Author Nick Murray often cites one of my favorite movies to simplify investing concepts.  That film is the original "Thomas Crown Affair" with Steve McQueen and Faye Dunaway.  Steve McQueen is Thomas Crown, age 36, in the year 1968, and a wealthy socialite and thief.  He spends A LOT of money.  He lives in an expansive mansion on Boston's Beacon Hill filled with art & antiques, and he drives a new Rolls Royce.  He is worth $3 million (which in 1968 was a ton of money), and he just completed a beautifully orchestrated bank heist from which he netted about $1 million.  This guy has $4 million in 1968…….he's rich.  Or was rich…………..…here is the point:

Let's imagine the story ends there, and Thomas decides to retire from being a thief and live a retirement of luxury.  He decides to invest his $4 million in a portfolio of bonds (no stocks at all) that pays him 4%/year after taxes (which is all-but-impossible to find today, but we'll be generous and assume he found some very good bonds).  So his income from those bonds in 1968 is $160,000 per year.  The average American in 1968 only earned about $8,000 per year, so Thomas is a high roller, right?  (source: U.S. Dept of Commerce)

Fast forward from 1968 to 2002………the high-living Thomas Crown would be 70 years old.  And his income would be………..the same $160,000 per year.  But because of inflation (estimated at 3%/year compounded yearly), he now needs about $655,000 per year to live the same life.  As a result, he has to sell his assets.  The mansion is gone.  The fine art is gone.  And a whole year's worth of bond interest couldn't replace the Rolls.  Don't get me wrong…..the guy still has a relatively large income.  But he has had to scale back his standard of living dramatically.  Can you imagine if today someone asked you to endure the rest of your life on 75% less money than you normally spend?

Two of the main and equally dangerous threats to a secure financial retirement are:

1. Temporary but miserable declining stock markets (which historically have best been battled with bonds).
2. And the inevitable rising cost of living (which historically has best been battled by stocks).  But Thomas did not factor this in. Thus the desperate fire sale of art, antiques, luxury cars, etc.

Always remember that an efficiently structured retiree portfolio is deliberate, diverse, and has balance.

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