If you’re at all familiar with investing, you’ve probably heard of the rule of 72.  Basically, if you divide 72 by the rate of return you get on your investments, the result will tell you roughly how long it will take to double your money.  For example, if you’re getting a 6% rate of return, your investments will double in approximately 12 years (72 / 6 = 12).  If you get a 10% rate of return, your investments will double in about 7 years.

Just like investment returns can grow your money, inflation can shrink the purchasing power of your money. So in a high inflationary environment like we’re in now, it’s good to pay attention to how quickly inflation can erode the value of your money.  To see the effect, you can use a modified Rule of 72.  Think of it as the Reverse Rule of 72.  Instead of dividing 72 by your rate of return, divide it by the rate of inflation.  If inflation is 2%, like it was until recently, the purchasing power of your money will be cut in half after 36 years.  But if inflation is 8%, like it is now, then the purchasing power of your money will be cut in half in 9 years.  That means in 9 years, you’ll need twice as much income to buy the same goods and services that your current income is buying today.  When you look at it that way, you understand how important it is to get inflation under control and why the Fed is willing to raise rates and risk a recession to do so.  

That tug of war between the Fed and inflation has been roiling markets all year.  When markets are volatile, it’s natural to look for ways to reduce risk.  Nothing wrong with that.  Managing your risk and allocation is important.  Just don’t forget about the risk of inflation.  It’s less obvious in the short term, but it can often do more damage in the long-term.  Moving your portfolio to cash can feel safe, but safe can be risky if you trade long-term purchasing power for short-term stability.  By investing in a well-balanced portfolio that is designed to keep pace with inflation, you can help improve the odds that your money not only lasts for your lifetime, but also provides you with the income necessary for security and independence during retirement.  But it also means you’ll likely need to ride out volatile markets every now and then.

Be Intentional,

Joe

The post Why inflation is so dangerous appeared first on intentionalretirement.com.

Happy weekend!  I just posted a few new videos to the Intentional Retirement YouTube channel and wanted to share them with you.  They’re just a few minutes each and offer some great insights on how to live an intentional, meaningful retirement.  

To watch, just click on the two links below or you can go directly to our channel to see everything available.  And please do me a huge favor and click “Subscribe” when you visit our channel. That way you’ll be sure to see the latest content when it’s available and it will help more people find us, because the more that people subscribe and watch, the more YouTube will suggest the videos to others. Thanks a ton. You’re awesome!

YouTube Video #1: Easy choices, hard life.  Hard choices, easy life.

In this video I discuss financial decision making and how making disciplined, hard choices can lead you to a place of financial security and abundant options.  If you ever wanted a little motivation to swim against the financial mainstream, this video is for you.

YouTube Video #2: Curate your life.

One of the most important jobs at any museum is the Chief Curator.  It’s his or her job to choose what goes in and what stays out.  In a similar way, you’re the Chief Curator of your life.  Your life (and retirement) will be defined by what you let in and what you keep out.  So be a tough curator.

Thanks for reading (and watching).

Be Intentional,

Joe

The post New videos on making decisions with money and meaning appeared first on intentionalretirement.com.

The world is an uncertain place.  Bad things happen.  No argument there after the last few years, right!?  Sometimes those disasters affect a wide swath of people.  For example, a global pandemic, a housing crisis, terrorism or a stock market collapse.  Sometimes you have the disaster all to yourself.  A job loss, divorce, illness or the unexpected loss of a loved one.  

Regardless of what form they take, most disasters or times of crisis have one thing in common: They tend to do a number on your finances. The stock market dropped more than 50% during the housing crisis of 2008.  Covid job losses in 2020 were in the tens of millions.  Two-thirds of U.S. bankruptcies in a typical year site medical issues as the key contributor.  How can you keep a crisis from ruining you financially?  Here are 22 practical ways to manage your finances before, during and after a crisis.

Before

Not surprisingly, the best time to prepare for difficulty or disaster is before it happens.  Here are a number of things you can start doing now to prepare for (or help prevent) a financial shock.

