For the past month the stock market has been on one of its periodic roller coaster rides: erratic enough to make you sick. China's economy is cooling down, giving the whole world a cold. Britain is getting close to a no-deal exit from the EU. Tariffs are good...or bad, depending on whether you benefit or are hurt. Even the golden goose, Apple, is having some problems. As of this writing 25% of the government is shut down. At some point those working for no pay are going to decide, no more.
As retirees we are directly feeling the effects of this instability. Our income is baked in. Stocks, mutual funds, bonds, pensions. savings - what we have is all we are likely to have. Depending on your age, it may be getting a little late for the markets to fully recover and world economies to play nice with each other.
During the 2008 recession, my investments lost about 30% in (paper) value. Same for my house. In the ten year since, everything has recovered and grown. Of course, I lost several years just clawing back to level ground. But, the American economy does regularly rise and fall, so I just figured this was part of the game.
That dark period was caused by greed, lax regulatory oversight, and a collective belief that everything only goes one way - up. I am pretty sure none of the people (minus Bernie Madoff) or businesses set out to throw our lives into a tailspin. That was simply a byproduct of unethical and risky decisions by too many people, including those who were offered a mortgage they couldn't afford.
This time around, the situation seems to be more worrisome, simply because I am a decade older than before. I have less time to rebuild what my wife and I are dependent on to keep us happy and healthy for the next fifteen or twenty years.
How far away are we from unpaid TSA agents and air traffic controllers walking off the job, bringing air travel to a grinding halt? The IRS is so short of people that tax refunds may be indefinitely delayed. National Parks are being closed both because of no staff, and our abysmal behavior when a park ranger isn't looking over our shoulder.
What if the economy slips into a recession this year? What if the stock continues to shed hundreds of points a day, only to recover a bit, and then fall again? As retirees what can we do?
This is not a financial blog. I wouldn't pretend to tell you what to do, only what I did and will do again, if need be. The late 80's recession, the dot-com bust of the early 2000's, the turmoil in 2008....we have all been here before.
During those three periods I did not give up on my planning. I did not sell low when things were scary just to sit on the cash. I had enough faith in the country's overall health and in my ability to weather the storm that I did not allow myself to become scared and run down the wrong path.
I cut our expenses. I delayed anything that was discretionary and expensive: house remodeling, vacations farther away that two hours north to the mountains, new furniture..anything that could wait. We sold a weekend cabin in the mountains and several weeks of timeshares in Florida.
We had simpler meals, more leftovers, fewer trips to the movie theater and restaurants. We cancelled magazine and newspaper subscriptions.
We delayed the purchase of replacement cars. Amazon's free shipping and added Prime services hadn't taken off yet; not having that tempt us certainly helped. That meant fewer opportunities for spur-of-the-moment purchases.
Now, in 2019, I am taking some of the same steps. Betty and I discussed our budget in December when things started looking shaky. We agreed that instead of waiting, we would be proactive. With our nest egg down about 10% in the last 30 days we are not prepared to cross our fingers and hope.
If the government can find a path to compromise, the world economy doesn't have a major upheaval and Britain somehow leaves the EU without falling off a cliff and pulling all of Europe down with it, we will restore what we have cut.
I must be honest: after the 2008 recession, not everything we cut from our lives has been replaced. A simpler, more-pared down retirement has been a good fit for us. True, there have been occasional splurges. But, after 17 years of retirement, we are finding quiet times with each other and family leave us quite satisfied.
In one of my strongest memories of the time during and right after the 2008 problems, I remember I felt almost no stress or worry. It was an odd reaction to a serious situation, but I felt calm and that things would work out. I had faith in our ability to weather any storm.
Whatever comes now we believe we can handle it. And, that is a great feeling.
I retired (i.e. was laid off) just before the 2008 economic debacle, and so my advice is not to rely on the stock markets for all of your future income and financial well-being. So while the markets have been good to me ever since (so far), I've made a point of producing other forms of income: SS, rents, working, insurance, pension. And then there's my brother-in-law's timeless advice. He was forced out of his company at age 55, and while he'd had a decent management-level job, he seemed to be living a pretty lavish lifestyle. When I asked him his secret for financing an early retirement, he looked at me like I was stupid, then shrugged and said, "A working wife!"
ReplyDeleteWe have less in the stock market than common wisdom calls for. Why? Because common wisdom is often wrong. We know our own risk tolerance and do not exceed it. Major stock market upheavals affect us, but not as severely as many.
DeleteI never worked for a company with a pension and Betty never worked for more than a part time salary with no benefits. The fact that we had to take care of our future plans pretty much on our own has given us the confidence to handle what may come.
