Where Retirees Should Park Their Money
After retiring as president of Boeing's (BA) aerospace unit in 1989, Henry "Bud" Hebeler was disappointed by the overly simplistic nature of most retirement-planning software and books. Now his second career is offering retirement advice via books and his free Web site, analyzenow.com. These days, Hebeler believes retirees should prepare for the worst: lower returns, higher inflation, maybe even a depression. He talked with Atlanta Bureau Chief Dean Foust.
Many economists expect lower growth and investment returns, and, at some point, higher inflation. What's your advice for current retirees and those hoping to retire?
Retirees should make more conservative projections for returns, inflation, and taxes. Also, fees, mutual fund costs, and taxes reduce returns. Retirees taking steady annual withdrawals inevitably sell during periods when the market has plunged—and have to sell more shares to make their normal withdrawal. That phenomenon effectively reduces an average return by one percentage point. If you're retired and need to sell assets to cover expenses, you'll often do better selling fixed-income investments rather than cashing in stocks in a bad market.
How are you invested for your retirement?
I divide my investments into three parts. The first assumes I want to be able to live through a Great Depression II. My choices here would include money markets, CDs, savings bonds, Treasuries, and debt-free real estate—investments you can get your money out of no matter what. The second assumes the American people will wake up to our problems, so it comprises a very conventional mix of stock and bond funds.
The third part assumes we'll have hyperinflation from all the debt we'll be trying to sell. The choices for that scenario include leveraged real estate—real estate investment trusts and even rental homes—stocks, inflation-protected Treasury bonds, and inflation-adjusted immediate annuities. I'm not a big fan of variable annuities, which just make insurance companies rich. But with inflation-adjusted immediate annuities, if there's inflation, you get a super return. Even if there isn't, you get a steady income no matter how long you live, and you might reduce your estate tax.
Where is the bulk of your portfolio now?
The largest part is in conventional, but what I have in the hyperinflation and depression portions is sufficient to get me by, especially if the conventional part isn't wiped out. To determine the fixed-income percentage for all three, I use a simple formula. For a 70-year-old, I'd say to keep a percentage equal to your age or 10% less, and the rest in stocks. You should set a minimum and maximum percentage allocation for stocks. I've found a spread of 10% between the minimum and maximum means I don't have to rebalance much, often not for two years. Our personal minimum percentage is 100 minus my wife's age, and our maximum is 10% higher. I was on a talk show last year when the host criticized this formula as too conservative. I thought to myself, he'll learn. I'm sure he has.
Which scenario seems most likely to you?
We're up to our eyebrows in debt—consumer, corporate, government. The nation's debt problems are so large that the sky will fall on the majority of people. To survive, they will have to save—lots. Perhaps the best protection if there's a Great Depression II would be to have different work skills. I was brought up in the Depression. My mother insisted that my sister and I learn a musical instrument because she felt that would always allow me to get employment if I lost my regular job. I learned to play three, so I guess I was diversified.