Three reasons why retirement is one big math problem
By Brian Decker
Retirees concerned about running out of money often fret about how inflation can ruin their plans.
While that’s understandable, it’s also possible that their worries are misdirected.
The No. 1 disaster that hurts people in retirement is not inflation. Instead, it is stock market crashes. In fact, a stock market crash can be so devastating that it can take you right out of retirement and put you in a situation where you have to go back to work.
Put simply, it’s a matter of math, and math sometimes can be problematic for retirees. Here are a few reasons why retirement is one big math problem.
Percentages work against you
If the market takes a 50 percent tumble, the climb to just get back to break even is steep. A 50 percent recovery would not do the trick. You would need a 100 percent increase to get to where you were before the crash. Think of it this way. If you have a $100,000 investment that loses 50 percent, that drops you to $50,000. A 50 percent recovery would just give you $75,000. And when you’re retirement age, you don’t have a lot of time to recover.
Markets decline twice as quickly as they rise
One of the first things you will notice when you look at stock charts is how quickly the market unravels. In the mid 1990s, the market went on a bull run, but it took a little more than five years for it to reach its peak in 2000. By contrast, it took just 2½ years for it to lose 50 percent of its value.
Market timing in general does not work
Some financial professionals advocate a “buy and hold” strategy, encouraging people to ride out the markets. One reason for that strategy is so you don’t miss out on the market’s best days, which can send your portfolio value soaring. People may have seen charts outlining what the negative impact on your return would be if you miss those best days. But the flipside of that is there is a positive impact on your return if you avoid the market’s worst days. You can’t miss all the worst days, of course, but the moral when it comes to market risk is that market timing in general doesn’t work.
There are approaches retirees can take with their money other than planning to hang tight in the market with a “buy and hold” strategy.
For one thing, you want to have cash available that you can get to in case of an emergency or unexpected expense. You also want some accounts where there is little to no risk to your principal.
Finally, depending on how the math works out, you may or may not need to put a percentage of your money in investments that carry some risk. At our firm, for example, we use a strategy that takes advantage of market risk in both bull and bear markets. But it’s going to behoove anyone in or near retirement to sit down with your financial professional and work the math for your situation.
Brian Decker is a financial planner and founder of Decker Retirement Planning Inc. He has more than 30 years of experience in asset management and has worked for several brokerage firms. He became a fiduciary in 1995 and since then has created several investment models and honed his risk-management skills with a focus on investment models designed to make money in up or down markets. He has a degree in finance and marketing from the University of Washington.
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Don’t forget taxation risk, as future tax rates may change. However the biggest unknown is healthcare related costs which defy all logic in terms yearly increases that have NO correlation to inflation. This is where it gets real tricky. Otherwise Market fluctuations can be hedged by non equity positions with liquidity that can be used to rebalance portfolio if a downturn occurs in stock market – Kind of like a rainy day warchest. I spent 2 days building retirement models in EXCEL and ran simulations on the third day using risk analysis. I retired at age 50, years back, which was my goal. I came to the conclusion that you need in excess of 1 million per individual retiree to make it work and that is a minimum. Even at 1M+ starting point you have to be careful and allocate assets in an appropriate manner. If I live past 85 then I potentially have some risk exposure but it is < 20%. Now Social security was ignored in all my analysis and will be an added bonus if it exists when I qualify. My advice, don't retire if you like your job and what you are doing. Retirement is a radical shift change, and requires work and reinventing your lifestyle. We all dream, or some of us do of not having to work one day. Well when that day comes, it is not what you think. The structure of work after decades and decades doesn't disappear overnight from your psyche. I truly understand why many people opt out of retiring, as simply their career is embedded with their personal identity. Just ask Warren Buffet. Good luck , ride the wave,