• Review your asset allocation and risk tolerance.  You want your money to grow and keep pace with inflation, but you don’t want to take more risk than is appropriate for your situation.  Regularly review your investments to make sure that your risk and allocation are dialed in.  
• Have a written retirement plan.  One important side effect of having a written retirement plan is that it gives you perspective in a crisis.  That perspective can help calm your nerves and keep you from making reactionary mistakes.  A good plan has a certain amount of unpredictability and volatility built in.  Knowing that your plan will work in spite of the current crisis can be a powerful calming agent.    
• Build a cash reserve.  Cash is critical in a crisis.  Many experts suggest that you set aside 6 months of expenses in a cash emergency fund, but that’s always seemed like a daunting place to start since surveys show almost half of America couldn’t cover a $400 unexpected expense.  So start with a few thousand dollars.  That’s enough to cover a major car repair or other unpleasant surprise without going into debt.  Once you have that set aside, add to it until you have enough to cover a month or two of expenses.  That would give you a cushion if you lost your job or had some other big disruption.  Then, if you’re able, keep building your cash reserve until you get 4-6 months of expenses set aside so you have enough to ride out a major crisis.  
• Tighten up your budget.  The fewer obligations you have, the more financially resilient you’ll be.  Most people have a lot of waste in their budget.  Trim the fat. Look for ways to delete, downsize, simplify and optimize.  This will free up some extra cash to add to your cash reserve and will make any remaining spending more sustainable even if your income takes a hit.
• Fixed vs. Discretionary expenses.  There’s nothing wrong with splurging now and then, but if you’re going to do it, make your splurges discretionary (e.g. travel) instead of fixed (e.g. an expensive mortgage).  In tough times, you can quickly turn off discretionary expenses, but you can’t quit making your house or car payment.  
• Get your legal affairs in order.  Don’t leave a mess for your family.  Make sure you have a will and powers of attorney and make sure they’re up to date and reflect your current wishes.  
• Review your insurance coverages.  What if you died or became disabled?  What if you had a major illness or needed long-term care.  Protect your family.  Make sure you have adequate life insurance, disability insurance, health insurance and long-term care insurance.
• Pay off debt.  Debt adds risk and reduces cash flow.  The less debt you have, the more financially resilient you’ll be.  Make a plan to gradually eliminate your debt and you will greatly increase your odds of weathering a financial storm.
• Get healthy.  A health crisis often leads to a financial crisis, because getting sick is expensive and can result in the loss of income.  Be proactive with your health.  It’s one of the 8 Habits of Successful Retirees.
• Do a pre-mortem review.  Think about the types of crises you might face and ask yourself “Could my finances withstand this?”  Look for weak points and vulnerabilities.  Try to anticipate what could go wrong and look for ways to strengthen your defenses.
• Hire an adviser.  You’ll be more likely to do everything listed so far if you have the help (and accountability) of a trusted, competent adviser.  

