Retired and Scared
Retired and Scared
Neal Frankle, CFP
Neal Frankle found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.
The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger. To learn more, visit www.wealthpilgrim.com
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If you are lucky enough to be employed or employable, the current economic crisis in the United States is “just” extremely frightening. Your investments have probably taken some big hits but if you’ve got (at least) another 10 years in the work force, chances are good that you’ll find a way to adapt that doesn’t include having cat food as retirement cuisine .
If, on the other hand, you are already retired, the situation is blood-chilling and terrifying. If you are in that situation, your portfolio might be down 30%, 40% or more. Folks in that camp, have to find answers fast. Of course, the most important question is how to structure your portfolio to generate the income you’ll need for the rest of your life.
Let me cut right to the chase. Interest rates are too low to consider CD’s or bonds as any long-term solution. You know that already.
So you are left with this reality: If you are retired today, you have to include equities in your portfolio unless you love the idea of Purina Cat Chow (chow chow chow) for breakfast lunch and dinner for the next 30 years. I know that statement might ruffle some fur out there.
Numerous studies have shown that if you have a 60/40 (stocks/bonds) portfolio, you can “safely” withdraw 4% to 5% (adjusted for inflation) for 30 years. This study goes back over 100 years and it includes the Great Depression among other fun historical periods. In the past, if you had a smaller percentage committed to equities, the chances of outliving your money went up – not a good thing.
Believe it or not, it’s safer to have a 60/40 portfolio today than it was a year ago or even over the last 12 years. (I know that it felt safer to own equities in the past several years but we all know now – it wasn’t). Of course, it could always get a lot “safer” down the road if stock prices keep melting.
I know that many readers will roll their eyes when they see this but it is safer today (although perhaps not safe) based on the chart below. This chart tracks the P/E 10 (Price/average earnings over last 10 years). As you may know, the P/E 10 has been a very reliable market indicator.
According to Michael Kitches, as the P/E 10 declines, the “safe” withdrawal percentage actually increases. In his report, Kitches presents the following data:
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Currently, the P/E 10 is 13.99%. This argues that a “safe” withdrawal ranges from 4.8% to 8.3%.
But even I don’t have the brass to suggest a retiree should set up a withdrawal plan without any regards to our current financial crisis.
In fact, I feel that retirees should reduce their withdrawals right now to 4% or lower if possible. Retirees should NOT take inflation adjustments on their retirement withdrawals right now. In fact, they should eliminate withdrawals if possible.
Am I contradicting myself? If all these facts, figures, charts and graphs suggest that a 4% withdrawal rate is sustainable, why do I suggest withdrawals be curtailed? Two reasons:
The first reason is that although the P/E 10 has fallen significantly, it could certainly fall even further. Stock prices can drop. Earnings can drop too. Even if, miracle of miracle, stock prices find a bottom, if earnings fall through the floor, the now “fairly priced” stock market will become “overpriced” and dangerous.
The second reason I suggest that retirees reduce withdrawal rates is that I’m a chicken.
If you are retired the bottom line is:
1. You should do everything you can to reduce or eliminate withdrawals from your portfolio.
2. Your withdrawal rate should not exceed 4% right now. If you do take 4% – don’t talk yourself into the loony bin with worry. Over the long-run, you’ll probably be ok.
3. If you can work part-time in order to reduce your withdrawals, get going.
4. If your portfolio is set up with a 60/40 split, you may be taking on more risk right now if you try to time the market by moving everything to cash. Probably the best thing to do is stay put.
5. Just because it feels terrible right now, the best course of action may be to stay the course.
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Could stock prices fall another 50% or more? Absolutely. In deed, these days it’s in vogue to forecast a very bleak future. I wish I could tell retirees that the best course of action is to put all their money into short funds. I would certainly feel better. The only problem is that such advice would fly in the face of all the facts.
What do you think? Is it reasonable to stay put right now or should retirees abandon their equities completely? Do you think such a move makes make the most sense over the long-run?
