(Photo: S&P 500 Index 1950 to present)
According to this article in the New York Times, fear of the stock market has driven investors away from stocks toward cash over the last couple of years. Globally, the percentage of individual investors’ assets held in cash has gone from 31 percent two years ago to 40 percent now. At the same time, the stock market keeps hitting fresh records and has notched another 45 percent in gains.
While I don’t hold 40 percent in pure cash, I also shifted my portfolio away from stocks, from 30 percent fixed income to 40 percent over the last couple of years. The effect was the same though--I missed out on that big run up of the market on that ten percent that I shifted out of. I share the same psychological scars as the cash hoarders. I lived through the great meltdown of 2008 with an allocation that was too aggressive for my taste. When things finally got back to where I started, I got a do-over and shifted to an allocation that I will feel more comfortable with when the market inevitably takes a turn for the worse.
I don’t regret it though, because I don’t need to hit it out of the ballpark. I just need to earn enough to meet my goal: to have enough money to live on comfortably for the next four or five decades.
The same Times article mentions that almost half of all investors surveyed didn’t know what the annual returns of their portfolios were. It may surprise you to know that I don’t have any idea what my annual returns have been either. Because what I have earned in the past doesn’t help me know whether I will meet my goal of having enough to live on for the rest of my life.
As the market (and my portfolio) have gone up over the first several years of my retirement (well first way down, then up, up, down, up, up, up), I’ve had to make adjustments along the way to make sure I would still meet my primary goal of not running out of money before I die.
The first two years of my retirement while the market was tanking, that meant cutting back on spending. The next two years I got a little boost with a part-time job. Now that the market has recovered (and then some) our nest egg is larger than what we started with, and that’s after taking out 6 years of living expenses. So whatever return I actually earned each of those years is not as important as whether the last cell in my spreadsheet is still positive when I hit 100.
Having enough money to retire depends on four variables: spending, inflation, investment returns, and life expectancy. The only number I know for sure is how much money I’m starting with, the rest of the inputs are just (educated) guesses. The variable I have the most control over is spending.
As my portfolio has grown, the spreadsheet will still work even when I assume a lower and lower rate of return going forward. When the portfolio shrinks it only works if I shrink spending (or supplement income another way like a part-time job).
Inflation has been next to nothing for our personal basket of goods so far. But just like returns, that’s history and irrelevant to me now. Or as Franco in the 1976 movie Gumball Rally says as he rips the rearview mirror from his car and tosses it out of the car, “And now my friend, the first-a rule of Italian driving: What’s-a behind me is not-a important.”
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I have had some of my retirement savings in stocks and mutual funds -- but I can see in hindsight that I haven't invested nearly as much as I should have. Fortunately, I didn't bail out in 2007-09, but just kept things steady. Now I can see I should have gone "all in" in 2009 ... but this is not poker, it's my future, so I guess discretion is the better part of valor.
Fortunately, ever since I "retired" in my early 50s, I've been able to work part-time consulting and freelancing. I enjoy the work; it keeps me busy; and while I don't make a lot of money, it's enough to keep me from dipping into my retirement accounts too much.
That's why I'm a big proponent of part-time work in retirement, esp. if you retire early, as long as you can find something that you enjoy doing. My next career -- working on a golf course; I think that would be fun.
Posted by: Tom Sightings | July 13, 2014 at 12:38 PM
Hindsight is 20/20. But you can't go backwards.
We made a few tweaks in our budget that enabled DH to retire at 57. I retired at 50. The secret for us is to keep making those tweaks. Keep being creative. Keep finding new ways through the maze.
Our rate of return on everything is between 5.5% and 6%. Are we well off? Depends. We have the Goldilocks Syndrome: we have enough which is 'just right' for us. Have no idea what another person might need/want.
Today I took one of those quizzes that lets you know how much you need per month in retirement. It said we needed $6501 per month. That's funny because we only spend $2400 a month. The quiz result had me spending $600 a month on meals out. We hardly spend $25 a month but there was no category for checking off 'no meals out', so the quiz just assumed we did.