During

• Don’t panic.  The Navy Seals have a saying: “Under pressure, you don’t rise to the occasion, you sink to your level of training.”  That’s why I spent so much time on the “Before” portion of this article.  When bad things happen (and they absolutely will happen), take a deep breath and think about everything you’ve done to prepare.  Don’t make rash decisions.  Seek advice from your trusted advisers.  Handle your emotions.  Respond well.  Do what needs to be done.  Lead.  Take care of those close to you.  Have empathy for others in need and look for ways to help.
• Study the type of crisis you’re in and respond accordingly.  History doesn’t repeat, but it rhymes.  For example, the market crash in 2008 had similarities with previous ones.  How did those work out?  How long did they last?  What were common mistakes that people made?  How can you avoid the same mistakes?  Knowing history helps you to keep things in perspective and chart a logical course through the crisis.  
• Communicate effectively with your family.  Be honest and transparent about the situation so you can all be on the same page.  It can be as simple as “Hey, we’re going through a tough time.  We need to make some changes.  We’re going to get through this, but we need to take action.  Let’s have grace and patience with each other and come out stronger on the other side.”  
• Be data driven.  Review your plan.  What is it telling you based on the new circumstances?  Do you need to cut back spending?  Delay retirement?  Reallocate investments?  Change your Social Security claiming strategy?  Let the data be your guide.  Don’t make rash decisions, but when the data is clear, be proactive and don’t be afraid to stop, pause, shift, delay or change as necessary.
• Be optimistic, but realistic.  You will likely get through this if you do the right things and take the right actions.  But avoid false optimism that keeps you from doing what needs to be done.  Don’t be afraid to take bold action when needed.
• Use dynamic spending.  If you’re already retired when the crisis hits, dynamic spending can be a good way to preserve your nest egg in the face of investment volatility.  Read more about it here.
• Continue investing if you’re able.  This is especially true if the markets are dropping and you’re able to buy shares on sale.  But if you need that extra money to weather the storm, you can stop your automatic investments in things like your 401(K).  Just be ready to start them back up as soon as you’re able.
• Look for help.  With a major crisis, the government often passes emergency assistance measures.  For example, with COVID we saw special unemployment benefits, PPP, tax relief, stimulus checks and student loan relief.  Local organizations like food banks are also there to help.  Don’t be afraid (or embarrassed) to get help if you need it.  That’s why those things are there. 

After

• Review.  Do a post-mortem review of the crisis.  What did you do well?  What did you do poorly?  What did you learn?  What can you improve?  Enduring one crisis doesn’t make you immune to the next one, so take what you learned and use it to be better prepared going forward.
• Recover, rebuild and restart.  What do you need to do to recover?  What needs to change because of your new reality?  For example, if your credit report was impacted by the crisis, what can you do to start repairing it?  If you panicked and moved your investments to cash, how can you get invested again?  If you depleted your cash reserve, how can you start building it back up?  If you stopped things like 401(k) contributions during the crisis, start them up again as soon as you’re able.   
• Reevaluate your priorities.  Pa Ingalls of Little House fame once said “It’s an ill wind that doesn’t blow some good.”  One of the benefits of enduring a crisis is that it often gives you a better understanding of yourself and what’s important to you.  It forces you out of ruts and gives you a new perspective.  Use those insights to recalibrate and reorient your life around things that bring you meaning, purpose, happiness and fulfillment.  

Be intentional,

Joe

The post How to manage your finances during a crisis appeared first on intentionalretirement.com.

The markets had a great first half of the year.  Stocks were up.  Bonds were up.  Both U.S. and International markets were up.  Everything seemed to be working.  Unfortunately, the second half has had a rockier start.  And given the headlines (e.g. trade war, weakening international economies, excess debt loads, inverted yield curve, etc.), that volatility could continue for a while.  Given that, I thought it would be a good time to scroll through the archives at Intentional Retirement and review a few past articles on how to deal with volatility, keep your emotions in check and make sure your retirement plans stay on track. Even though they were written during past periods of volatility, the lessons are just as relevant today.

• Should you prepare for a deeper downturn?
• What is an inverted yield curve and why is everyone worried about it?
• How to keep your retirement plans on track despite the volatility.
• Anxious?  Focus on what you can control.
• 3 ways to protect your nest egg and prepare for the coming volatility.
• My brain made me do it: How to avoid bad investment decisions.
• Retirement fire drill

Be Intentional,

Joe

The post How to manage fears and avoid mistakes when markets go haywire. appeared first on intentionalretirement.com.

The sharp market selloff in the fourth quarter of last year was partially caused by investor concern over an inverted yield curve.  Just last week we saw another big drop as the curve inverted again.  What is the yield curve and why are people worried about it? More importantly, how could it affect your plans if you’re at or near retirement and what can you do to protect yourself? 

What is the yield curve?

When you get a loan, the interest rate you pay is based (in part) on how long you need to borrow the money. All else being equal, the longer you borrow, the higher the interest rate will be.  The same is true when the government borrows.  They pay higher interest on 30-year bonds than on 30-day bonds. If you plot out government bond rates (e.g. 1-year, 2-year, 5-year, etc.) and connect them with a line, that is the yield curve.  In a normal economy, the curve slopes up and to the right, because as we just discussed, rates rise along with time to maturity.  

