As I write this post the stock market is swinging wildly: up 350 points one day, then down 600, up again 500, then plunging on word that the latest Covid variant is shutting down parts of Europe again or the supply problems are not getting any better. The same pandemic song we have been forced to listen to for the last two years continues to dominate the headlines and our lives. It is all starting to feel like listening to an endless mixtape on permanent repeat.
At the same time, inflation is at its worst in quite a long time, as too many dollars chase too few goods. The president is struggling with recalcitrant members of his own party, putting his plans for the country in the deep freeze for now. And, with the 2022 midterm election just around the corner, sometimes I just want to find a dark spot and hide.
it seems that now is not the time to be investing our retirement savings and money in anything new. Except, that could mean our hard-earned funds will lose purchasing power under the twin assault of inflation and an unsettled future.
So, what to do? After retirement are we done investing new money? Do we take what we have and figure that is what has to last for the rest of our lives? I can only speak for me, but, yes, that has been my assumption. After all, I don't work anymore. I have no "extra" income, do I? What would I use to invest? And, could I handle the extra risk without an ulcer?
Actually, the more I thought about it, the more obvious became the fact that I do have money to invest. My wife and I have continued our lifelong habit of spending less than our income. Specifically, between Social Security payments and the required minimum distribution from my IRA, we have more coming in each year than we need to support our lifestyle. Yes, there are occasional splurges, like a partial freshening up of the kitchen last spring or taking Betty to Disney World for her birthday, but that still doesn't put us in the red for the year.The inheritance I received from my parents was invested several years ago and remains mostly untouched. Through the efforts of a financial advisor I trust implicitly, that money generates money, most of which we hope to leave to our daughters when the time comes. Of course, if something happens where we need to tap those funds, we will do so. For now, it is out of sight and not part of my consideration.
At the end of most years, there is leftover cash because expenses were lower than we had budgeted for. We have just rolled that money over into the next year allowing for more money in certain budget categories for the new year. But, we could take those unspent funds and plug them back into investment accounts. The RMD has to be taken, even if we don't need all that money. Rather than just letting it pile up, should I be a bit more aggressive?
I am naturally conservative and I don't know what the future holds. The first part of that sentence tells me to not risk new investments. The second half of that statement tells me we can't just stop trying to grow our financial resources
I think these are difficult times for cautious or conservative investors (my humble opinion only) and I count myself in that group. The stock market's current and almost constant volatility highlights the risk in owning stocks, yet there are bonds out there with negative returns. Leaving funds in cash accounts earning minimal interest exposes us to the risk of inflation, and we've seen that number tick steadily upward in recent times, decreasing our buying power. I believe it all comes down to determining an asset allocation that will allow us to sleep well at night while protecting, preserving and/or growing our financial resources to the best of our ability in this climate. No wonder it's called "personal" finance - each of us has to grapple with the challenges of the financial world and chart a course that supports the level of risk that we're willing to accept. It's a complicated decision affected not only by our current financial situation, but also our value system, our fears and our responsibilities. A challenging situation, for sure, Bob, and no one has the answers to the test.
ReplyDeleteGood answer, Mary. My head tells me to reinvest the excess; my heart says leave it alone you don't need the stress.
DeleteIf our resources weren't sufficient to take us to the end of our days, my answer likely would be different. Then, I would want to try to increase my nest egg.
But, why put myself through the extra worry and uncertainty if I don't have to.
Yes, I continue to invest. The 1y market is still nearly 11% up. The 5y market is up 71%. My investment mix is up 96% in 4 years.
ReplyDeleteMeanwhile, my HSA is a paltry .006% but I'm leaving it there for future medical costs.
I wonder is rates for CD's or accounts like HSA's will ever make sense again as a place to park money.
DeleteOf course, if they do that means we are back to very high inflation
I feel your pain. On top of that, my HSA is actually decreasing without me paying any allowed medical bills because of a monthly 'account maintenance' fee the bank deducts.
DeleteThe big swings in the market are indeed unsettling, but I know I would have way less in my retirement and savings without investing. Most times I am able to ignore it except for the daily check at day's end of how things went (and the ensuing stomach when it really dropped). We're not wealthy by any means, so I suppose if it all went to h*ll (as my dad used to say), I would make some hard moves. But right now, we're just riding it out at the levels we set and hoping for the best. Surely this pandemic has to resolve at some point. (Disclaimer: I am sometimes known to be unrealistically optimistic.)