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March 4th, 2009 at 11:03 am
oh you are soooooooooooo right I have been writing about this for awhile. Losing my mortgage career is scary but I have 15 years to make it back
how scary it would be to be 62 and lose everything, you don’t have that chance
add to the misery that most pension plans are underfunded and soon the retirees are going to be getting letters cutting the check that they sweated all their life for
the money was all in the same rabbit hole with the banks, investment banks and insurance companies
so so so so sad
add to it the obama policies that hate the rich which makes your old nestegg evil and they don’t care if you lost it and if you still have anything they are going to tax it
add to that the new terms “legacy costs” YOU KNOW THE THINGS THEY WANT TO DO AWAY WITH
that is your promised retirement but to sell the nation (who don’t pay attention) they need cutesy words, saying you want to screw grandma and grandpa didn’t sound so good in the focus groups
so obama pits blacks against whites
rich against poor
now young against old
(don’t think that his healthcare plan will spend money on surgeries for 70+ people to get well)
that is the first people they are ignoring in Canada and Europes supposedly WONDERFUL healthcare
old against young, sadder than sad
March 4th, 2009 at 11:21 am
catherine,
I found your letter moving…and I agree with you sentiments…especially the young against old comments at the conclusion of your thoughts.
Best of luck,
Bruce
March 4th, 2009 at 11:27 am
I am retired and I would agree with most of what you say. I got caught with equities that, because I wasn’t able to KNOW the perfect timing to sell, kept them too long, waiting for things to turn around. I will probably keep them for a turnaround.
I don’t agree with the following:
“Let me cut right to the chase. Interest rates are too low to consider CD’s or bonds as any long-term solution. You know that already.”
If we don’t know what “long term” means, and who does, with this present mess, CD’s are not a bad holding position. You make it sound like anybody with CD’s is crazy. But not being a “know-all expert” in the investment area, I am not about to take the losses on what I have, just to buy more equities that might lose. Besides the smaller portion of our retirement funds that are in equities, we have CD’s. And, by the way, people like me probably make up a large portion of the retirement community.
My major point is that, putting aside all the above, being retired right now is not all that bad, because our income is fixed and prices have gone down; so getting by is reasonably easy. But the key point I would emphasize, adding to your message, is that if you have to worry about your retirement fund holding out, you should emphasize that retirees cut back on their lifestyle and do only those things they need to get by. Maybe it is implied in your position of withdrawing as little as possible, but I think it should be emphasized. There are a lot of ways to have enjoyment, no matter how much money you are spending, and finding less costly activities during rough times are the challenge that can be rewarding. Nobody, including the present administration and all the financial nuts out there who think they have the answers, knows when this will improve; and as bad as things are, it could be here for a long time. I would not feel sorry for those retired people who still take their 2-3 cruises a year and then cry later because they don’t have anything left in their retirement.
March 4th, 2009 at 11:35 am
What’s the market P/E excluding Finance and Insurance (and GE)?
March 4th, 2009 at 11:37 am
What do you think? Is it reasonable to stay put right now or should retirees abandon their equities completely? Do you think such a move makes make the most sense over the long-run?
Neal,
This is what I think retirees should do…it is what I am doing…first let’s set the tone;
I assume you mean all retirees, and that these people are basically financially unschooled…and very worried..and have been primarily invested in equities and taken the losses that are so widespread..if this is who you are talking about I would get out of equities…and put my remaining monies in 2-3 year cd’s that now pay about 3 per cent…
Why?
First, this could be a depression…if so, remaining in equities with no job would be even more horrifying.
Second, if the Mishites are wrong, and this global stimulus produces inflation, you are short-term enough to put these peeps back into something for inflationary times…
Third, you make 3 per cent…Ain’t much, but it is not a decreasing portfolio either…
Fourth, the only positive I’ve seen the last several months is the GDP data out of China…Hmmmmm..is this enough to bring the rest of the globe economic salvation, and do you believe the numbers…if you think not, then the best course is to be prudent…
Putting the money in puts or shorts…sounds great, but the people here who do that are traders and accept the risk…most retirees cannot.
Good luck with your investment counseling…especially retiree money…that would be a huge burden if you cause them to become impoverished…glad I don’t have that job…
March 4th, 2009 at 11:46 am
I’m still reading a lot of this “stay invested” advice. I’m guessing this drys up at the bottom. If we track the social mood of the 1930′s (and of course we won’t EXACTLY) then at the bottom most of Wall Street will be viewed as criminals and people won’t touch stocks with a 10-foot pole. Worry and hope change to anger.
Every profitable market strategy requires discipline to follow. But not every strategy that requires discipline, will be profitable.
March 4th, 2009 at 11:47 am
Catherine, I also found your comments very moving….
Dean….your thoughtful remarks are helpful. I do indeed think we should focus on cutting back and that does not mean giving up enjoyment at all. I should have made that more clear.
Bruce and John…… bottom line, nobody can be sure what the best course of action is. I am of the mind that investors probably should NOT put more into equities. However, I think investors should be very cautious before going to 100% cash.
March 4th, 2009 at 11:52 am
Why Neal…if you are a retiree and it is short term CD’s?