Why is everyone worried about it?

As we just saw, a normal yield curve slopes up and to the right because long-term rates are typically higher than short-term rates.  Once in a while, however, conditions are such that short-term rates rise above long-term rates.  This is a warning sign that the markets are anticipating trouble for the economy and they expect the Federal Reserve to cut rates.  When short-term rates rise above long-term rates, that graph we talked about earlier shifts from upward sloping to downward sloping.  In short, it becomes inverted.  This is concerning, because it turns out that an inverted yield curve is a pretty good predictor of recession.

Does an inverted curve guarantee a recession?

Not every inverted yield curve has led to a recession, but every recession we’ve had since World War II has been preceded by an inverted yield curve.  So when the yield curve inverts, it’s worth paying attention to.

Is the yield curve inverted now?

The yield curve flattened for most of 2018 as the Fed raised short term interest rates and long-term rates stayed low.  Then, during the fourth quarter, portions of the yield curve inverted.  It wasn’t entirely inverted, but even having portions inverted is a red flag.  Rates normalized a bit earlier this year (and the markets rallied), but last week portions of the curve inverted again when 10-year rates fell below 3-month rates.

If a recession follows an inversion, how long does it usually take?

An inverted curve is a good predictor of recessions, but they generally don’t happen right away.  The average time between inversion and recession is about a year.  

What does the stock market typically do after the curve inverts?

Markets will usually continue to rise for a period of time after an inversion.  For example, markets rose an average of 35% after the last 3 inversions (1989, 1998 and 2006), before ultimately falling as the economy went into recession.  And returns on the S&P tend to be above average for many months after an inversion. So yes, an inverted yield curve can signal a potential recession, but it can also signal a period of strong stock returns before the recession arrives.

What should investors be doing?

A yield curve inversion isn’t a perfect indicator and it’s by no means the only economic indicator. There are plenty of signs that point to a strong U.S. economy and as we saw above, markets usually continue to rise for a period of time even after an inversion.  That said, it’s a red flag, as are signs of slowing economic activity in Europe and China.  The best thing you can do is to make sure that you are invested in a way that is consistent with your risk tolerance, time to retirement, goals and overall financial situation.  Then, even if things get choppy, you’ll be able to ride out the storm.  For further ideas on what to do, read: Should you prepare for a deeper downturn?  

The post What is an inverted yield curve and why is everyone worried about it? appeared first on intentionalretirement.com.

I’ve seen some disturbing data points recently:

• 78 percent of American workers report living paycheck to paycheck.  This became very visible during the recent government shutdown.
• 40 percent of Americans said they couldn’t cover a $400 unexpected expense without going into debt.  That number jumps to 60 percent for a $1,000 expense.
• A record 7 million Americans are 3 months delinquent on their car loans.  
• In 2018, student loan debt hit $1.46 trillion and $166 billion of that is seriously delinquent.  Both record highs. 
• People in their 60s with student loans owe an average of $33,800 in student debt.  They owe $86 billion total which is a 161% increase since 2010.
• People over 60 owed $615 billion in credit cards, auto loans, personal loans and student loans as of 2017.  That’s an 84% increase since 2010 and the biggest increase of any age group.
• The percentage of bankruptcy filers older than 65 is higher than it’s ever been.

Whatever the reasons, we’re spending too much, saving too little and living on the bleeding edge of financial insecurity.  Sure, everyone on Facebook looks like they’re #LivingTheirBestLife, but peer behind the curtains and there’s trouble.  To make matters worse, all of this is happening at a point in time when the economy is in relatively good shape, unemployment is at multidecade lows and the stock market is near all-time highs.  What happens if/when we have another recession?  

