Did the Meltdown Wreck Your Retirement?

With so many baby boomers (people born between 1946 and 1964) on the cusp of retirement in late 2008, significant numbers of these imminent retirees were caught with their shorts around their ankles when the financial crisis struck. Anyone born in 1945, 1946 or 1947, that may have been planning to retire at age 62, 63 or 64 was devastated by this event. To put the enormity of it in context, there were almost 2.9 million people born in 1945 with annual births peaking at 4.3 million in 1957. In short, millions upon millions of boomers were and continue to be affected. Were you one of the casualties – did the meltdown wreck your retirement?

Of course, boomers born later than 1947 suffered as well. The impact of market losses on anyone over 55 must have been nothing short of bone jarring. With so few years remaining to rebuild their retirement funds and exacerbated by the fact that the jobs necessary to earn that funding were being lost in huge numbers, the meltdown pushed many boomers to the depths of despair. Perhaps you were a victim!

There Were a Lot of Victims – Did the Meltdown Wreck Your Retirement Too?

Did the Meltdown Wreck Your Retirement?
Did the Meltdown Wreck Your Retirement?
The fact is we were all victims in one way or another. In the 7 months following the crisis, the Dow Jones Industrial Average nose-dived from a pre-crisis 11,700 to an abysmal 6,500. Mutual fund investors alone sold off $200 billion in stock (many would argue, at exactly the wrong time).

Many of us suffered from derailed retirements, underwater mortgages, decimated stock portfolios or job losses due to downsizing, outsourcing, business bankruptcy or merger. For many, it was a combination of these. In short, few escaped unscathed. This is no longer news; it is history. The question for those looking forward to retirement and/or financial security is what lessons can be learned from this financial crisis?

Lesson # 1 – Avoid Debt

These lessons are in no particular order, but if they were, avoiding debt would be at or near the top. No matter what financial crisis will emerge in the future, and there will be one, it is easier to weather a crisis in a debt free condition. Imagine the difference a low debt load would make in your quality of life if you lost your job, if the value of your home tanked, or if your portfolio lost one-half its value. Everything in your post-apocalyptic life would be easier absent the burden of debt.

Lesson # 2 – Ignore the Experts!

Don?t place too much reliance on the expert advice so freely given by the talking heads, brokers, market watchers, economists and other soothsayers. Truly good advice has a price, just like everything of value. Freely given opinions are usually all over the map and being human, we tend to hear only the voices in agreement with our own views anyway. The fact is?no one accurately predicted the meltdown. Most, in fact, were assuring us of the brightest of economic futures. Rely instead on your own common sense and life experience. Your chances of calling it right are just as good as anyone else?s. This applies equally to sunny predictions and dismal ones.

Lesson # 3 – Keep Your Assets Simple

Invest in simple assets and straightforward strategies. Warren Buffet may have said it best, ?Never invest in a business you cannot understand.? Those investing in credit default swaps, convoluted hedge fund strategies and complicated derivatives were hit hard, while simple folks investing in well understood equities like McDonald?s and Coca-Cola fared quite well.

Lesson # 4 – Keep a Healthy Amount of Cash

Cash is not a four letter word. While holding cash reserves will cost you income opportunities in good times, when there is a financial crisis, cash is king. If we learned nothing else from 2008, we learned that having a cash reserve is critical to survival. What percentage to hold, in cash or cash equivalents, is up to each individual, but to have no cash reserves is an enormous mistake. Build an emergency fund!

Lesson # 5 – Understand the Relationship Between Risk and Reward

Understand your capacity for risk. Most of us understand the risk/reward concept. We understand that accepting higher risk can mean greater rewards. Higher risk investments can also spawn significant losses. Anyone planning for retirement, a child?s college education or overall financial security must address the element of risk. Deciding how much risk you are willing to accept is a critical first step in any investment strategy. There is no one-size-fits-all solution. The answer is as individual as the investor.

One thing is certain, if we fail to learn from the mistakes made in the years and months that led up to the financial meltdown, we are destined to repeat them and that is not a good plan!

H. D. Carver is an American who currently resides in Cagayan de Oro City, Philippines. He has years of experience in the financial services sector and has served as a manager for Fidelity, as the vice president of a large regional bank, as the president of a financial services company, and as the Manager of Administrative Services and Support for the Aon Corporation. He has worked as a freelance writer for 4 years. Currently, he writes for Your Finances Simplified.

( Photo by grahamc99 )

13 Responses to Did the Meltdown Wreck Your Retirement?

  1. We retired in 2005 with a very good pension. Additionally, we had a 401K which was invested in treasury bonds. Our other investments were bonds and dividend paying stocks. So, although the bottom line amount decreased during the meltdown, the interest and dividend income just kept on coming without interruption. We never plan to invade the principle and will just use the earnings so we came through relatively unscathed.

  2. Hi Kathy – You did it right, and that’s why you survived. Personally, I think that high dividend stocks are the way to go for retirement. You’re emphasizeing income, but allowing yourself to participate in higher stock prices.

    Too many investors go mainly for growth, since it works so well during strong markets. But when the market reverses – those are likely to be the people who see their retirement dreams fade, often in a matter of months.

  3. Oh man, did we ever lose our asses (for the 2nd time) in 2008/09. Fortunately we didn’t pull out and have more than recouped our losses, but that was a real wake up moment for us. The first time we lost, we weren’t that phased, but the second time – ouch. My wife was well on her way to retiring early – ha! That never happened. Now we’re paying off our mortgage as fast as we can and as soon as that’s done, we’re going to stash cash like we’ve never done before.

