Book review: The 7% Solution: You Can Afford A Comfortable Retirement

For those who believe they might still be able to retire by choice in this economy, financial adviser John H. Graves has written a book detailing how you can take control of your future planning.

Obviously there’s quite a bit of work involved, and while Graves takes somewhat of a dim view of the financial planning industry – a group he considers “nothing more than salespeople for lucrative, prepackaged financial products” – he concedes there are people who would feel more comfortable with professional advice and gives pointers on what to look for in that field. A reader can quickly presume that Graves isn’t all that pleased with the work others in his chosen avocation have done for the millions of Americans who would like to enjoy their sunset years without financial worry.

But the book is so named because Graves believes one can get 7% income from your portfolio, year after year, by being diligent and attuned to opportunities from a variety of sources. Writing that “Mr. Market” shows up at your door every day with a broad spectrum of financial choices, Graves points out that it’s rare you won’t send him away without a sale, but there are times where you can take advantage of him.

A key component of Graves’ strategy lies in value stocks, for studies have shown a vast majority of total stock market returns comes from dividends. Obviously share prices move up and down, but companies which have paid relatively high dividends for long periods of time should be the basis on which a portfolio is built, says Graves. Whether a company’s price per share is $10 or $50, a dividend which continues to increase each year is income that can be counted on towards the 7% solution.

And while stocks are a key component of the strategy, Graves doesn’t discount the role that bonds, mutual funds, annuities, and other more esoteric investments like REITs, master limited partnerships, and business development companies, among others, can play in a well-rounded portfolio.

I have no doubt that someone with the time and a little bit of knowledge gained from this book and other sources Graves cites within can indeed build a reasonable portfolio which can provide income. Given that, The 7% Solution can be termed as a success, and Graves cites a few of his own clients as success stories at the end of the book. But I believe there are a number of flaws within his assumptions.

For one, Graves believes the Baby Boomer generation is a generation of savers. This may have been true at one time, but while many millions had something set aside for their retirement the sad reality is that too many counted heavily on the fallacy of home equity and on maintaining a full-time job for the remaining years until they decided to stop working, figuring those geese would lay the golden eggs while they spent what they earned to keep up an opulent lifestyle, one which outpaced they could truly afford. If a Boomer has seen his job and savings wiped out by the Great Recession and instead finds himself in debt up to his eyeballs, 7% of nothing is – nothing.

And while retirees of today can still rely on Social Security, there’s no guarantee that it will be here for future generations. Unfortunately, while many of Graves’ principles have stood the test of time over the last several decades, there is a wild card that no one can predict and that’s the impact of government policy on retirement. For example, Graves devotes the penultimate chapter in his book to tax policy for retirement planning, but that’s among the most susceptible to change at any time.

Certainly his book is fine for the time being, but there’s another question left unanswered: what happens if we reach a financial Armageddon where, say, the government decides to take over 401.k accounts? Those rumors have floated around occasionally since the 2008 financial crisis and with government holding trillions of dollars worth of unfunded liabilities, anything can happen. And aside from land and improvements thereon Graves only writes about paper assets, a fact which may prove a disservice in difficult times when hard assets like precious metals could be useful in saving for retirement.

Retirement is a phenomenon unique to the last few decades, since our ancestors worked until either they dropped dead or their bodies could no longer bear the strain. With the rise of capitalism, people were finally able to save money and insure themselves a relative life of leisure in their golden years. It’s also provided authors like John Graves a lucrative market for books like The 7% Solution.

The do-it-yourself approach to retirement planning Graves espouses is a sound one, even if it puts people in his chosen line of work out of business. As a primer, you could do much worse than invest in the book and put the ideas Graves suggests to work. But be aware that government interference has been keeping us from realizing the real 7% solution of annual GDP growth, so don’t count on Mr. Market to keep showing up at your door.