I’m going to spend the next several posts discussing these worrisome trends and talking about how you can overhaul your expenses, save more and improve your retirement security.  Today, however, I’m just giving you a friendly reminder.  The general idea behind retirement is to reach a point of financial independence where work is optional.  If you’re not on track for financial independence, you’re doing it wrong.  Stay tuned over the next few weeks and I’ll give you some practical ideas on how to get there.

Be Intentional,

Joe

The post You’re doing it wrong appeared first on intentionalretirement.com.

In life, we often have the option to do things the easy way or the hard way.  We can choose between the wide and narrow roads.  Paradoxically, choosing the easy way out often leads to a hard life while choosing the hard way often leads to an easy life.

Narrow, difficult decisions that require discipline and sacrifice usually pay off by leading us into a place where the road is wide and our options are plentiful.  On the other hand, taking the wide, easy path often ends up funneling you down a narrower and narrower chute until all good options are gone and all that is left are painful consequences.  In short:

Easy choices, hard life.  Hard choices, easy life.

Nowhere is this more true than with our finances.  We all stand at a fork in the road when making decisions on things like debt, saving, investing and giving.  Path A is wide and well worn.  Reach for that credit card.  Try to keep up with the Joneses.  Feed those desires.  The other path, as Robert Frost might say, seems a bit grassy and in wont of wear. Live within your means.  Give generously.  Save for the future.  Steward those resources wisely.

Perhaps not surprisingly, my advice on finances (and pretty much everything else) encourages you to take the road less traveled.  Sure, doing so will be difficult and take discipline, but it will ultimately lead you to a place of peace, security and comfort.

Be Intentional,

Joe

The post Easy choices, hard life. Hard choices, easy life. appeared first on intentionalretirement.com.

Quick note: I’m in the process of redesigning the Intentional Retirement website.  If you have any thoughts or suggestions on ways to improve it or make it more helpful to you, please hit “reply” to this email and send them my way.  Now on to today’s article…

Save more or work longer?

One of the first things I do for new clients is create a detailed retirement plan based on their unique circumstances.  This helps us determine if they’re on track financially for the type of retirement that they want.  Sometimes this exercise produces smiles.  Sometimes not so much.

If a plan is falling short, there are many ways to get it back on track.  You can save more, change your allocation, work longer, work part time, change your Social Security claiming strategy, get out of debt, spend less in retirement or downsize to a smaller house.  The effectiveness of those options varies.

The most obvious tactic is to save more, but the power of saving diminishes as you approach retirement.  Why?  Because each new dollar has fewer years to compound.  A dollar saved at 25 becomes about $22 by retirement (assuming an 8% annual return and retirement age of 65).  A dollar saved at 55 only becomes about $2 by retirement.

A recent report from the National Bureau of Economic Research illustrated this point by showing that saving another 1% of your salary each year for 10 years is only as effective as working for a single month longer.

To explore this idea further and look at the effectiveness of different tactics, I thought it would be interesting to look at an actual retirement plan and see which changes produce the biggest results.  Below is a short video of me working through a plan and testing potential changes to improve the overall success rate of the plan (If you have trouble viewing the video, click through to our site and click on the YouTube link).

The post Is it better to save more or work longer? appeared first on intentionalretirement.com.

Money

I did an interesting exercise this week.  If you’ve ever looked at a copy of your Social Security statement, you know that page 3 shows how much you’ve earned each year throughout your life.   As I looked at mine, I was suddenly curious about something, so I grabbed a calculator and added up my lifetime income. Then I opened my financial plan to get a quick snapshot of my net worth and I divided my net worth by the total of what I’ve earned.  The result was a rough calculation of what I have to show (financially at least) for twenty plus years of work.

This was at once both encouraging and discouraging as well as illuminating and thought provoking.  Encouraging because I’ve managed to hang onto a decent percentage of that income over the years and then invest it in a way that has caused it to grow.  Discouraging because there’s a larger percentage that we didn’t manage to hang onto.  Sure, part of that went to feed and clothe us and part of that went to fund experiences and memories I wouldn’t trade for the world, but I know that a not insignificant portion went to a category I’ll charitably describe as “non-essential.”