It also said we would be spending $2000 a month on housing but in reality we only spend $816 (taxes, insurance, maintenance).
The longer I am retired, the more I understand and respect each and every fellow retiree. People need to do what is best for them and there should be no judgment. Just a sharing of ideas and suggestions.
Glad you're back posting.
Posted by: Cindi | July 13, 2014 at 01:20 PM
I agree so much with your perspective! We are risk averse with a focus on having enough for the rest of our lives. We did get some benefit from the stock market run up as we just sold the stock mutual funds from my parents' estate. However we also had to sell the bond mutual funds so it may have evened out. I refuse to look at that LOL. Now what to do with my inheritance?
Posted by: Juhli | July 13, 2014 at 01:27 PM
Tom: Further to the discussion on picking up part-time work in retirement, David Blanchett had a great article in Marketwatch: http://www.marketwatch.com/story/why-retirement-planning-is-more-than-401ks-and-iras-2014-06-20 that talked about the value of "human capital" in your retirement portfolio. It acts kind of like a bond when considering your total wealth picture.
Cindi: Well you are the queen of figuring out how to do more with less (not to mention making a little extra retirement income from renting out your vacation place). Looks like you've gotten back to blogging again too!
Juhli: Well good luck figuring that out! Sounds like you will be very careful with it.
Posted by: Retired Syd | July 13, 2014 at 02:17 PM
I learned a long time ago to ride the waves of the stock market, and adopted a buy and hold attitude toward investing. Feeling pretty smug about it now that my portfolio is don't so well. But I still have 'bag lady syndrome'... Always worrying about my future. Thanks for reminding us that there are simple ways to tweak each of our scenarios... and to keep looking forward!
Posted by: Angela | July 14, 2014 at 10:05 AM
First thing I did when I retired young in 1999 was sell a chunk of my all stock 401(k)/IRAs and buy TIPS at the rather high interest rates (3.7% plus inflation) available then. A few years later TIPS were "discovered" and those interest rates are long gone, probably never to return.
After that adjustment I weathered the 2000 bear market with little damage. And several decades of investing experience allowed me to sit tight in 2008 during that big bear market, since I knew that it would come back eventually (I did buy some stock shares in Feb 2009 just before the bottom, but cash was tight after that big plunge).
I do feel sorry for those who panic and sell at the bottom of a bear market, then swear off stocks until the bull market has been going for several years. "Sell low, buy high"? How is that a successful investing strategy?
One way to help avoid panic selling is to be sure to have several YEARS worth of living expenses stashed in liquid investments so that there is no need to sell into bear markets to raise cash. This is a must for early retirees who are living off savings and investments alone. I have mine in Series I Savings Bonds, purchased when interest rates were much higher (of course).
One more thing. I've mentioned this before: Social Security is basically an inflation-indexed annuity and can be considered as part of the fixed income portion of a portfolio. If more people would figure SS into their investment mix they might find that their allocation to stocks isn't nearly as high as they think and they might sleep better during bear markets.
Posted by: dgpcolorado | July 14, 2014 at 12:55 PM
Angela: You kept a cool head, you earned the right to be a little smug in my opinion.
dpg: I agree about the cash. And here's a great article about viewing Social Security basically as the equivalent of TIPS in your portfolio: http://www.marketwatch.com/story/social-security-as-part-of-your-portfolio-2013-08-19. I think you could have written it yourself!
Posted by: Retired Syd | July 14, 2014 at 01:09 PM
Syd, you already know about my early retirement. I ERed in late 2008 as the markets were crashing and that was a BIG help to my ER budget because I was able to buy low at bargain-basement prices while selling while still pretty high.
I am not that concerned about my overall rate of return (which is about 4% so far in 2014) because I do not sell shares of anything to pay my expenses. I rely on a monthly income stream from mostly bond fund dividends which is a function of the number of shares I own and the dividends per share they generate. Nowhere in that forumla is what those shares are worth so if those shares rise or fall in value it makes no real difference. That provides me a great level of comfort.
