Do You Have Time?
While watching the news last week at the end of a day in which broad stock market prices fell 1.2%, the reporter interviewed three retirees to get their reaction to the day’s events.
Each person interviewed echoed a similar problem they believe they had: “I’m worried. At my age, I don’t have time to make it back.”
The next morning, a leading headline and story on Wall Street Journal’s Market Watch website echoed the exact same sentiment spelled out by those three retirees who were interviewed:
Stock Prices in Free Fall Again:
Retirees Worried They Don’t Have Time
The story then captured a quote from a retiree I’ve heard too many times to count:
“Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 70 years old. I don’t have time to make up for any losses.”
Does this sound familiar? Have you ever had a similar thought?
If you have, I can assure you that you’re not alone. I can also tell you that it is unnecessarily in the way of you enjoying the Relaxing Retirement you deserve.
Whenever markets correct, as they recently have, the investment time horizon for the majority of retirees in America quickly shrinks.
While increases in market prices over their lifetimes are typically met with reservation, i.e. “it can’t or won’t last”, decreases in market prices are greeted with the gut feeling of permanence, i.e. “it sounds really bad this time. I don’t think it will ever come back in my lifetime!”
If you study financial news reporting, you will find a version of this story during every market correction. So much so that the “we don’t have time to make it back” mantra is treated as an indisputable fact, one which governs investment decisions for the majority of Americans during their retirement years.
I’ve heard it so many times that I decided to do a little research for you to see if this dominant sentiment is supported by facts.
Our Shared Problem
As we review some critical facts, it’s important that our shared problem is at the forefront of our minds since it is the reason we all choose to invest and subject ourselves to market volatility in the first place. As we’ve alluded to many times in the past, our shared problem is two-fold: rising costs and longevity.
We live in a rising cost world. In order for us to maintain our chosen lifestyle, our income must increase substantially over our lifetime. And, our lifetime is a lot longer than it was a generation ago as you’re about to discover.
This is not a “want”. This is a “need”. Our income must increase. And, in order for our income to increase (to offset inflationary costs over our lifetime), the assets we own in our Retirement Bucket™ must increase in value over the course of our lives to generate that lifestyle sustaining income.
In short, our shared problem is a long term problem, not a short term one. If our lifespan truly is that short as the quote suggests, market corrections are of no significance.
First, we wouldn’t own equities because equities solve a long term problem.
And second, although potentially uncomfortable to think about, if we did own equities and market prices temporarily dropped right before our demise, our beneficiaries would inherit and maintain ownership of them while prices corrected back.
How Long is Long Term?
With all of this talk about time, i.e. “I don’t have time to make it back”, let’s examine the facts about just how long is “long term” using Average Life Expectancy information from mortality tables used by life insurance companies and social security.
For clarity, a few highlights:
- Life expectancy for a 60 year old male is 44 years, and 24.37 years for a female. However, their joint life expectancy, i.e. the average life expectancy for the survivor in a 60 year old couple is 31.8 years, i.e. just shy of 92 years of age.
- For a 70 year old couple, their joint life expectancy is 6 years.
- For an 80 year old couple, their joint life expectancy is 5 years.
- For an 85 year old couple, their joint life expectancy is 1 years.
- At age 75, the average life expectancy for a male is 94 years, and 12.76 years for a female.
Take a moment to let these facts sink in.
Assuming for a moment that you are just “average” (I know that our members are well above average in many respects), where are you in these numbers?
For example, if you’re a 70 year old couple, your number is 22.6 years, so your personal investment time horizon is 22.6 years!
Stock Market Corrections
With your investment time horizon firmly in your mind, now let’s examine historical market corrections.
Since 1928, market prices have fallen 10% or more (the definition of a correction) on 87 separate occasions, and 20% or more (the definition of a ‘bear market’) on 23 separate occasions.
The average length of time for market prices to return from their bottom back to their pre-correction price level is 111 days. Since those are trading days, that means 5 months.
Yes, you read that correctly. 5 months!
Investment Time Horizon
With these historical facts, let’s now return to those Average Life Expectancy facts and your investment time horizon to determine if the often heard quote, “Investing for the long term sounds great when you’re in your 30s, 40s, or 50s, but I’m 70 years old. I don’t have time to make up for any losses” is valid for you.
Let’s assume for a moment that you have followed The Relaxing Retirement Formula™, i.e. you have determined what it costs to support your lifestyle, and how much of that must be withdrawn each year from your Retirement Bucket™. You have set aside multiple years worth (5 is a very safe number) of your anticipated withdrawals in money markets and short term income instruments, and properly diversified the rest across a spectrum of equity asset classes.
If you are that 70 year old man and you are single, your investment time horizon is 14.13 years. If you are a woman, it’s 16.33 years. If married, it’s 22.6 years. In either case, is the “I don’t have time to make it back” mantra factually valid? No!
Even if it took five years for market prices to return, which is twelve times longer than the historical average, you would not have had to sell any of your equity holdings at a loss to free up funds to support your needed withdrawals because you already had those funds set aside outside of equities.
The reality is that your investment time horizon is a lot longer than you may think, and if you follow The Relaxing Retirement Formula™, you do have time!
Knowing this should give you enormous confidence to spend what you have planned to spend no matter what the current market conditions are at the moment.