I’d like to hear your reasons…just as a discourse…
(I promise I won’t say anything about your momma….)
The short term nature naturally means if we recover, you don’t stay in short term cd’s….
March 4th, 2009 at 12:12 pm
Neal,
your talking about ‘generic’ equities, though, you already know, there isn’t such a thing.
which vehicles are these ‘retirees’ riding in?
and, why not Covered-Call writing to increase Portfolio yield?
also, as, additional, constructive criticism, give ‘Cat Food’ scare-phrase the rest it, so richly, deserves.
if your clients are such that that is what they respond to, I’ll reiterate what Bruce said: “Good luck with your investment counseling…especially retiree money…that would be a huge burden if you cause them to become impoverished…glad I don’t have that job…”
not only do you have to have the right product, one has to have the right customers..
self-annuitizing one’s Portfolio, of its own nature, decreases opportunity–again, much as Bruce points out..
the “fixed-income” mentality is, as well, self-defeating. People, no matter their Age, need to win. As a further + it’ll decrease their other Costs..
March 4th, 2009 at 12:43 pm
Neal,
Nice post – liked the personal touch of the ‘bio’ at the top. Makes me want to trust you and buy your book.
60/40 sounds reasonable I guess. That ratio gets tossed out by a lot of money managers. “… over 100 years” is a lot longer than your 30 year draw down period. It would be interesting to see what that strategy would had done over time though. With yearly or quarterly adjustments to maintain the ratio (depending on what the market did – less management and commission fees of course!). Say starting in 1970, 1980, 1990. Guess it would depend on what stocks you picked huh? Those darn details!
The success or failure of any general rule is in picking which equities make up the mix. And if one has the skill to pick a winner… well then who needs a rule? Last time I checked most managed equity funds could not even match the indexes.
March 4th, 2009 at 2:43 pm
JD – well put. I just wish I’d said it….. (DOH!)
Bruce – I absolutely agree that investors can go from short term CD’s to equity – but its tough. If you rely on a systematic approach – fine. (See JD’s comments) If you go to cash out of fear it will be tough to get back to the market in a timely manner. (See JD’s comments again)
Mark – some of your points are well taken. I absoultely agree for the need to use a broader set of tools to help clients these days.
With respect to the comments on me “causing” them to be impoverished……all I can say is I’m glad I’m not your doctor.
March 4th, 2009 at 3:56 pm
I’d probably focus on strong dividend, debt free companies in sustainable and international businesses more than anything else right now.
Forget the cat chow….eat the cat. Here kitty!
And this is a promise I make to myself. If a 50% correction is enough to impoverish me when I am retired I will slap myself in the face for being so foolish and squandering a lifetime of opportunity. Not only should people have seen this coming, but their portfolios and houses should have been paid for and sturdily built by the time they are in their late ’50′s unless they were exceedingly poor in the first place. There is no room for greed in money management. You get to the place of replacing your income first and you get there conservatively and then you build from there. I know many may hate me for saying that but it is the truth and it is not intended to harm. I mean to wake up some of the younger ones reading this board because they need the wise council right now
March 4th, 2009 at 6:50 pm
Neal,
sorry if that came across too sharply, it, really, wasn’t intended that way.
I was, merely, echoing Bruce’s observation, and concurring that, ISMW: “it’s a touchy deal”.
though, there’s another side this observation of “Retired y Scared”, it is a useful meme to quell any type of questioning of SocSec, Medi-Care/Caid, et al. while our ‘Government”s imbalance sheets continue to hemmorhage..
LSS: “Buy ‘n Die” isn’t the only misconception that should be swept out of people’s minds..
March 4th, 2009 at 6:57 pm
Mark,
No worries. You make really good points. I may have had too much coffee. Anyway, I appreciate your wisdom.
Common man…….really well said. I am really amazed at all the ideas I’m picking up in here. I should write more often!
Thanks folks.
March 4th, 2009 at 7:53 pm
“If you go to cash out of fear it will be tough to get back to the market in a timely manner.”
Its me again. I’m not sure I would agree with this comment. All the “experts” say the same thing, so I’m not just taking a shot at you. I continue to read comments like that, which basically say, if you don’t select the bottom and buy, you lose. I worked my own investments during 2006-07 and made enough to never get close to withdrawing the principal and that was by no means starting at the bottom. If the market is performing “normally” (there’s a laugh; whatever that means), you can make money in the market, through prudent investing, without having to jump in at the bottom. I haven’t understook why so many put so much emphasis on market timing.
