This week, I found myself face to face in the mirror with 60-year-old Chuck. Until that moment, he was never someone I was afraid to meet.
I’ve been planning the meeting in 2027 that I’ll have with 65-year-old Chuck since I was 20 and started my professional career. I could barely afford to put anything aside, and yet I contributed to the pension plan because I knew that one day my 65-year-old self would show up asking me what I had done. of his money.
This future self haunted me for decades; whenever I was tempted to save less or spend more, the inevitable arrival of 65-year-old Chuck was my motivation to keep saving.
What I couldn’t have foreseen, however, is how much of an impact market and economic conditions might have on the run-up to and around his arrival. My 60th birthday this week – a day when the stock market was having one of its 200 worst days in history, no less – rang the bell on that.
It makes no difference that I don’t see myself retiring in the traditional sense for a long time, if ever. The juxtaposition of current conditions and a big anniversary was a wake-up call everyone, regardless of age, needed.
More specifically, what investors need to consider is “yield sequence risk”.
Of all the things you hear about the market, economy, and world events right now, yield streak risk may be the most personal, least understood, and least discussed.
Still, it proves the idea that the stock market doesn’t know or care when you need your money.
In all my focus on retirement, I never gave 55-year-old Chuck much worry until I went through a surprise divorce in my early 50s. The 55-year-old self is important because it’s the one that kickstarts retirement, the version of you whose decisions can catch up, or cut back and save and prepare for retirement takeoff or, alternatively, doom you to a retired life of struggling.
The market was moving forward when I reached my mid-fifties.
This is not the case as I enter my sixties.
For anyone nearing the end of their working life, it’s about to find out why many financial advisers describe the last 10 years of a job as “the fragile decade.”
Retiring during or just before a market downturn and the combination of withdrawals and poor performance can tap into a nest egg much faster than expected and make recovery difficult.
For proof, consider someone retiring with $500,000 in savings/investments, planning to take out $20,000 per year.
Keeping the math extremely simple, let’s say the market in its first decade of retirement will experience five years of 5% losses and five years of 10% gains.
If the five good years come first, the saver ends the decade with about $450,000 (having withdrawn $200,000 from the account in those years). If the good and bad years alternate, they have about $410,000 if their streak begins with a positive first year, and just under $395,000 if the first year is negative.
But if the first five years of the decade are the losing 5%, the investor will have about $370,000 left over, despite the big bounce at the end.
Now consider that we are currently in bearish territory, with the stock market down more than 20% from the highs. On my show, “Money Life with Chuck Jaffe,” I spoke with many pundits who see a prolonged downturn ahead, with the market stumbling until it hits a recession in 2023 or 24.
While it’s easy to ignore the gloomy predictions that see the market lose half or two-thirds of its value, consider that it’s already taken a big step forward.
When you’re gawking at the price at the gas pump or expressing your frustration at the high prices at the supermarket, it’s not hard to envision a significant drop from current levels.
So while you may not subscribe to the most pessimistic predictions, there’s no denying that they look more plausible today than they have at any time since the 2008 financial crisis.
And no matter what you think of the government and hope things are different, it’s clear the recession is coming. No political party has the power to stop it, although they can block it for a period of time.
It actually adds to the alarms in my 60-year-old head.
With retirement looming, I want this recession and downturn to happen as quickly as possible. The pieces are in place for a long-term economic recovery and a return to impressive long-term growth, but only after the economy has digested the bile and blockages that have built up over the past 15 years.
The sooner we swallow this bitter pill, the sooner we get past it, the better the environment for people my retirement age.
Research from Fidelity Investments suggests that a good retirement savings goal is to save 10 times your salary by age 67 (you’re said to be on the right track if you’ve saved your salary by age 30, have three times your salary at 40, six times by 50 and eight times by 60).
But it is a “guideline”, a starting point for building a plan.
This plan must also take into account the market and the economy.
If your plan is to hit a savings goal or life milestone and quit, that’s dangerous right now.
To ignore what the market is likely to do to your savings life over the next few years is to run headlong into trouble.
You may never have “timed the market”, but timing should be a factor in your life choices.
If you continue to be healthy and have a secure job, and more work time would create greater peace of mind in retirement simply by adjusting the market circumstances you will face when you resign, plan accordingly.
You will answer for your decisions to your ultimate future self, the one you face in the mirror every day of your retired life.