Many things in financial planning and investing appear upside down. This, of course, is what makes it interesting. When is the best time to buy? According to the famous and wildly successful Baron von Rothschild, it's when there is "...blood in the streets." Not to digress too much (I apologize for trekking afield but this has stuck in my craw for a long time - the Rothschilds didn't take a lot of risk), but his most well-known coup was trading on the inside information of Napoleon's defeat provided by his swift carrier pigeons not on contrary trading. But, still, the original point has been the basis of contrarian investing over the years.
At the other end of the spectrum, investors are told to lighten up when all the news is positive and averages are hitting new highs.
This upside-down idea applies to the question of when to retire, as well. The mistake a lot of people make is to feel comfortable in retiring after a push up in the market has produced the magic "number." They then retire, and watch in horror as the value of their portfolio drops in a down market and the "number" fades into oblivion. On the other hand, when news is negative, as it is today, and markets have dropped, people are fearful of retiring. But, if the financial plan works today, after the market has experienced a meaningful downturn (and stock prices are at more reasonable levels), it is very likely a good time to retire. As long as a solid strategy is in place to ensure that cash flow needs can be met over the next couple of years without having to liquidate stocks and bonds in down markets, retirees should be able to weather the storm.
Having said all this, it goes without saying that there are no guarantees. Talk is increasing that we are on the verge of another period like the 1930s, that the next shoe to drop is a serious deflation, and that our monetary and fiscal policies are failing us. This view can't be dismissed; but I, along with most observers, still see this as a low-probability event.
It has to be said , of course, that if we are moving into a 1930s type period, then retirement is a bad idea. Work as long as you can.
What do you think?
Like the decision maker ;)
ReplyDeleteI think easing into semi-retirement may be less risky as you continue to spend some time working (perhaps freelancing). I've read that for those who still had work in the great depression, real wages and real buying power increased throughout that period. Of course, this came at the expense of the artificially unemployed, in a sense.
Hi Rob,
ReplyDeleteIn order to avoid the horrors of post retirement falling market, i guess the key lies in transitioning from an equity weighted portfolio to safer securities. Income producing real estate is one idea.
No one knows what's coming ahead, in the near future we might look back and find that emerging economies picked up the falling demand from the US. Let's wait and see.
@ Invest it Wisely- You are exactly right and it is even so today. If you have income it goes a long way. For example, if you want a deck built on your house you can get a real aggressive bid from out of work carpenters. Easing into retirement is probably a good way to think about it.
ReplyDelete@ Mich One of the difficulties it seems to me is that people come to financial planners and ask if they are on the right path to retire. Financial planners then run the numbers and come back with the finding that if the client is 70% stocks and 30% bonds and the markets return what they did over the past 20 years then the client can retire. Then if stocks have a weak 10 years the client has a problem. I know 10 years ago many people looked at the value of their house and their portfolio and figured they were a cinch to have a great retirement!
I would NEVER want 70% of my retirement portfolio in stock, and theoretically I should have MORE than 70% of my retirement portfolio in stock. I think it really depends on risk tolerance as well as anticipated retirement date. There really was this loss decade for stock, which is okay I guess if you have a long time horizon to retirement or don't care too much about making your net worth grow.
ReplyDeleteDavid HERE!
ReplyDeleteYour words:
"Having said all this, it goes without saying that there are no guarantees. Talk is increasing that we are on the verge of another period like the 1930s, that the next shoe to drop is a serious deflation, and that our monetary and fiscal policies are failing us. This view can't be dismissed; but I, along with most observers, still see this as a low-probability event."
I think you need to touch on this scenario more. Wasn't "Fooled By Randonmess" all about this possibility? Isn't that on your favorite books list? Low -probability---yeah right! With the gang of clowns we have in office/power right now you better hedge your bets that it is a HIGH-probability!!! Beside isn't it better safe than sorry or what about that saying prepare for the worst and hope for the best.
I think the near future will make the 1930's look like a walk in the park!
:-) Just my two cents.......