Ha, Tom! My DH said the same thing in the last downturn. Now that we're both retired, it's a different story. :)
DeleteHi Bob. Thanks for the very insightful article. Hubby and I are not quite retired yet (about 10 more years hopefully) but I enjoy hearing your sound advice as we navigate toward our goal. Something in your article really caught me eye, "We sold a weekend cabin in the mountains and several weeks of timeshares in Florida." We also have a timeshare that we would love to get out off. I have been contacted by several firms that all want money up front and I am hesitant to get into business with them. Is there actually a legitimate way to get out of your timeshare? Maybe you could do an article about it? I have to think that I am not the only one who would be interested. Thanks again and keep up the great work!
ReplyDeleteLet me look into the timeshare situation. You are right: there are many who want to unload them for various reasons but don't know how.
DeleteIn our case, we sold through the resort where the 3 weeks were located. They had an in-house resale unit that made the process simple and fair. But, ever since (10 years ago) I get calls and mail from timeshare sales people wanting to help me. The fact that I haven't owned any for a decade doesn't stop the harassment.
We have friends with a timeshare that advised us not to ever buy one, as they did and were not able to sell it for a long time. We haven't been in touch in a while, so I don't know if they ever were able to sell. But I've heard a lot of people have trouble selling them.
DeleteWe have been satisfied timeshare people for many decades. That being said I am still very familiar with the process of getting rid of timeshares if they are a burden.
Delete#1, do not get into bed with any company saying they will get you out of your contract for X thousands of $ (and it will be $thousands). Anything they can do you can do in your own.
#2, do not expect more than pennies on the dollar at best, and think about $0 as the final outcome. The resale market is littered with people trying to sell their weeks or points. Check out eBay for validation of this.
#3, approach your timeshare provider directly. Many may take the unit off your hands but you will likely receive no compensation.
#4, think about renting your unit rather than accepting $0.
#5, worse comes to worse, walk away from the timeshare. In many/most cases there will be no ramification.
Sorry for your situation; timeshares should be viewed as nothing more than prepaid vacations to be enjoyed, and never as a financial transaction that might have some value to others. If the timeshare salesperson is saying something else, they are lying through their teeth.
In my opinion, the advice you share in this article is near priceless. I was/am still working so I had a paycheck to lean on during the 2000 and 2008 swoons (I am too young to have "enjoyed" the 80's bust). Like you, I did not sell. We just trimmed expenses to build up a buffer in case of job loss. But I am retiring this year and my wife retired this past November, so the next stock market crash will be felt without the benefit of a paycheck. My plan is to heed your advice!
ReplyDeleteThanks for continuing your blog!
A good friend of ours sold everything during the 2008 disaster and converted completely to cash. He was too hesitant to get back into the market at all, so his losses were locked in with no hope of gain. The end result: he and his wife sold their home and moved in with a daughter. That was the only type of retirement they could afford.
DeleteThe market runs on emotion more than fact. Acknowledging that helps one avoid making dangerous decisions.
Thanks for your kind words, Tim.
So often we are led to believe we can't live without certain items, toys, conveniences,vacations,etc., but we are learning that living simple is actually much more peaceful and fun. We take walks, we grocery shop carefully, we put as much extra cash into savings as possible, and we pause before every purchase to be certain we really want it. Our future doesn't look financially wealthy but it does look "life wealthy." Thanks for the wisdom of balanced perspective!
ReplyDeleteBalance, as you note, is so important. So does really understanding the difference between a need and a want. Retirement should contain a mixture of both. Too often the balance you refer to isn't maintained. We take the attitude we have "earned" all the toys, vacations, and splurges. Nothing could be farther from the truth.
DeleteTom, I love that term - "life wealthy!" And great post, Bob. Many insightful comments, too.
DeleteGreat summary of 2008 forward. The stock and real estate markets do seem to regularly get overheated, the international economy is mostly out of the control of the US and our government decision makers regularly make poor decisions re the economic well being of the average person. Diversification and/or safe but low return investments coupled with prudent personal economies see to be what is available for the average retiree.
ReplyDeleteYou have nailed it: diversification, safer investments with less risk and lower returns, and a lifestyle modified to match that approach = a satisfying retirement. Maybe not the one the media portrays, but the one that keeps a lot of the stress and uncertainty at bay.
DeleteAn excellent post. I'm a worrier, even though our investments are conservative. Thanks for sharing your sane perspective.
ReplyDeleteWatchful worry and proactive planning. That is my approach.
