Your retirement assets may have to respond to many different risks. Which of these worry you and which do you have a strategy for?
Risk to principal. You buy a stock at $30 a share and it drops to $15 a share. Ouch! What are your choices? Wait for the price to rise? Take the loss and move on.
What you do will depend on why you bought the stock, your target for selling, and what caused the price decline. Does it signal something had fundamentally gone wrong?
Market risk. The market goes down, not just your stock. Don’t be startled. Let me share what I hope is a calming perspective about the S&P 500 composite index. You may know that it is an index that you cannot invest in directly. Past results are no guarantee of future results.
Let’s consider research from 1949 to 2019. Knowing the historic patterns may remove some fear and prevent you for jumping out of the market when it would be better to stay in. [American Funds, “Investor Resource: A Guide to Market Fluctuations Keys to Prevailing Through Stock Market Declines” 2019]
In that 70-year period:
5% declines happened 3 times a year
10% once a year
15% every four years
20% about once every seven years
In addition, history shows that for the worse declines those of 20% or more, in the next five years, the investment doubles from their lows.
So, patience and holding on are likely to be a good strategy. IF you are holding quality investments that have been resilient at other times, then you have a reason to stay invested. The analogy is a healthy person gets the flu and is knocked down for a while but is likely to recover and be fine.
Inflation risk. Inflation is like a silent thief. Today you have $1000 and if inflation averaged 2% for ten years, your account may say $1,000 but that money can only purchase $818 of goods.
You can look at these in two ways; your money can buy less, or you need more money to buy the same thing. So, forty years ago a gallon of gas for a car cost on average 86 cents. The average now is $2.77 which is three times more. [AAA national average 7/7/19]
So where will you get the money for the increase in goods and services? If you are working, hopefully you will have raises. If you are retired, then what?
Recall that the rate of inflation in the 1970’s was 7.25% and in the 1980’s it was 5.82%.
[Average Annual Inflation Rates by Decade FEBRUARY 22, 2019.tby Tim Mcmahon https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp]
Do you know if and when those levels of inflation might return?
There would be a significant impact on mortgage rates, credit card interest, and car loans. If those increased what would you do?
The risk of being too conservative. You may not like the first two risks (risk to principal and market risk) and therefore you don’t want to take risks.
An NYU professor tracked the returns for 90 years from 1928 to the end of 2018 on 3-month Treasury Bills and the S&P 500 index. He showed that $100 invested conservatively in the 3-month Treasury became $2,063.40 and the $100 in the S&P 500 became $382,850. [You can get the excel spreadsheet that contains all of this data and more here: http://www.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls]
How conservative can you afford to be?
Has someone shown you how you can be conservative and also grow your money? If not, you may want to access my free white paper to help you begin to understand this concept of growth for someone who is risk averse.
Risk of Under reporting expenses. For instance, those expenses for your house and your lifestyle. Know the total cost of running your house and your lifestyle expenses.
You can run out of money because you are under-reporting what you are spending. You may think it doesn’t matter. But, focus in detail at least once a year. Get accurate and comprehensive numbers for the house and your lifestyle otherwise you may lead yourself into a downward spiral and wind up running out of money.
You do not want to outlive your money!
Risk of poor financial planning and poor portfolio construction. Have you, or has a someone else provided a financial plan that included health care costs and an assessment of the strengths and vulnerabilities of your portfolio?
With a clear view of what your portfolio is doing for you, you can make improvements now if needed. Don’t wait for a crisis to find out your portfolio never considered your being sick. Optimism is fine but poor planning isn’t.
Risk of relying too much on one asset. Examples of this are the house, the stock of the company you work for, your art collection, investment real estate.
Diversify the money streams. Different asset classes each have their highs and lows and respond to the larger forces of the economy (there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk).
IF you know that you will need to sell a specific asset, find out the trends that make a sale advantageous for you.
A wonderful asset may lose its value not intrinsically but because of timing. Risk is about timing not only fundamentals.
Risk of not saving enough for each investment goal. Most people have five pockets for investing:
- Rainy day or emergency.
- One-year goals.
- Two to five-year goals.
- Five to ten-year goals.
It’s valuable to adequately fund each goal otherwise you may be forced to borrow from retirement to pay a rainy-day incident. That’s not a good outcome.
Risk of not knowing when to begin to fund retirement and when to end funding retirement. When you have steady work (meaning income) that you expect to continue for six months or more, SAVE SOMETHING. Even if it is a dollar. The function of this deposit into a savings account is to create in your mind a pattern that will serve you well. You don’t live life only aware of today. You plan other things you will do this week and next. In the same way, money is not all for today.
When do you stop saving for retirement? You don’t unless you are exceedingly wealthy.
You are saving something in retirement for the same reason you saved when you started out. There are unexpected good things and bad ones and having the “extra” money makes a big difference to your sense of calm.
Small sums matter:
- $5 a week if it could earn 5% on average in 5 years might become $1,473.
- $50 a week might become $14,734 in 5 yrs.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return do not reflect the deduction of fees and charge inherent to investing.
Do you have a family? The risk of forgetting you are a family and that you can pull together. When an elder parent or relative needs care, there is often an unspoken assumption that a particular person will take on the role of caregiver.
Let’s say everyone assumes Alice will take it on. Maybe because Alice lives closest or has fewer family responsibilities or a more flexible work schedule. However, Alice does not want to take on the role and is not assuming she will.
If you have an elder who is in their late sixties, or in his or her seventies, that person may not qualify for long-term care insurance. IF the person is healthy enough to qualify, but cannot afford the premium, what if all of you contributed to paying the premium? Then there would be professional care for your loved one and you could be supportive, visit and help without just one person like Alice taking on the full-time duties of a care giver.
According to the Altzheimer’s.org fact sheet, every 65 seconds someone in the United States develops the disease. It is the sixth leading cause of death in U.S.
The national median cost for a year in a nursing home is $100,375 and over five years it has increased by 3.64% according to the Genworth Cost of Care Survey 2018.
US Department of Health and Human Services says that people who reach age 65 will likely have a 40% chance of entering a nursing home.
But 70% of those over 65 will need some type of long-term care services.
So, who are you going to take care of? Who is going to take care of you?
The government does not pay for custodial care unless your assets as a single person are under $2000. For a couple the numbers are low but not that low.
Can your portfolio pay out over $100,000 for a nursing home or do you have a devoted circle of friends and family who will take care of you 24 hours a day?
As a family, you could chip in to pay for a long-term care policy for your mom or dad (guarantees are based on the claims paying ability of the issuing company).
If you are 50 you should consider some sort of long-term care strategy. As a family you can help each other and care for a parent by sharing the financial commitment.
Life and investing expose us to many risks. By being aware of some of them, we can plan and create alternatives or safety-nets. A spirit of resilience and optimism helps.
Penelope S. Tzougros, PhD, ChFC, CLU. Financial Planner, Author, National Speaker. Wealthy Choices.com. [email protected]. In all 50 states, Penelope S. Tzougros is registered with, and securities and advisory services are offered through, LPL Financial, a registered investment advisor. Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.