Am I nervous about the stock market, having just retired while it is diving? Yes. Do I know better than to be nervous? Yes.
The logical, finance-person part of me realizes that over the next 50 or so years of my retirement, the market is just going misbehave from time to time. I know this. But the emotional part of me screams “why now?” Why, right at the beginning of my retirement?
I’ve been retired for almost 4 months. In my detailed finance-nerd spreadsheet that I created to assure we would have enough money to live comfortably (not excessively) until the ripe age of 95, we need to make an average of 6% on our investments (while experiencing an average 3.5% inflation rate, and dying promptly at age 95).
I know that in any given year, we will not experience a 6% growth rate in our assets; it will be higher in some years and lower in others (and in some years, like this year, so low it’s NEGATIVE). This year, for the four months since I retired, our assets have declined by 4%. That may not sound like a lot, but we should only be withdrawing 3% per year to live on, so we’re already down over a year’s living expenses with eight months to go of this first year.
At first glance, this doesn’t sound catastrophic, like all we have to do is die at 94 instead, right? Wrong. Due to the miracle of compounding, it actually has the miraculous effect of shaving TEN years off our allowed life span. At this point in my life, I’m not ready to plan on throwing in the towel at the sprightly age of 85.
But in a way, it’s good that we are experiencing a market freefall during our first years of retirement rather than a huge market increase. Why? Let’s say by age 95 we experience whatever ups and downs the market has in store (and do manage to eek out an average of 6% per year). Let’s say that year 1 was a huge up year. If that were the case, I think that would have given us the impression that my retirement budget was too strict. After all, look how much money we have with this huge upswing. I think, in that scenario, we might grow accustomed to spending based on our new increased asset base. Then what happens if we encounter some big down years beginning in year 10? It might be to late to recover from 10 years of overspending if we had been lulled into a false sense of security in the early years.
But since this first year looks to be a hard-slogging one, this is forcing us to see where we might be able to cut some costs, just in case. Better we learn this lesson and make adjustments now, rather than when it’s too late to recover from overspending in early flush years. It just means we forego some of the extravagances this year (and maybe the next couple of years). With 50 years to go, it’s ok if we don’t get on that European vacation right away—more time to brush up on a foreign language. Maybe we won’t eat out as much this first year; excellent, then we won’t waste all these veggies that are growing in our garden.
I guess the big question is, will we still remember these lessons years down the road when we do have some large upswings in the market?