Fixed Income Investing: Slow Financial Suicide

The chart below shows how the real (after-inflation) return on long term US government bonds has been just below 3.6% over a period of 208 years.  At this time the return on a 30 year Canada or US government bond is in the neighborhood of 3%.

Imagine you retire tomorrow at the age of 60 and have $1,000,000 dollars invested. Do you think it would be enough? It could provide a guaranteed income of $30,000 for the next 30 years.

Total Real Return for USA 1802-2010 Source: Stocks for the long run, 2008, Jeremy J. Siegel, updated to 2010

Note: U.S government bonds have returned only 3.59% over inflation in the 208 year period shown above.  It is much worse since the 1930’s, and this is before tax.

The problem is the cost of living keeps rising. If inflation is only 2% over the next 30 years your cost of living will almost double. If you spend the whole $30,000 per year then you will have to start eating into your principal in year two and by year 30 there will be nothing left of your million dollars. Try it yourself with this investment and regular withdrawal calculator at 3% return, 2% inflation, $1,000,000 starting value and $30,000 income.

Just think back 30 years ago and ask yourself what was the cost of milk, bread, gas, taxes, a house, a car, insurance. If you retired 30 years ago on a fixed income did you achieve lasting financial security, or did you go broke?

Total return 3%

Inflation      -2%

Left to spend 1%

With a million dollars invested in bonds you should only spend $10,000 per year if you wish to avoid depleting your capital. Seems crazy, I know, but it is a historical and present day reality.

An excellent financial advisor does not hide from reality but faces it head-on and plans to overcome such obstacles by educating clients about the lessons of history.