Time

The interesting and enlightening part of the exercise came when I widened the aperture a bit and rather than just thinking about my lifetime earnings, I thought about my lifetime instead. Or more succinctly, my time.  How have I spent, saved and invested my time? I’ve been “paid” 45 years of time. How much of that have I used wisely and intentionally?  Alternatively, how much have I just allowed to slip through my fingers?  Have I used my time at work to create a career that is enjoyable, rewarding and useful to others?  Have I used my free time to invest in my family, develop my friendships and pursue interesting things?  Have I used my time and attention to invest in my health so that I can “earn” more time? The answers to those questions aren’t necessarily as black and white as a bank balance, but if you put “time wasted” on one side of the scale and “time well spent” on the other, you can get a pretty good idea of which way it leans.

Similarly to when I did the financial exercise, the time exercise was both encouraging and discouraging. Much of my time was well spent and much (either by omission or commission) was poorly spent.  If I’m being honest, there are days, weeks and even years where I wish I could get a do-over.  There’s nothing I can do about that now, however, except learn from it. So I’ll internalize those lessons and do my best to be a better steward of my “time wealth” going forward.  I’ll try to be a good steward of my finances too, but I suspect that the closer I get to the end of my life, the less I will care about how I invested my money and the more I will care about how I invested my time.  You too? Then do something about it so when you come to the end of your years, you’re not left wondering, “Where did it all go?”

“It’s not that we have a short time to live, but that we waste a lot of it.”  ~ Lucius Seneca

Be intentional,

Joe

The post What do you have to show for it? appeared first on intentionalretirement.com.

The current bull market is 9 years old.  That’s the second longest on record and it has people wondering how much further it can go.  That question has taken on added urgency given the recent volatility, rising interest rates and political uncertainty.  Markets lost ground in February (the first losing month in over a year) and they’re on track to close lower in March as well.  Is this the beginning of something bigger?  Should you make changes to your portfolio or otherwise prepare for a deeper downturn?  I’ll share my thoughts below.

Keep Things in Perspective

First of all, I think it’s good to keep things in perspective.  Yes, there have been some scary drops recently.  In February, the Dow had its two biggest point drops ever.  The S&P 500 had four of its largest drops ever.  On a percentage basis, however, those drops didn’t even crack the top 20.  Still, when the daily loss has a comma, it’s disconcerting.  Just try to remember that pullbacks are natural and healthy, especially after the outsized gains we’ve had over the last several years.  At the beginning of this bull market (the end of the Great Recession) the Dow was below 7,000 and the S&P was below 700.  Now, even after the recent selling, they’re around 24,000 and 2,600 respectively.

Watch the Fundamentals

Warren Buffett has famously said that in the short-term the market is a voting machine, but in the long-term it’s a weighing machine.  In other words, fundamentals matter more than feelings.  How do the fundamentals look?  In a word, strong.  GDP and corporate earnings are growing at the fastest pace in years.  The tax cuts will boost profits even more.  Job creation continues to surprise on the upside.  Unemployment is low.  Consumer sentiment and consumer spending are very strong.  Interest rates are still relatively low.  Most signs point to a healthy and growing economy.

3 Key Risks

While most indicators are positive, that doesn’t mean that investors should be complacent.  The bullish case is always strongest right before it’s not.  And even if the fundamentals stay strong, you can still get some nasty price corrections.  What are the key risks?

I see three primary risks right now: 1) Valuations, 2) Interest Rates, and 3) Political/Geopolitical risks.  Because of the strong economy, stocks have been going up and valuations are at the upper end of their historical range.  Markets are priced for perfection.  What if we don’t get it?  To quote John Mauldin, an economist I follow, “the consequences of a mistake are growing.”  Or what if the Fed raises rates too aggressively?  That could tip the economy into recession.  And the uncertainty in Washington is not helping.  If we get into a trade war with China or the Mueller investigation finds serious wrongdoing, markets will not react positively.