March 4th, 2009 at 9:27 pm
As some of the recent charts have shown, being in the market has not been such a blast. Fixed income instruments are not necessarily so weak. I call them sleep easy portfolios. I am reminded of a time in the early 80s when inflation was roaring and companies were struggling. Earnings were tanking and the market was kind of ugly. Not a good place to be until things got sorted out. Neighbors were crowing they got one year IRAs paying 17.4%, Cool. I got three year IRAs paying 16.9. Care to guess what happened? So depending on the timing, inflation is not necessarily going to chase everyone back to stocks right away.
I would still bet on earnings. I have friends that want to speculate on the banks and GE, and I try to steer them away. Maybe double, maybe zero. Too soon to say. I can recall stock mavens touting particular RBOC stocks at AT&T divestiture. To the stock, the ones expected to set the world on fire sank like rocks. They played the Wall Street game. The ones that stuck to their knitting and discounted short term Wall Street BS prospered, and eventually ruled the world: Southwestern Bell. Who’d a thunk it?
As far as Catherine. A common American tragedy. Trust me. I’ll manage your portfolio, take my cut off the top, and stay within the boundaries of other talking head’s advice. Cramer. So where exactly did things go wrong. Duh. Moral hazard. Fiduciary trust. You name it. Not exactly on the top ten FBI hit list these days.
March 4th, 2009 at 11:39 pm
Millions and millions of people bought into the fantasy that you can just send your money to some company and they’ll send you back a bunch more. This ‘something for nothing’ mentality, pervasive in every economic system, comes tumbling down as the ponzi-like scheme inevitably implodes. You can only exploit people so much before your system does itself in. Nature has a way of bringing everything back into balance.
What is truly amazing is the degree by which people still buy into it. People still don’t get what the problem is. Of course, I am sure most people felt that serfdom and slavery were “the way it was” in their day.
March 4th, 2009 at 11:56 pm
At 67 and a retired teacher, with a state employee’s pension, I have always considered that pension – protected by clauses in the state’s constitution – to be my “bond” funds. I invested my 403b – the public employee’s 401k without the employer matching funds – in equity funds. Currently the majority of this money is invested in an income & growth fund which only invests on US traded stocks which have paid dividends from earnings for the last 10 years. As with all equity funds this fund has taken a major hit (around 50% from its historical high) but the portfolio is high quality stocks. I amd sure that a good share of the value will come back over time, most but probably not all.
Here’s how I am dealing with this “panic”
1. I had been withdrawing funds but as things went south early last year I suspended all withdrawals
2. I have CDs equaling nearly 5 times the annual gross payments we receive from our state pension
3. We have always lived within our means and we have not changed our lifestyle at all
4. We haven’t had any debt since we paid off our house 35 years ago and we pay cash for all our purchases
If I were younger I would be sorely tempted by some of the prices I am seeing right now
1. Even after reducing their expected dividend, GE seems tempting
2. Of the former big three, which we follow closely here in Michigan, Ford has already been retooling for nearly a year and will bring out comfortable American style, high quality, reliable, fuel efficent, autos and trucks that are rated some of the safest on the road. It hasn’t taken any TARP funds yet and the recent market price for its stock is really tempting.
Finally, a lot of the posters here are expressing worries that we are in for a second “Great Depression”
1. Even though the current crisis is centered on Wall Street and the big banks, the existence of FDIC insurance on bank accounts will keep the people who have CDs from loosing their savings
2. The Department of Labor is projection a high in unemployment before the economy turns around to be around 11% — During the Great Depression unemployment reached 25% with out women being in the employment pool (meaning that the actual unemployment rate in the 1930s reached nearly 50%
3. During the Great Depression there weren’t programs to help the unemployed such as food stamps, medicaid, unemployment insurance, Social Security, FDIC, etc. to keep the unemployed from selling apples on the street corners, building “Bushvilles” out of waste materials on vacant lots in our cities, or standing in “soup lines” that stretch over a block.
So all in all it is not a time to “follow the herd” dashing to the “next big think” – either to dump your stocks or invest in the next Ponsey scheme. It is time to continue to invest in the market with a dollar cost averaging system investing the same amount every month.
March 5th, 2009 at 9:41 am
Bentrider, thanks for your post. It should give anyone, who reads it, insight into why Moses, after leaving Egypt, spent ~40 years leading his people through the desert.
LSS: Slaves no nothing of free societies..
March 5th, 2009 at 9:45 am
Once again, really wise comments here.
