It was Mike Tyson who said everyone has a plan until they get punched in the mouth. I’ve always liked that quote and it seems to pretty much cover the last few weeks, doesn’t it?
We plan for the future, for retirement, for how our investment portfolio is going to help us accomplish our goals. We plan to get our kids through college. And then that right uppercut comes from out of nowhere… bam! It leaves us feeling bloodied and dizzy, and wondering if there was any value in all that planning when life seems so uncertain.
Fortunately, planning does have value. One clear example is how the planning we’ve done helps provide a framework to evaluate your options during times of market crisis. It helps us triage, so to speak, when figuring out what if anything to do with your investments.
As I see it there are three groups of individual investors right now: The Spenders, the Almost-Spenders, and the Savers. Each group has its own triage framework to lean on and you need to know which group you’re in. This isn’t always an easy task, especially when the fear and anxiety we’re all facing makes it difficult not to join a fourth group, the Sellers.
All three groups have a challenge ahead of them, so here are some thoughts to help frame your decision-making. You’ll likely notice the recurring theme of having a plan, sticking to it, and not letting fear dictate your options. This is probably the best advice in difficult times even though it doesn’t necessarily make things any easier.
The Spenders –
You’re probably descending through various levels of anxiety while seeing your portfolio values drop. This is the money you’ve spent decades saving and it’s taking hits from all directions, including the money you’re withdrawing to live on.
During times of crisis it’s important for Spenders to revisit the details of their retirement plan. If I did the plan originally it included a “bear market test” based on retiring just before the Great Recession. How does this current situation compare? Does your plan require any tweaks? Test it and find out.
Where does spending money come from when stocks are down? Well, from bonds of course! If you’re feeling scared about the current market environment, please go through the following exercise and insert your own numbers. If you need the bond and cash amounts, just ask.
- Add up your spending needs for the next year. Let’s say this is $80,000.
- Subtract known sources of income, such as Social Security, any pensions, rental income, and so forth. Let’s say all of this together equals $60,000.
- That leaves you with an expected $20,000 draw from your investment portfolio.
- Now please divide the total amount you have in bonds and cash in your investment portfolio by that $20,000. This tells you, in back-of-the-envelope fashion, how many years you can “afford” to wait for stocks to recover.
Is the answer to your math question at least two years? Five? Ten? During the Great Recession it took investors 2-3 years to get back to normal if they did the right things, such as diligently rebalancing and not selling out of fear. How long do you think it would have taken had they sold stocks during the worst of it?
In other words, Spenders can use their bonds to fund their lifestyle while allowing their stocks enough time and space to recover. Two years is probably a minimum, but you likely have much more than that. Hopefully this provides a little piece of mind during very turbulent times.
The Almost-Spenders –
These folks are less than five years from retirement and are feeling a ton of anxiety right now. They’re in their peak earning years but are planning to start winding down soon. Does this crisis mean they should stop funding their retirement accounts? Does it mean shopping for a more comfortable desk chair and maybe an office plant because they’re now going to have to work longer?
The next few years will be critical for this group and they can’t afford to make mistakes. This would be true even in the best of market conditions. As above, they should revisit, update, and retest their plan based on current market values. Does the plan still hold up? If not, what changes can be made to allow for retiring on schedule? And it probably included assumptions for continuing to fund your retirement accounts. Prices today are at a discount. Now’s the time to keep buying if you can afford it, even if it’s uncomfortable.
The Savers –
Typically, these are younger investors who are trying desperately to manage their finances and pay down debt while still trying to save for their future. That’s a tall order anytime, but it’s made more challenging by a looming virus-induced recession.
If Savers find themselves unemployed for a time, they should avoid hitting up their retirement accounts to fund their living expenses. Easier said than done, I know, but the 10% penalty and taxes on top of realizing investment losses creates a huge hole to climb out of later.
Assuming they still have a job during this crisis, their framework right now is the simplest of the three groups. All they need to do is buy more, as much as they can reasonably afford. They need to put more money into their retirement accounts and buy more stock. Prices for high quality diversified mutual funds and index funds are 30+% less than they were a month ago and potentially moving lower. In short, there’s rarely been a better time than now to start ramping up retirement savings.
Have questions? Ask me. I can help.