ReplyDeleteOur investment advisor worked with my parents for 15 years and is now handling our accounts. She has done a stellar job in understanding my tolerance for risk all while generating excellent growth for us.
DeleteI tell her when we have plans for increased vacation travel or something unusual, like a new car, so there is always enough cash available. Otherwise, when a bond comes due, she has permission to reinvest it based on her research.
Bob, as you already know the market has been massively propped up by the Fed since 2008.The government provided historically unprecedented stimulus in 2020. All of this has benefitted retirees significantly. Many very well-known market investors have already stated that the net effect of all this intervention is to have pulled forward demand at the expense of future returns. Had the government not stepped up in 2020 I am quite sure we would have had a 50% drop in the market, instead of 34%, and a much slower recovery. The two previous recessions had drops of 49% and 57%. Much of that was also due to the effects of the Fed policies. Bottom-line is I fully expect a 50% drop during the next recession, and no instant recovery. The problem is I cannot tell when it will occur. I will continue to invest to address a retiree's biggest worry. Erosion of assets due to inflation. I will keep at least 5 years of income needs totally isolated from the market. As stated by others I have absolutely no idea if I am correct.
ReplyDeleteI agree, Fred. The stimulus was essential but makes predicting the future tough. The Fed is starting to react and I believe will continue to do so.
DeleteWe do have several years of completely liquid assets in case things get seriously wonky on the investment front.
Well, you're in good shape if you can live on SS plus 401k withdrawals. One rule of thumb I know is to keep 100 minus your age invested in stocks (preferably low-cost index ETFs or mutual funds). So if you're 60, you keep 40% in stocks, if you're 70 you keep 30% in stocks ... and rebalance once a year. The rest, presumably, would be in cash or bonds or maybe even real estate. These days I'd keep plenty in cash so if the market does go down by 50% you can wait the 2 - 3 years until it recovers before having to sell. But that's just one of many rules-of-thumb. Everybody's different.
ReplyDeleteMy advisor does a yearly rebalance. For 2022 we are at about 25% stocks. I agree with her that instability in the equity market makes a slightly more conservative mix wise.
DeleteYes, we are well aware that having a good lifestyle based on must-take income is a blessing to be thankful for every day.
Since you have a trusted advisor, I would listen to their advice on this. We have been lucky enough. by keeping our lifestyle low to be able to cover our yearly living expenses with our SS and small pensions. We do not have to touch our investments except for travel and extraordinary expenses. We have a son and family permanently residing overseas, so we have been touching the investment money a bit. our advisor has us using the 3-bucket model and we keep 3 years of investment money in cash or low interest "safe" investments so we can (hopefully) weather a significant market "correction" if needed. Like you we trust our advisor. The 2 best things we ever did was get a trusted advisor and keep our lifestyle in check.
ReplyDeleteI can fully support both your key decisions. We trust our advisor because she proven she has our best interests in mind, and we have lived beneath our income for most of the past 45 years. When an emergency arises, there is plenty of wiggle room to cover it.
DeleteOh, and I will add a third "rule" of ours: no credit card debt. Pay in full every month.
I agree. In addition, our good car is 8+ years old and the "around town" car is 17+. Both with less than 100,000 miles. We always rented for long trips and kept miles off the cars. Could rent for 2 weeks for the cost of a car payment. Kept a lot of wear and tear off the good car. Probably kept 15,000-20,000 miles off the cars.
ReplyDeleteFor 19,000 miles our car was towed behind our RV. It didn't register those miles and had no wear and tear. So, the 104,000 miles on it are legitimate driving miles and it is performing well.
DeleteWhen we get a new car (when plug-in hybrids are available again) our current car will be kept for times we need a little more room for hauling things.
Well, can't rent for the cost of a car payment anymore. My 10dy rental in Dallas last year was $1340. (large enough to seat 5 comfortably).
DeleteNot much I can add other than you are in a good position, the future is taken care of, and it seems to me you have done all the right things. You could take on more risk but at this time of life do you really want to try to squeeze out every last dollar from your investable assets and have the stress that goes with it? Personally I'd carry on doing what you have been doing--so far so good.