P.S. Syd, I love your Gumball Rally reference. That is my faorite line of the movie and I often act it out recalling how actor Raul Julia (since deceased) delivers that memorable line.
Posted by: deegee | July 14, 2014 at 02:06 PM
deegee: That's funny (about the Gumball Rally reference)--I use it often too! Just never in print before.
Posted by: Retired Syd | July 14, 2014 at 02:09 PM
I'm not sure, but you might be in the minority on that among ER-r's:
To me, it's a business and if I don't run my business properly then I'm going to have to give it up to a more passive strategy like the Permanent Portfolio or DGI or Couch Potato Portfolio - wherever I can do the least damage. TBH, I would really miss the math and calculations part though. (Also think I'm competitive at games - and beating my estimates is a game - so that might explain some of the focus.)
Like deegee, I don't get too fussed about the ups and downs since the dividends don't change despite all the noise.
Posted by: Jacq | July 14, 2014 at 07:37 PM
Jacq: I do think I'm in the minority on this one. But just because I don't know my rate of return doesn't mean I don't know how I'm doing in this business of retirement. I update my balance sheet each month and rebalance whenever my allocation gets out of whack. And I project out from my current balance what the next 50 years are projected to look like so I don't wind up negative before I turn 100.
When I retired, my retirement projection worksheet got me to 100 when I projected an average earnings rate of 2% over inflation. Now, the spreadsheet works while assuming future growth of 1% over inflation. So while I don't know what my actual returns were each of the last 6 years, I do know it's better than I originally projected because my assumptions going forward can afford to be even more conservative than when I started.
Which means to me, my asset allocation and spending levels don't need tweaking for now. In other words, no action necessary (going forward) at the moment.
If I went back and calculated my returns for the last 6 years, I would undoubtedly find they were WAY worse than I projected for 2008 and 2011 and WAY better for 2009, 2010, 2012 and 2013. But I'm not sure that gives me any more actionable information than I already have.
Posted by: Retired Syd | July 15, 2014 at 05:33 AM
We have used non-traded REITS for part of our portfolio. They pay between 6 to 7% and then when they go public they have sold at a profit.
Posted by: Karen | July 15, 2014 at 09:04 AM
Oh definitely hear what you're saying, didn't at all mean to imply that you didn't treat it as a business. Everyone - not just retirees - should look at their personal financial position as IncMe. I think we're coming at the same place (ie. do I need to do something different?) just in a different way or for a different purpose. I also suspect that most accounting types can get a good ball park figure for their returns at a glance without even pulling out a calculator or spreadsheet. I'll have to have a full year of not contributing to see if that's true or not. :-)
It's interesting that you project out much farther than I do. I read somewhere that future oriented people will project out something like 33 years. I've got my spreadsheet going out to 65 but gave up going past that when I decided it was just too much of a crapshoot - and got tired of playing with the estimated net returns cell, downsizing proceeds/timing, etc. etc.
Posted by: Jacq | July 15, 2014 at 10:41 AM
Jacq: Well you and I are similar in that we can't shed our accountant-like tendencies. Job hazard I guess. Although how you could ever get tired of playing with a spreadsheet I'll never understand :)
I know 100 is way too long (especially since the likelihood of BOTH of us living to 100 is next to nothing). But then there will be room for things I've not built in, like possible long-term care costs and other unforeseen costs. That is definitely the accountant in me, overly conservative!
IncMe--I like it!
Posted by: Retired Syd | July 15, 2014 at 11:01 AM
My husband pulled household and his IRAs before the last crash. He dabbled for a bit. It has been in cash for three years. I took my portfolio and invested in mutuals and single stocks. Since we calculate everything together, we made about 5% last year. I am about to sell all and take a year to dollar cost average in again.
Our nest egg is for old age. Thank God my husband bit the bullet and suffered through an Army career. His pension is not large, but with the house paid off, we are golden :) I am thinking we will feel rich when we start Social Security.
Life is good.
Missed you Syd! Glad to see you here again!
Posted by: Jan | July 16, 2014 at 07:29 AM
Thank you Jan!
Posted by: Retired Syd | July 16, 2014 at 07:48 AM