How to Protect Yourself

I said earlier that pullbacks are healthy.  What do I mean by that?  Economist Hyman Minsky had a theory that stability leads to instability.  In other words, when the economy and markets are good, it encourages more and more risk taking.  People start to focus on reward and ignoring risk.  They invest too aggressively.  They take on too much debt.  They save less.  They get complacent.  And then a shock hits the system, losses start to build and people panic.  The bottom falls out.  That sudden instability is referred to as a Minsky Moment.  The longer the period of stability, the greater the likelihood that people are making decisions that will eventually lead to serious instability.  Periodic corrections are healthy because they keep people from straying too far from home.

Which brings me to the question at the beginning of this article.  Should you prepare for a deeper downturn?  The answer, of course, depends.  During this 9-year bull market, how far have you strayed or drifted from your appropriate investment and retirement strategy?  How can you tell?  Here are 7 areas to look at closely.

Risk Tolerance.  The longer a bull market goes, the less people worry about (or even think about) risk.  That’s a problem, because the economy and markets usually revert to the mean.  What would mean reversion look like now?  We’ve gotten a taste of it over the last several weeks.  After years of rising markets, they start to fall.  After years of almost non-existent volatility, it spikes.  After a decade of historically low interest rates, they start to climb.  If the market dropped 20-30% this year, how would that impact your portfolio?  Could you (would you) just ride it out?  If not, you should probably dial back your risk.

Asset Allocation.  The two primary ways to manage risk are through diversification and asset allocation.  Look at your portfolio.  Do you have any outsized positions?  Is your stock/bond balance appropriate given your risk tolerance?  Has your allocation drifted or changed over the years?  Review your portfolio and align your asset allocation with your risk tolerance.

Time Horizon.  All of this is a bigger deal if you’re at or near retirement.  You have less to worry about the longer you have to go.  Even after the 57% peak to trough drop in 2008-09 the markets fully recovered within about 4 years.  Those who rode it out did fine.  Could you ride out another major downturn?  If you’re already retired, maybe not.  At the very least you’re 9 years closer to retirement than you were during the last serious pullback.  And even if you have time, sharp drops can cause you to make mistakes and do the wrong thing at the wrong time, so see points 1 and 2 again.  Make sure you understand your risk tolerance and that your allocation is aligned with that.

Spending.  Most people have lifestyle bloat as they get older.  As income grows, so do expenses.  Bigger paychecks mean better houses, cars, vacations, wardrobes and gadgets.  That’s not necessarily bad, but the longer good times persist, the closer we tend to push our spending to the outer limits.  That makes a person financially fragile.  It can cause stress, limit your options and force you to make compromises in life.  You control your spending.  Beware of bloat.  The more you live below your means, the more financially resilient you will be.  And when you splurge on things or add expenses, do your best to make that spending discretionary rather than fixed.  That way you can dial back if your income drops or the economy heads into recession.  See this article on how to use dynamic spending to make your money last.

Debt.  One of the characteristics of long bull markets is that people load up on debt.  The boom years make them more comfortable borrowing for cars, houses and credit cards.  Having debt adds risk and reduces cash flow, two things that are especially troublesome for a person at or near retirement.  If you want to be better positioned to weather a financial storm, get rid of debt.

Saving.  The average savings rate in 2015 was 7.19%.  In 2016 it fell to 5.98%.  Last year it fell to 3.74%.  Care to guess which direction it will move in 2018?  This is what Minsky was talking about.  Stability leads to instability.  People become complacent.  They save less, which means they have less of a buffer, which means they’re less able to weather a storm.

Cash.  It’s always a good idea to have a portion of your portfolio in cash or short-term securities.  That way, if markets drop and a good investment opportunity presents itself, you’ll have some dry powder to invest.  Or, if you’re already retired and taking distributions from your portfolio, you can pull your distributions from your cash rather than selling your stocks into a declining market.

Will the markets drop further?  Who knows.  The risk is certainly there.  The important thing is to focus on the things you can control and make sure that if we get another downturn, it won’t derail your plans.

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