"Since You Asked"
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Here are some of the questions submitted to Paul Merriman from readers of Living It Up Without Outliving Your Money.
- Do people really outlive their money?
- You didn’t include REITs in your book. Why?
- You recommend taking money out of your portfolio at the start of every year. Why not take it out instead as it’s needed?
- You recommend that half of an equity portfolio should be in international funds. Isn’t that too risky?
- What can I get from your book that I can’t get from other investment books?
Q: Do people really outlive their money?
PAUL: Usually not in a literal sense. But a lot of elderly people rely almost exclusively on Social Security. This is not “their money,” only a government payment. Many older people move in with their children for economic reasons. That’s not exactly “running out of money.” But when retirees no longer have money that’s discretionary, they run out of choices. They lose the ability to decide to travel or give generous gifts or go out just for the fun of it. One of my goals for this book is to teach people how to avoid that.
Q: You didn’t include REITs in your book. Why?
PAUL: Real estate investment trusts can play a valuable role because they are not strongly correlated with other types of stocks. They have done very well over the past 15 years in an environment of falling interest rates. However, when interest rates go the other way, REITs probably won’t be so attractive. Added to a portfolio made up only of the Standard & Poor's 500 Index, REITs are a wonderful diversifier. But in order to include them in a broadly diversified bundle of asset classes such as I outlined in Your Perfect Portfolio, you have to reduce your allocation to value stocks, to small-cap stocks and to international stocks, all of which have a higher expected long-term return than REITs.
REITs are not tax efficient. If you invest in them, they should be held in a tax-sheltered account such as an IRA or a 401(k).
Q: You recommend taking money out of your portfolio at the start of every year. Why not take it out instead as it’s needed?
PAUL: Taking money out once a year makes it relatively easy to do the calculations for withdrawal strategies. Leaving the money in longer, until it’s needed, gives the money more time to benefit from being invested. There’s not always a compelling reason to keep a year’s worth of spendable income in the form of cash.
However, some people have a difficult time emotionally taking money out of their savings. For them, annual withdrawals might minimize this financial angst. In the end, the optimum way to use retirement accounts will be different for every household, depending on individual financial and emotional needs.
Q: You recommend that half of an equity portfolio should be in international funds. Isn’t that too risky?
PAUL: On the contrary, as I point out in Chapter 9 using the example of Japanese investors, having half your money outside your own country is less risky, not more risky. If you made an index of all the money invested in the world , you’d find about half of it invested in the United States and the other half elsewhere. My recommendation essentially tracks that.
When we design portfolio for clients, we often find that people are uncomfortable having half their equity portfolios in international funds. When necessary, it’s easy to reduce the international exposure. If we can persuade a client to accept even 30 percent international equities, I think that is much better than the 10 to 15 percent that so many advisors recommend.
Q: What can I get from your book that I can’t get from other investment books?
PAUL: Much of the advice and information in this book can be found elsewhere. However, “Living It Up Without Outliving Your Money!” is the only investment book I know of that advocates our unusual asset allocation strategies. It’s the only book I know of that goes into detail about withdrawal strategies and why they matter so much. It’s the only major financial book I know of that includes a dedicated Web site offering updated tables and allowing readers to ask questions of the author. And I’m sure that this is the only book that contains a description of my 500-year estate plan.
