I don’t have time to make up for losses
Working with retirees and folks transitioning to retirement, I often hear some version of “I don’t have time to make up for big losses in the market,” and on the surface, this may be true. However, it’s still worth digging into the details.
Historically, the stock market has been a large driver of wealth and over the long haul likely will outperform cash and short-term investments. With exceptions of course, it’s best for individuals to put as much money (or as much money that makes sense) into this growth.
If we have a false sense of needing to protect our money, it can steal this valuable growth opportunity away from us. Of course, this doesn’t mean you should be reckless. I don’t mean to imply “put all your money into the market and stop all the worrying silly.” What I am saying that if we let our natural human instincts and surface level knowledge run our strategy, then it will likely produce lower returns for our hard-earned savings.
Okay, but back to the concept of not having time to make up for losses. You may be thinking to yourself “yes Nick I have my nest egg, I’m retiring next year and cannot afford to lose this money since I plan to start withdrawing from it next year.”
In this scenario I typically like to bring clients through an exercise of finding out exactly how much money they will be withdrawing from their accounts when retired. Depending on when your social security and/or pension starts (and other factors) you may withdraw varying amounts the first handful of years, while others will withdraw a consistent amount from their savings each year.
Consider this example. A couple who has $1,000,000 is ready to retire next year at age 67 and will begin social security that year as well. To supplement social security payments of a combined $50,000 they will withdraw $32,000 from their investments to support their lifestyle. If we are conservative and assume we want to protect the next seven years of spending needs from the untrustworthy Mr. Market, then we would need to keep $224,000 (7 years x $32,000) in some type of safe position like cash, bonds, or other fixed instrument.
This would leave them with $776,000 which would be left sitting until their expense needs kick in… seven years down the road. They could even extend this exercise to a 10-year cycle if they wanted to be even more conservative — which would mean protecting $320,000 and having $680,000 that be available in 10 years to use. Of course, this all depends on your level of risk preferences and can be customized as such.
Those numbers hopefully open some eyes to the detriment of what happens if we trust our gut and put the entire $1 million in bonds or cash to ensure our safety. For one thing, inflation will cause our lifestyle to cost much more in the future, so we need to grow our money to at least keep up with that, but also hopefully outperform inflation and grow our assets for our future selves.
My general experience is if you don’t trust the market to grow or to protect your money over a 10-year cycle, then you are probably not trusting enough to invest your money… and none of that provides too much reassurance. Yes, there have been 10-year cycles where there has not been stellar growth, however even one of the worst 10-year cycles, starting in 2000, there was ultimately some positive returns. Just imagine someone starting their investment the day before the tech bubble crashed and ending in 2010, just after the financial crisis. During that period the market was virtually flat with limited growth — but, those who reinvested dividends still made a return that was reasonable in the 2-5% range. Of course, this was a very stressful 10 years of investing, but if that is our worst-case scenario and some individuals still eeked out a small positive return, then I am optimistic about what the next 10-year cycle will bring us.
With that historical context, hopefully, any worst-case scenarios you’re imagining for yourself over the next decade feel a bit less threatening to your retirement. While there is nothing any financial planner or advisor can do to future proof your investments, understanding the rough math behind what is possible and what has happened in the past can help us make better decisions with our money.
The person that follows this general framework will have 7-10 years of lifestyle in very safe, secure investments providing peace of mind. This security often provides these individuals with some comfort as the rest of their money fluctuates with the market and the understanding that these shifts are not a threat to their “future self” money.
Growth investment vehicles earning a hypothetical 7% per year would allow our assets to double approximately every 10 years, and a 10% average return could double our money in 7 years. The markets may do a bit better or worse than those figures, but if you have a solid plan in place (and can stick to it) then you will vastly the outperform those that are trying to zig when the market inevitably zags.
The Federal Reserve has created a system which punishes us for keeping our money safe, as we now all earn close to zero on cash. No matter what numbers we crunch and modeling we do, if a person is going to invest and grow their assets then they must take a leap of faith in the markets and in America. It’s up to you to decide the amount that you feel most comfortable making that leap of faith with… it’s different for everyone.