DeleteBob, I retired at the end of the summer of 2000, only to find myself caught squarely in the Dot Com bust, the market drop following the 9-11 attacks and the Enron and WorldCom scandals. The markets took almost 7 years to recover to their previous levels and then went directly into the Great Recession. The stock market (S&P500) finally returned to the level it had been in 2000 by early 2013. A significant period with no growth. Selling stocks, particularly during the worst parts of both market downturns, was very painful and something I avoided as much as possible. We managed to get through, much the same way you did, by reducing expenses and trying to focus on the longer term. But it did impress upon me the need for maintaining a significant fixed-income position and a healthy Emergency Fund. In 2017 as the market continued advancing to new highs and it looked like the good times would never end, I managed to convince myself that it was finally time to begin reducing my very high exposure to stocks. I spent 2017 and 2018 as a net seller of stocks and increased my fixed-income portfolio. This was a difficult decision for me to execute because I would sell a batch of stocks only to watch as the value of those stocks continued to increase. I found myself continually in a tug-of-war between Fear and Greed. Fear that the stock market would go into a full bear market at any time and Greed that kept telling me that the bull market might continue to run for years to come. I have no idea if we are about to go into a major economic downturn or if the markets will shake off the recent losses and move on to new highs. I still have the majority of my assets in stocks, but the higher fixed-income allocation allows me the peace-of-mind to know that I can wait out many years of a market downturn without having to sell stocks at a loss or significantly reduce my standard of living. In these uncertain times, that alone is worth a great deal.
ReplyDeleteThat eternal battle between Fear and Greed is one of the main factors that drives the market. Someone who tries to time the market or anticipate what it will do with a piece of information is bound to be hurt. Those of us who are amateurs always choose to sell and buy the the wrong times.
DeleteThe good news is, we learn from our mistakes. As your story shows, even though it may be tough to pull the trigger at certain times, we have been up and down this road enough times to know that nothing lasts forever, especially in financial markets.
Thanks for sharing your story, Rick.
We were both working in No. California during the dot com bust and have since relocated to the flyover zone near family. But I clearly remember selling stock at a loss to pay expenses and college tuition for kids when I was out of work for a year and half. It wasn't fun. It made me very leery of single stock investment, regardless of the advice of any advisor or newsletter hype.
ReplyDeleteWe are definitely aware of the market gyrations, but try not to get too worried, as there really is nothing we can do to affect it once we've balanced our investments to our comfort level. That said, we are looking at wants vs needs very carefully and have delayed a 'big' vacation for the time being. It's just reality once we stopped getting a paycheck (or two in our case). But we have a pretty happy, low key life and we both enjoy it. Walking our dog, hitting the library instead of the bookstore, movies at cheaper times (less crowded anyway), eating out early instead of the pricier late dinner hour - which works better with aging digestion anyway. :-) We really can't complain and getting rid of cable news was great for our blood pressure. I'd say our retirement is pretty satisfying!
I like your positive spin on things. Of course, with a name like Hope Springs (eternal) I count on you to see the bright side!
DeleteI certainly remember the runup to the dot com bust, when seemingly sane people claimed the good times would never end. Companies with no products were worth billions. Anyone with eyes wide open knew that was not going to end well.
Even so, I dabbled in day-trading for a few months....and lost thousands even during an up market. That was a mistake in hubris I have never repeated.
Now, steady as she goes. 17 years after retirement life is good.
Indeed! I remember people talking about how easy day trading was, and I bought stock in some of my customers (Cisco, Intel, etc.). Wow, when the market crashed that was ugly. Like you, I won't repeat that crazy mistake. And yes, Hope Springs eternal. It beats the alternative. ;-)
DeleteBob, I feel strategy and a pre-determined plan are the key in any retirement. Many of us have been educated to expect up and down cycles with our investments. Also, risk level is yet another angle that we must all understand. Each of us have different tolerance levels for risks. One of the key items I have learned from others over the past couple of years is to bucket your retirement savings into several categories of risk level. One key principle I have employed (and did so right before the recent "correction") was to ensure I have 3+ years of living expenses in cash or low risk, non-volatile savings. This money is a buffer to protect us from wild market swings and a bear market. If we are in a down market, then I minimize replenishing the "cash" fund from my equities or bond investments until the market makes a turnaround and my investments recover some or all of their losses. I continue to maintain a certain percentage of my investments in equities which, by nature, tend to be higher risk and do not plan to touch that original investment principle if possible. I worked with one of my financial advisers just before the end of the year to also sell under-performing investments at a loss in order to offset a capital gains profit I took earlier in the year. I also am not quite 55 so pulling from my tax deferred accounts is really off the table for another 5+ years, so those investments remain in index funds and equities. I have a broad investment portfolio that contains annuities, REITS, and other products in order to protect my retirement savings from devastating losses due to recession or a market downturn. The "bucket" approach so far is working for me, but it is still somewhat unnerving to watch your portfolio value drop 10-15% over the course of 3 months time. I keep reminding myself to stick to my plan and not allow the media sensationalism to affect my temperament.
ReplyDeleteA balanced, disciplined approach is the best long term strategy. I am glad you mentioned the cash reserve fund. I take the IRA RMD right after the first of the year. Between that and Social Security we are pretty much funded for the rest of the year, so stock market or other indicators ups and downs don't have an immediate impact.