ReplyDeleteThat is my mindset, too. Whatever extra money would not be worth the risk to my mindset.
DeleteI'm a generally cautious person and averse to risky investment strategies, but I also understand that one of the risks to retirement savings is inflation. Like you, I have simple needs and have almost always lived below my means. And, like you, I have about 25% of my retirement funds in equities. Recently, I've been investing some of my cash savings into I-Bonds, which help fund the government and are guaranteed to return a bit more than the rate of inflation.
ReplyDeleteBad inflation is the great unknown in my planning. Of course with higher inflation comes higher rates of return in corporate bonds.
DeleteAmazing what a thoughtful and intelligent group of readers you have, Bob. We're all pretty much in agreement. At 74, I've been retired 6 years and taking a small chunk of investment income along with SS. Our principal continues to increase faster than we use it.
ReplyDeleteHi Bruce, while pre-retirement you hear a lot about saving and not outlasting your money but, as I have have commented here before, it is not uncommon that retirees end up with more money than they started with. Most people underspend in their retirement, especially in the early and most healthy years. You'd think it'd be easy to spend your retirement money but it's more difficult than it seems. After a lifetime of "saving for the future" it's hard to become a spender when that future actually arrives. Old habits die hard.
DeleteBruce, I know I am very lucky to have such a great group of regular readers and those who leave comments. I always learn something from what people say and almost never have to delete anything inappropriate.
DeleteDave has helped me understand that the money we saved is meant to be enjoyed. It is hard to switch mindsets after a lifetime of saving.
You BOTH sure are right about THAT! Adjusting a 40-year mindset from saving to spending is tough. And feeling like the VALUE of things seems less these days may also be our curse. There is something SO comforting about having no debt and more than enough money for our lifestyle and I still fight my "accumulation disorder" daily. But I sure am thankful I have the disease!
DeleteBruce, your "accumulation disorder" (love that term!) is something to be celebrated as it got you to where you are today. Be sure to toast it regularly while you're enjoying the pleasures and adventures it provides!
DeleteBruce, here is one thing I try to tell myself to combat my own "accumulation disorder" (yes, I suffer from it too) when I am hesitating on buying something I can easily afford but I am getting anxious about actually spending the money: "If I didn't save it so I could spend it, then why did I save it?"
DeleteAt the end of the day saving is current consumption deferred for future consumption. If that future consumption never happens then it was pointless to have saved in the first place. That's the theory anyway. Good luck!
The last comments by Bruce and ddavidson really strike home with me. I too have been a lifetime saver, and now struggle with actually spending those pinched pennies if not absolutely necessary. It's one of the surprising aspects of retirement I never expected, and would be hard to explain to someone who is still working and saving. Uncomfortable contemplation of mortality comes into play.
ReplyDeleteI have had to almost force myself to break out of the budget now and then. We have plenty of money but after 50+ years of earning, it is hard to shift gears.
DeleteI agree wholeheartedly with ddavidson. I think the unwillingness to enjoy the money you saved reflects fear, anxiety and the quest for security. Security is mostly a superstition. Eleanor Roosevelt said " There has never been security. No man has ever known what he would meet around the next corner." Keep in mind that the brain's number one task is to keep you safe. It does that by overestimating threats. It then underestimates your resources for coping with them. It will present 1,000 false alarms in order to keep you safe from one true alarm.
ReplyDeleteMy wife and I lived frugally for many years. At this point, we make doggone sure we enjoy our money. We played the money game--working, saving and investing. We won. We don't have to play it anymore. We are not greedy. We have no interest in dying with a ton of money. Even the bogeyman inflation can't scare us from our spending phase. Now, our largest expense is experiences, especially travel ( we've been to dozens of countries) entertaining and dining with friends. Giving away money is also enjoyable, especially to the grandkids for music lessons and college expenses. We like seeing their smiles and shock when we present the checks. That beats leaving the money in a will.
It is a hard lesson to learn: spending what you save on experiences and things that make you happy. I am still fighting the "saving genie" inside me way too often.
DeleteI couldn't agree more how nice it is to make gifts to grandkids and daughters. Enjoying it now while we can see their joy is priceless.