always have. And if you keep investing monthly, dips and crashes just help you buy shares cheaper.

4. Keep your riskiest investments outside your tax-sheltered retirement plans, and your relatively safe, high-dividend investments (like real estate investment trusts) inside. (And never put things that are already tax-deferred or tax-free inside a retirement plan. E.g., buying a municipal bond inside an IRA would serve to turn its tax-free interest into income you ultimately had to pay tax on at withdrawal. And buying an annuity, which is already tax-deferred, inside an IRA, is just wasting the tax-deferral of the IRA on something that’s already tax-deferred.)

5. Think twice and then three more times before buying annuities. (But if you have TIAA-CREF annuities, don’t be alarmed. They’re pretty good.) I’ve written about this several times before. Click here for one of my more succinct renditions and here for a wordier version.

There is surely more to say about this subject, but I don’t want anyone else losing his job.


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