DeleteRecessions always happen again. This is a normal part of our economic system. Our approach uses several well known ideas.
ReplyDelete1. Enter retirement with zero debt.
2. Documented spending history. We must know our normal monthly expenses.
3. CD ladder with enough funds for next 5 years living expenses.
4. Separate fund set aside for house repairs/unbudgeted emergencies.
This frees us up to make any adjustments to our investing portfolio without fear of short term consequences. Our personal view of the economic cycle at this point calls for at least 40% of investable funds to be in cash equivalent investments. CD's, money market accounts etc. This money will be invested into a total US market fund once we move into the next recession and the market has corrected by a minimum of 30% from its peak. These funds will be deployed at predetermined points in the recovery from the bottom. If the market fools us and the bottom is not really in we leave any funds invested in place and wait again for specific recovery points to invest. We never get in at the absolute bottom. We also never let everything ride all the way from the top to the bottom.
You approach is one for many to consider. I have total trust (with oversight) in my financial advisor to keep me in the right mix and not "play" the market. She knows my risk tolerance and our desire to leave an inheritance to our daughters, so she keeps all of that in mind. The few times I have blinked and wondered out loud if we should sell something or shift percentages she has provided wise counsel.
DeleteLike you, we entered retirement with no debt. That was a very reassuring position to start from.
I am still working, but planning on retiring in three years. However, because I just found out, today, about an increase in the COBRA costs from my work, I may delay my retirement until I am 65, in six years. I am still not sure. I just want my pension and social security to cover my present expenses, which are not lavish at all, without having to dip into savings. But, I do not want to retire and have a major health event happening, which with my family history, is more likely than not..... I, too, want to leave an inheritance for my kids.
ReplyDeleteNo matter how well we plan, health problems and associated costs are the big unknown. Even with Medicare and supplemental coverage, the average 65+ person has to plan on spending around $275,000 until the end of his or her life. That is a depressingly high figure.
DeleteWhen my husband and I retired early, age 60, we were able to qualify for subsidies on the ACA (Obamacare) plans and so we have had affordable health care till I qualified for Medicare lasty ear. My husband still has an ACA policy at low cost. You may be eligible,"anonymous," and able to still retire before age 65 without having to use COBRA.Just a thought. Worth checking into?
DeleteI'm not a greedy person.
ReplyDeleteI don't want to die rich.
I live simply.
Those three statements pretty well define my investment strategy. Since I have a pretty robust defined pension, I can pretty much live off that and my monthly Social Security checks. In my 18 years of retirement I have barely touched my 401k or other investments.
So, I have very little in the stock market. If you don't need to grow your savings (other than to keep up with inflations) why take on all the worry of a dramatic stock market plunges and such. I am worry free in that regard, and that kinda feels nice. Now all that's left is to sit back and enjoy my simple lifestyle every day.
Your employment history with a good company provided something I will never experience: a solid pension. I would never exchange the life I led, but I do miss that security.
DeleteUnderstanding and accepting your "risk tolerance," and adjusting your investments accordingly goes a long way toward achieving peace of mind and a satisfying retirement. The rule of thumb that you should be invested in X% stocks and Y% bonds at a certain age is a general guideline that does not work for everyone. I believe that investors who are completely honest with themselves about their tolerance for risk (and loss) will be more content with the way their assets are allocated and better able to ride out the wild swings in the markets.
ReplyDeleteSo true, Mary. The ultimate responsibility for the direction of our investments lies with us.
DeleteA good example is the "4% rule." It has been a touchtone for years and the basis for a lot of discussion. The 4% figure was developed during a time when interest rates and investment returns were different.To blindly follow it as the way someone withdraws money from retirement accounts is risky. As we live longer, the 4% rule may mean we run out of money before we run out of life.
The point is to rethink what you are doing and how on a regular basis. But, don't toss a long term plan out the window because of a short term problem.
Re: Understanding and accepting your "risk tolerance"
DeleteOne thing I have learned over the years is that you don't really know your investment risk tolerance until you go through a bad downturn, a really bad downturn. Then you know. And typically it's lower than you first thought. Something most of us that post here probably found out the hard way.
Bob, judging by the number of comments you certainly touched a nerve regarding protecting your hard earned (and hard saved) retirement money. I don't think I can add a lot. Diversification have been mentioned a lot and that's key. Remember what good for young people with long time horizons isn't necessarily good for those of us with less time. At this time of life guaranteed investments like CDs aren't a bad thing for a portion of your portfolio. Currently I have about 25% of my retirement portfolio in guaranteed investments and I sleep well.
ReplyDeleteThanks, Dave. Yes, diversification is really the answer. Someone with 80% in stock at our age, or %10 for that matter, is probably in need of a rebalancing.
Delete