When folding money goes, gold and silver will have trouble, too
Q: I have a question about gold and silver. In the event of a catastrophic economic collapse, where can I sell my gold and silver? Surely, banks will have crumbled and precious metals dealers will be out of business. I can't very well take a gold bar, or for that matter, a 1-ounce gold coin to the store to buy bread and milk. Who will buy my gold for cash? Or do you predict a barter system will take over? - D. Z., by email
A: That's the question most of the gold bugs don't ask. History shows that barter rises as a currency loses value. It may be possible that gold and silver coins can be used in the barter process, or even as substitutes for currency. But it's a rough mechanism. Even when you compare the smallest typical units of silver (1 oz.), that's a lot to trade for a loaf of bread. Today, most people carry $20 bills and smaller, but a post-apocalypse economy will have a tough time doing commerce in gold coins. An interesting read on this subject is Dmitry Orlov's "Reinventing Collapse."
Q: My wife and I are retired. We are both 70. We have $800,000 invested with a brokerage firm that charges 1.75 percent to manage our funds. About $300,000 is in IRA accounts and $500,000 in 401(k) accounts. These funds are invested 60/40 stocks and bonds. We also have a $75,000 IRA with Fidelity (invested all in stocks) and there is no management fee. We have $80,000 in savings and a few thousand in checking.
We owe $70,000 on our home mortgage and have no other debt. We have about $45,000 a year in Social Security benefits and about $6,000 a year in "mailbox" money (from oil and gas). Later this year and next year we will both begin mandatory withdrawals which might be $15,000 to $20,000.
Any suggestions to make our funds last another 20 years or so? - J.L., Marble Falls, Texas
A: The first thing you need to know is that you're likely to have more income from those required minimum distributions than you think. The withdrawal requirement for the first year is 3.65 percent. That would make a $32,000 minimum distribution, not $15,000 to $20,000.
The good news is that required minimum distributions, in themselves, are a very efficient way to make distributions with an eye toward longevity. Since the distribution rate rises each year, you're likely to see two things. First, the distributions will probably offset inflation and, second, it's highly unlikely that you will exhaust your account in 20 years, when you are both 90.
You can increase the probability of not running out of money still further by eliminating your expensive brokerage management. If your account is invested in individual stocks and bonds, you may not have a very diversified portfolio. But if it is invested in mutual funds (not what you said) the total expense burden will be higher.
Basically, a management fee of 1.75 percent is outright unacceptable because it endangers the long-term survival of your money. Let me give you an example, using the Portfolio Visualizer website. Suppose you invested your money 60/40 in U.S. stocks and intermediate-term government bonds, had no expenses, and withdrew an inflation-adjusted 4 percent a year. You'd have a 99 percent chance of success for 20 years, which is pretty good. Run it out to 30 years and the odds of success drop to 93 percent. Most people would call that pretty safe.
Now take 1.75 percent a year from the fund for management fees and the odds of 30-year survival drop to 68 percent while the 20-year survival falls to 89 percent.
Yes, I know, you're probably not thinking about living to 100. Few do. But if you've made it this far, the odds are pretty good that one of you will live longer than 20 years. Using a recent life expectancy table, for instance, here are the survival odds for 70 year olds to reach 90 - 24 percent for a man, 35 percent for a woman, 50 percent that one of them will be alive, only 8 percent that both will be alive and 50 percent that neither will be alive. So unless you've got some grim health records in your past, thinking about 25 years would be a good idea.
• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.
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