  4. Hi Jim – Paying off your mortgage is an excellent strategy. The reduction in living expenses will lower your need for income. You might want to get a bit more conservative with your stock market holdings too. The current market is looking a lot like the peaks in 2000 and 2007, and just like then, people now don’t think anything more than a minor correction is possible.

  5. Market-timing is dubious at best. I can count the investors that are in the market-timers hall of fame on zero fingers.

    If you’re diversified globally and have a long time-horizon (30 years+) short-term losses are an affordable risk. If you’re already living off of your investments, keep 2-3 years of living expenses in cash equivalents and draw on that during downturns. All the while using a flexible SWR based on the performance of your investments.

  6. Hi Chaz – I’m not sure it’s that simple. If it’s 2009 and you planned to retire in 2012, and 60% of your portfolio has been wiped out in the crash, you probably won’t retire. Garden variety bear markets (25-30% corrections) are one thing, but crashes of 50% or more are something entirely different. It can take years to recover from that kind of hit.

    Many of the people who held through the last crash in 07-09 are only now reaching the point of recovering their losses from the crash. Not only the monetary losses, but the emotional roller coaster you’re on in that situation changes your whole outlook.

    I know that everyone says “you can’t time the market”, but you can determine when markets are excessive (like now) and begin paring back on your holding, or moving your money to safer stocks. I’ve never been a fan of the “anytime is a good time for stocks” line of thinking.

  7. Hi Kevin!

    Ah yes, the short term. Being able to tolerate high volatility is what gets you the high reward of equities. But what if you’ll soon be needing that money to start living off of?

    Historically, around a 50% decline has been the bottom for a diversified (global and sector) portfolio during the worst of the worst bear markets. But if you only need to draw down 2% of your portfolio to live off of next year is it really a game changer if a crash ratchets that withdrawal up to 4%?

    Market beat-downs come fast, but the resulting runups come almost as quickly. Staying in globally-diversified equities with your no-touchie money during your 20’s-50’s is what will afford you the luxury of weathering downturns in your 60’s+.

    Over the last century, equity returns have greatly out-performed debt returns in just about every investable country over the last century. The 2 worst bear market decades in history were both followed by 8+ years of positive returns and the global market hasn’t gone more than 8 years without reaching a new all-time high (total return). Bonds have returned just over 2% (inflation-adjusted) over the same time frame.

    If you?re already living off of your investments, keep around years of living expenses in cash (or T-bills, T-bonds and gold) and draw on that during downturns. And don’t be rigid on your safe withdrawal rate, but keep it flexible based on the performance of your investments.

  8. Sorry, that last part should’ve read:

    “…keep around 2 years of living expenses…”

  9. Hi Chaz – That would certainly work if all we have to worry about is two years. But the stock market ran sideways from 1966 to 1982, at a time when inflation was eroding the value of even a strong portfolio. Then when the market crashed after 1929, it took until 1954 – 25 years later – for the market to recover lost ground. A lot of people experienced something similar from 2000 until 2011 or 2012. In fact, if the current market were to take a 30-40% haircut, which is well within the range of normal, most investors would be no better off than they were in 2000.

    I think we tend to favor recent experience, and disregard the longer term, when we’re looking to make investment scenarios work. If you’re within 10 years of retiring, the longer term declines can never be ignored.

  10. Hi Kevin,

    I think we’d both agree that there isn’t any investment that’s safe in every economic environment. For example, US Treasuries lost 41% (in real wealth) in the decade ending in 1950.

    After the 1929 crash there was deflation, and the market had totally recovered by 1945 (real and nominal). And yes, 1954 was when the index recovered, but that ignores all the dividends paid out up till then, which is akin to scoring the return on bonds but leaving out the interest.

    And yes, if you were invested in US stocks through the decade ending in 2008, your portfolio would’ve lost around 35% in purchasing power. But if you were invested globally during that same time, you wouldn’t have. If you stayed balanced in equities but were diversified between US, International, commodity futures and REITs (a simple all-equity mix) you would’ve beaten inflation by 8% and also would’ve beaten Treasuries.

  11. Hi Chaz – I agree. A balance is best. I get nervous when I hear of people touting one investment or another as being an “all weather” investment. That’s happening a lot these days with stocks. My fear is that each bull market breeds its own cohort of perma-bulls, often comprised of people who have never experienced a protracted decline or crash. We’ve seen that in stocks, real estate, gold and even certain stock sectors. Sure you can recover and go on IF you hold on forever, but human emotion and personal circumstances DO play important roles in everyone’s life and investing.

    One of the biggest mistakes we can make is in assuming consistent personal prosperity. For example, if a bear market (50%+ decline) in stocks hits, and then you lose your job for a year or more, you’ll likely be forced to liquidate your stocks to survive. That’s not anywhere in the perfect-world investment handbook, but it happens in the real world, and when it does your losses are locked in.

  12. We have always had excellent credit and depended on it for many things. Now I realize the true relevance of the statement cash is king. In 2008, our finances went down the tubes and it has taken us this long to get back on our feet and even consider retirement.

  13. Hi Matt – Working in the mortgage business for many years I came to realize that people were often working a bit too hard on maintaining a high credit score, at the expense of getting out of debt and building up savings and investments. Those become more important than keeping a good credit score when it comes to retirement.

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