Dean, I am only saying that if you have a “system” to guide your moves (in and out of cash) it is far better than doing based on gut. Both are fallible of course but using a methodology will, over the years, serve better. At least that is my experience.
I don’t think investors should ignore the financial landscape and I don’t think they should ignore their feelings. I just think its important to temper it all with intellect. As well as you’ve done, I’m sure you use your brainpower plenty.
March 5th, 2009 at 1:12 pm
There is a very simple (old-timer with adding machine) indicator that would have had you out early enough and will say when to get back in.
Calculate the 20 week and 50 week moving average for a broad index (djia, spx).
If the 20WMA goes 1% over the 50WMA, move to an index fund.
If the 20WMA goes 1% below the 50WMA, move to “cash”. I would look for a CD or something from a local credit union that pays more than 1%. One local one had a 3% CD (for several months, but it should take that long for the indicator to switch).
Things APPEAR cheap now, but are likely to overshoot until the dying institutions are shot and put out of everyone’s misery.
A second problem with riding equities down and up is you might need some extra cash between now and the recovery (I usually make this point for “in it for the long term” investors – ok, so when you’ve lost 75% of your portfolio THEN lose your job, you will be FORCED to sell at the loss or declare bankruptcy or go into foreclosure).
March 5th, 2009 at 2:03 pm
“Dean, I am only saying that if you have a “system” to guide your moves (in and out of cash) it is far better than doing based on gut. Both are fallible of course but using a methodology will, over the years, serve better. At least that is my experience. ”
I wouldn’t disagree that some type of system is needed and I did have one that had held up during “normal” (there goes that stupid word again) times, so I wasn’t operating with gut feelings. I really haven’t seen any system that holds water in what has happened lately. The market go so radical, that sell parameters were having to be set that were outside my trading company’s guidelines. If I set by my normal parameters, I was selling almost as fast as the entry was complete, then the price shot up out of sight again, before dropping like a rock again. The operational phrase in what you said is “…over the years….” and that is where I am sitting now. Wait for an indication of a turnaround, accept as little loss as possible in what I now hold and start over.
March 5th, 2009 at 3:31 pm
Dean……did you notice that ever since the uptick rule was suspended (I think it was 7/07) these tremendous swings have really increased in frequency? I had to make some major changes to my “system” once that happened.
Did this impact you? (Or anyone else out there….)
I also agree with Marc’s comments on Bentrider’s post.
Lot of wisdom in this space.
March 5th, 2009 at 11:44 pm
Sorry, but about that time (for a couple of months) I pulled everything out to cash because we made a trip to Germany and I didn’t want to be worried about what was happening during that trip. I guess I had a complete disconnect with results that might have been tied to the uptick rule.
March 6th, 2009 at 1:26 am
@ Hoffer,
I have never understood why people that own equities don’t put together covered call strategies. Fine way to manage risk. And you know, lots of these people in this segment tend to have held some old school big boy stocks for the really long term so covered calls indeed.
For the rest, I’d be real careful about giving general advice to retiree’s asking questions on this board without a complete understanding of things such as time frame, asset base, income needs, current insurance or Long Term Care protection and whether or not it is enough, income tax situation on fixed income and types of investments and liquidity among others or specific personal goals or needs. I know you all mean well but without a complete understanding of these things you could do some serious damage to someone, for example, Cramer and his “lightning round” recs.
The harsh reality for many people that are currently retired, or have retired recently is that they never saved enough and if they really lost 30-40% they will in fact not be o.k.
March 6th, 2009 at 10:07 am
ben,
no doubt. sadly, I think the answer may be that it isn’t ‘popularized’ for it would disintermediate the WallSt./FinServ/MutFund Industrial Complex to a, too, great degree..
http://finance.yahoo.com/q?s=MO
http://finance.yahoo.com/q/op?s=MO
the Mar16c are yielding 3%, as an ex.
I’m not seeing Altria going to Zero, though others orbits may perturb..
LSS: People, if they care to be around, need to roll their own..
March 6th, 2009 at 9:30 pm
re: those Mar16c, they closed .21 bid x .23 ask
roughly, .21/15.72 (MO)= .0134 w/two weeks left, or ~2 2/3 %/month
if one pulled that 7x a year, ~ 18.50+% annualized..w/o the use of Margin.
and MO is, currently, paying a div.
of course, the 15.72 can go to Zero, as max. risk, though, the option trade is a + revenue, it is always yours.
IOW, If you’re fixin’ to own shares, get paid for doing it..as a +, you get to vote the Proxy, not some desk-jockey whom you’ve, probably, never met, or, even, could call by name..