Tuesday, September 1, 2015

What's Going On Here?

     You can go on vacation, but you can't get away from your IRA account.

     I've been away for less than two weeks, and Wall Street has gone crazy. What's a poor retiree to do?

     Well, if you're a poor retiree living on Social Security alone, then you probably don't care. Or if you have a good pension supporting you in retirement, then it probably doesn't matter much to you either. But for those us who have no pension, and who have spent a good portion of our lives saving up for retirement . . . that's all we've got!

     So what happens next? Nobody knows -- not your broker at Merrill Lynch, not the expert holding forth on CNBC, nor the reassuring missive that arrives by email from Fidelity or Vanguard.

     I guess we all have faith that over the long term the American economy will continue to prosper and corporate profits will grow along with it. And therefore the stock market will reward those of us who invest in it, either directly in stocks or mutual funds, or indirectly through some retirement plan. If you don't have that faith, perhaps you should be investing in Asia, or gold, or hiding your money under the mattress.

     Regardless, in the meantime we should all keep plenty of cash on the sidelines. Here's the best advice I've seen on that score.

     All the financial experts say you should set aside some kind of emergency fund so you're not forced to sell your assets in the middle of a crisis. Many recommend keeping enough cash outside your retirement account to cover six months of expenses.

     But here's the alternative I like better: Figure out how much you typically withdraw from your savings to cover the gap between your ongoing expenses and your recurring income from pensions, Social Security and anything else. Then set aside enough cash -- it can be inside or outside your IRA, it doesn't really matter -- to cover the gap for five years.

     Yes, five years. That's so you don't have to sell investments when they are down. (You didn't want to be forced to sell your stocks cheap in 2008 or 2009. But you didn't want to sell them in 2010 or 2011 either, not when they were going to be worth a lot more in 2012 and 2013.)

     But the amount you should keep in cash may not be as much as you think. For example, if you spend $3,000 a month, and take in $2,500 a month in pensions and Social Security, you have a $500 per month shortfall. So $500 a month for five years equals a cash balance of $30,000.

     Of course this is just an example, and there's always room for adding or subtracting a little bit here and there (subtract some if you really don't have the savings; add some if you're worried about a sudden emergency expense, or a return of inflation). But you get the idea.

     And besides, maybe the market will go up again next week, and all our worries will be over. I doubt it; but it could happen.


DJan said...

I'm just glad that our Social Security benefits were not privatized, so we would ALL be forced to dumpster dive to make ends meet. I have enough income to cover my expenses, but lately I've been thinking of buying a new (used) car and wonder if it's a good idea to stretch my monthly income like that. It would be tight but doable. :-)

Anonymous said...

I have lots of cash in the bank and have decided not to invest it. I am so risk averse that I would hate to lose even a penny.

Snowbrush said...

Since bonds and stocks seldom move in tandem, and bonds never drop as much as stocks, I have but little in CDs and a lot in medium-term bonds. I go with the age-ratio. For instance, I’m 66, so I have about 66% in bonds/short term and 34% in stocks. Because my wife and I live frugally, we’ve yet to take any money out of the market but are getting by comfortably on SS alone.

As for the previous commenter, if you don’t invest, you still lose, only to the loss of the spending power of your money to inflation. I’ve seen the market drop so many times that I no longer pay attention to it. I have noted that the news media loves to scare people by saying things like, “The market went into freefall today,” this after a 3% drop.

b+ (Retire In Style Blog) said...

This is the best advice I have seen in quite a while. When we worked and were in fear of losing our jobs, we alway kept a reserve fund just in case.... Thank heavens we squeaked by until retirement. How our income is very stable or as stable as it ever will be. But we always have enough available in case the bottom falls out.

I like, "Regardless, in the meantime we should all keep plenty of cash on the sidelines". That amount on the sideline is what will give us the peace of mind we need. And we do know that the market can take years to correct itself. Darn!

I might add that I think Snowbush is right. There are many ways to lose value where our money is involved. A diverse plan is always good.


Heidrun Khokhar, KleinsteMotte said...

It is wise to have a mix. My theory about the current volatility has to do with the volume of Chinese folks trading and playing , messing with stocks by causing a fear so there's a flash of selling low that can then be snatched up fast. Gambling is a huge part of stock activity. Oddly the realestate market continues to be strong. How come? It's not easy to manipulate the housing prices playing with algorithms on a computer. Have you ever seen a photo of a room full of people sitting at screens trading stocks? It looks a bit like people at slots machines.
There seems to be some glitch in the system for drops and highs to be so volatile in the past few weeks.

stephen Hayes said...

I don't have anything in the market but I know people who do, and lately they've had a queasy look about them.

Olga said...

I agree that it is a crazy idea to privatize social security. Where is the security in that? I am holding my breath a bit over this, but I am not in panic mode yet. My mantra has become, "think longterm." You know, cause I will probably live forever.

Anonymous said...

When I was 20, interest rates were 19% but I had no money. 35 years later, I have a nest egg and interest rates are 0%.

Where's the fun in that?

Anonymous said...

This post makes me so happy that when I retired and I was offered a lump sum or an annuity from Verizon I chose the latter. As it is, we (David and I) are both likely to live a very long time. This means we will have to make our money last as long as possible. I have to live to age 80 to break even on my annuity from Verizon. So, far, so good!

Tom said...

Agree it's a good thing that SS hasn't been, and hopefully never will be, privatized. But as Snowbrush points out, cash does slowly lose its value over time, so it's good as a short-term strategy but not as a long-term investment. And Stephen ... lucky you!

Janette said...

Last week brought me back to Kenny Rodgers
"You've got to know when to hold them
and when to fold them."

My husband folded three weeks ago.
I folded behind him.
Did I lose money---not really.
I only lost profit- no principle.

I'll be back in around December until next election cycle
which always gives it a swing.
GOSH- I wish the federal reserve would care about us standing here with money in our pockets!

Anonymous said...

Being on vacation/out of touch is probably the very best thing that can happen to a stockholder when the stock market takes a dive. I feel for those who sold out when the market crashed in 2008 and were then unable to ride the market back up. Of course, people who are that risk averse should, as gigihawaii does, recognize that they shouldn't be invested in something that they are not emotionally equipped to handle.

Anonymous said...

Oops! I failed to self-identify. Apologies.
Cop Car

Robert Tranchell said...

So there is another way... Use a reverse mortgage line of credit and draw on the line during a down market. Wait for the portfolio to recover then resume draws from the portfolio if there is enough recovery you might even pay back the line. BTW the reverse line of credit grows in availability and cannot be frozen or canceled.