Financially Speaking: Can You Still Retire?
As I sit down to write today, I’d like to acknowledge that this day is special for two reasons: First, I met my wife Dee, 43 years ago while down the shore. Second, it’s Flag Day, a celebration of the American flag that President Woodrow Wilson established on June 14, 1916.
Today, the S&P is down 20.79%, and the Bloomberg U.S. Aggregate Bond index is down 12.10% year-to-date. The volatility of the markets is front-and-center every day, making everyone more anxious. Inflation increased to 8.6% year-over-year ending May and remains in the news daily, with many experts believing that by year-end, it may be around 4.5%. China is starting to open up from its zero-COVID policy, and hopefully it will help the supply chain issue. The war in Ukraine remains on the front page, and there doesn’t seem to be a quick end in sight. Food prices have continued to spiral upward, and gas is now at $5 per gallon, and likely to go higher. The COVID variants are still an issue. Oh, by the way, we have midterm elections this year. You can almost hear Joe Pesci in the 1992 comedy, “My Cousin Vinny,” stomping his feet and saying, “I ain’t slept in five days, I got no money, a dress code problem … Is there [anything else] we can pile on … ? … Is it possible?!” Well, only time will tell.
Everyone is concerned, and rightfully so. Do not sell out of the market, as that will lock in your losses versus having your portfolio being down. Stay calm, and it will get better.
We have had a few calls from clients asking if they can still retire, and others asking if they can remain retired. These are important questions during difficult times.
The first question is fairly easy to answer if they are an existing client. If we have completed a retirement plan for them in the past, then we can review it and see if the information they provided is still accurate, rerun the plan based on their current account values, and provide an informed answer. We are conservative financial advisers and have always used 5% as our inflation number. Since Feb. 1, 1985 (when I started my practice) to May 2022, the average inflation rate has been 2.73%, based on the U.S. Bureau of Labor Statistics CPI inflation calculator. So, during that time our clients have had a cushion, depending on when we first started working with them. We also use 5% or 6% when we model investment returns in their financial plans. Basically, this provides a real rate of return of 0% or 1%. Based on their risk tolerance, their long-term actual returns may have been better. This may provide less worry during this difficult economic environment.
The second question about staying retired is a little different. When we initially complete a financial plan focusing on retirement, it is based on a questionnaire that our clients fill out for us. From the original retirement plan, many things can change — whether it be an illness, helping an adult child, etc. Whatever it is, life gets in the way. If it was a fee-based retirement plan and we manage their assets, then we have made adjustments over the years based on the economy and the client’s life changes. If we complete a retirement plan, and the client manages their money themselves, then they may not have known how to adjust their portfolio for external economic factors. We design retirement plans based on the risk our clients are comfortable taking. Investment recommendations are based on the current market and tax code when we complete their plan. There have been instances when a client comes in for a financial plan tune up a few years later, having never rebalanced their portfolio. Because of this, it’s likely that the stock portion of their portfolio is too high. Think about it, if you look at the time from near the market bottom of the great recession (January 2009) to May of 2022, the S&P 500 is up 524.9%, or 14.73% per year. If someone hasn’t rebalanced their portfolio, then they have more risk than they should. If that is the case, then their financial plan has taken a pretty good hit this year in particular. If they don’t panic, we can work through it and help right the ship. Remember to be more cognizant of your risk tolerance because if you have taken more risk than you can handle, it may not be fixable.
In 2000, we received a call from a client (for the sake of this article we’ll call him Gilligan), for whom we had completed an hourly, fee-based retirement plan. We had worked with Gilligan and his wife, updating their retirement plan and making investment recommendations over the years. This was an hourly plan, so Gilligan would make the changes in their investment accounts himself. After several years, they achieved their retirement funding amount, and there were hugs all around. Their goal was to buy a 60-foot sailboat, since Gilligan had his Coast Guard charter boat captain’s license, and his wife was a chef. They planned to run Caribbean charters in the winter and summer tours along the Chesapeake in the summer during their retirement. They had realized their dream. He was all set to be able to retire from the job he hated.
UNTIL … He called our office in a panic. I was out of the office on my way to my son’s freshman high school football game when my office contacted me. At the time I had a portable bag phone (Do you remember those?), and my office was letting me know that Gilligan called and needed to speak with me ASAP. I called him back when I got to the game, and he said they needed help since their portfolio was down more than 50%. I immediately set up a phone appointment for the next day, since I didn’t have his file with me. When we spoke, he said they needed to see me so I could fix their plan. I had already reviewed our final recommendations, which were fairly conservative. If you are old enough, you remember the dot-com bubble and how stock of a certain group of companies went up almost daily. This was also the time when day trading was big. I asked what happened with his portfolio, since last time we talked he and his wife had enough money to purchase his sailboat and retire. He said he was getting stock tips from his neighbor, which were doing great until they weren’t. I asked why he changed their investments, and he said, “I thought I could get a bigger boat.”
In Gilligan’s case, they could not retire. They took more risk than they were comfortable with, and when the dot-com bubble popped, their investment popped as well.
It is different today, although we are in the midst of a bear market (stock market down over 20%), which makes everyone nervous. Review your investments, and make sure your retirement plan is on track.
A good place to find peace during this difficult time is on the beach. So, grab your chair, book, and a refreshment, and relax.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ, 08243.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.”
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
S & P 500: The Standard & Poor’s (S & P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
