But, I Don’t Have Time to
Make it Back
Good Morning Relaxing Retirement Subscriber,
Most Americans walk proudly and carefree when market prices are climbing.
Risk becomes irrelevant. Strategic asset allocation looks boring, and disciplined diversification gets called into question because some asset classes outpace others. Many begin to lament not having all of their money in the winning asset class over the last year.
The fact that markets correct all the time and have experienced many ugly stretches during their historic long-term climb is a distant memory.
And, then………the market hiccups!
We experience a normal, garden variety correction, like the 14% intra-year price drop we’ve experienced each year on average over the last 38 years.
The financial media jumps at the golden opportunity to increase viewership ratings by stirring the pot and perpetuating the myth that “this time is different.”
Microphones are placed in front of innocent retirees who claim, “I’m worried. At my age, I don’t have time to make it back.”
“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 experience sharp corrections during their retirement years, the investment time horizon for too many Americans quickly shrinks.
While increases in market prices are typically met with apathy as I mentioned above, or reservation, i.e. “it can’t or won’t last”, sharp declines 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.
However, this dominant sentiment is not supported by facts.
Long Term Purchasing Power
We invest to solve a long-term problem, not a short term one. And, that problem is purchasing power.
Take a look at what you spend money on. If history is any guide, outside of a few items, prices will be significantly higher in the future if for no other reason than the stated goal of the Federal Reserve is an inflation target 2% per year.
Given this, in order for us to maintain our desired lifestyle, our income must increase substantially over our lifetime. This is not a want. This is a need.
Our income must increase. And, in order for our income to increase, our Retirement Bucket™ must increase in value over time in order 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, stock market corrections would have 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:
- Life expectancy for a 60-year old individual is 25.2 years. However, the joint life expectancy of a 60-year old couple, i.e. the average life expectancy for the survivor in a 60-year old couple is 30.9 years, i.e. just shy of 91 years of age.
- For a 70-year old couple, their joint life expectancy is 21.8 years (age 91.8)
- For an 80-year old couple, their joint life expectancy is 13.8 years (age 93.8)
- For an 85-year old couple, their joint life expectancy is still 10.5 years (age 95.5)
Take a moment to let these numbers sink in.
Assuming for a moment that you are just “average” (chances are very good that if you’re reading this you’re well above average), where are you in these numbers?
For example, if you’re a 60-year old couple, your number is 30.9 years, so your personal investment time horizon is 31 years! If you’re a 70-year old couple, your investment time horizon is still 22 years, i.e. the length of time your Retirement Bucket™ must last!
Stock Market Corrections
With your investment time horizon firmly in your mind, now let’s examine historical market corrections and the amount of time it took to “make it back.”
** For simplicity, we will use the S&P 500 Index as a proxy for the market as it provides a long history to track and encompasses a large portion of the market value.
From 1945 through 2019 (74 years after World War II ended), there have been 93 market pullbacks of significance (5% or more):
- 59 of them were between -5% and -9.99% with the average drop of 7%. It took average of one month to fall 7% and two months to recover back to the original price before the drop.
- 22 of the pullbacks were between -10% and -19.99%, with an average of price drop of 14%. It took an average of 5 months to reach the bottom, and 4 months to recover back to the original price before the drop. (The most recent 19.8% drop took place from September 26 through December 24 in 2018, and prices fully recovered by the end of the first quarter of 2019.)
- Of the remaining 12 pullbacks, 9 of them were between -20% and -39.99%, with an average of price drop of 26%. It took an average of 11 months to reach the bottom, and 14 months to recover back to the original price before the drop.
- Adding those three together illustrates that 90 of the 93 pullbacks over the last 74 years have fully recovered in 14 months or less, with 81 of them (87%) recovering in 4 months or less.
- Finally, 3 of the pullbacks were over -40% (including the two recent ones between 2000-2002 and 2007-2009), with an average price drop of 51%. It took an average of 23 months to reach the bottom, and 58 months to recover back to the original price before the drop.
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 precisely what it costs to support your desired 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 to start with) of your anticipated withdrawals held outside of your stock related holdings, in money markets and short-term fixed income instruments which do not experience volatility levels like stocks.
You then strategically and broadly diversified the remaining balance of your Retirement Bucket™ across a spectrum of stock asset classes using cost-effective index funds weighted toward areas of higher expected return.
And, you allowed all dividends you receive to accumulate in your money market to support your anticipated withdrawals instead of being reinvested. (**a very important distinction**)
If you are that 60-year old couple, your investment time horizon 30.9 years! If you’re that 70-year old couple, your investment time horizon is still 21.8 years. In either case, is the “I don’t have time to make it back” mantra factually valid?
Even if we experienced what has happened only three times in the last 74 years and it took 58 months (just shy of five years) for market prices to return, you still would not have had to sell any of your stock based holdings at a loss to free up funds to support your needed withdrawals because, in addition to allowing your dividends to build up in your money market, you already had those funds set aside outside of stocks.
The reality is that your investment time horizon is a lot longer than you may think, and if you adhere to 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.
Committed to Your Relaxing Retirement,
The Retirement Coach
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Thank you for the trust you place in us.
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)