Volatility and Confidence

Good Morning Relaxing Retirement Subscriber,

While attending Schwab’s Impact Conference for advisors in Washington, D.C. last month, an executive at a very large and well-known investment firm asked me what Relaxing Retirement Coach does.

My answer was simple.  I told him we do a lot, but it all boils down to supporting two crucial goals:

  1. First, we help those who have done a wonderful job saving money all their lives confidently liberate and spend their own money, i.e. their Retirement Bucket they’ve built, so they can live the life they’ve earned without depending on the income from work to support their lifestyle.
  2. Second, in order to accomplish that, we do everything we can to help them feel comfortable with necessary and normal market price volatility by following a disciplined system.

He was slightly taken back, especially with the first part of my answer, so he asked me to expand a little.

The Phenomenon

What I shared with him on the first part was a phenomenon I’ve witnessed our members experience first-hand for three decades.  While most younger Americans might struggle comprehending this, you likely know exactly what I’m referring to.

One of the biggest challenges in anyone’s life is to go from working, receiving a paycheck, and saving money your whole life…to no longer receiving that paycheck from the work you do.

And, to make matters even more challenging, you then have to withdraw and spend the Retirement Bucket you’ve taken your entire life to build in order to support your lifestyle!

For those, like our Relaxing Retirement members, who developed the disciplined habit and took pride in aggressively saving money during your working years, it’s even harder.  Flipping the switch and now spending the money you’ve saved just doesn’t feel normal.  It feels strange, and thus, requires a lot of confidence.

The big challenge, then, for the disciplined accumulator is that all those years of aggressively building up your Retirement Bucket are of no use to you now unless you have the financial confidence to spend it.

This is why we began crafting custom designed Retirement Blueprints for all of our members decades ago, taking into consideration all priorities and resources, before deciding on your Retirement Bucket Strategy for investing.

Doing so has consistently answered two of the three questions we receive the most: Do we have enough? And, how much can we afford to spend?

The third question we’re most asked gets us to the second goal I stated about market price volatility: How can we make it last?

Confident Despite Volatility

In order to make your Retirement Bucket last over the remainder of your life, there’s a huge distinction about the word risk that most Americans lose sight of, in large part due to the massive amount of misinformation in the financial media, especially during market downturns like October.

The biggest risk you face on the road to making your Retirement Bucket last is not market volatility, corrections or crashes.  History has repeatedly demonstrated that they have virtually all been short lived.

As a quick refresher, using the S&P 500 Index as a proxy for the market for a moment, since 1945 (73 years after World War II ended), there have been 91 market pullbacks of significance:

  • 56 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.
  • 23 of the pullbacks were between -10% and -19.99%, including two already in 2018, 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.
  • 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 88 of the 91 pullbacks over the last 73 years have fully recovered in 14 months or less, with 79 of them (86%) 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.

In spite of all of this “volatility”, the price of the S&P 500 Index over those 73 years has risen from 13.49 to 2,711.74 at the end of October, 2018, or more than 201 times in value.  And, this does not include dividends which adds many more times to that figure.

What all of this demonstrates is that while market volatility and crashes can feel scary, they are not the biggest risk you face, especially if you strategically plan for them.  (More on that in a minute)

The Biggest Risk You Face

The biggest risk you face is having your income keep pace with rising lifestyle costs.

For simplicity using nice round numbers, even at modest 3% annual inflation, a 62-year old couple who currently spends $100,000 per year will need $243,000 per year in the last year of their average life expectancy to support their exact same lifestyle.

A 72-year old couple would still need $186,000 to support today’s $100,000 lifestyle.

Think about that for a moment.  If your income doesn’t rise to meet these rising costs, you either have to make difficult and uncomfortable cutbacks to your lifestyle, or go back to work to make up the difference, something your health could prevent you from doing.

On the flipside, if you continue to draw out the rising income you need, but your Retirement Bucket doesn’t grow fast enough to keep pace, you could run out of money.

This is the big risk you face, and it is what investing is all about.

Legendary investor Warren Buffett once said, “Investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power, after taxes have been paid, in the future.”

Dealing with Temporary Market Setbacks

With all of that said, during months like we’ve just experienced, when stock market corrections occur and the value of your carefully crafted Retirement Bucket declines, even though these statistics demonstrate that market corrections are temporary, it still stings when it happens.

I’ve often said that it’s one thing to see and hear bad financial news.  (And, there has certainly been no shortage of that over the last month or two) It’s quite another when you see the realization of that bad news reflected in your own investment values that you’ve taken a lifetime to accumulate.

As prepared as you believe you were, it may still be a challenge to come to grips with at times.

This is where it’s critically important to remember that the correction we’ve just experienced, and the dozens more like it that you will experience over the remainder of your life, are normal.  And, they have to be strategically dealt with in order to capture the returns you need to keep pace with rising lifestyle costs.


Going back to my conversation at the conference, the key to developing and maintaining the confidence you need to spend what you’ve taken your entire life to save is having a system.  And, a very large and necessary component of that system is a disciplined strategy to deal with normal market volatility in order to capture the investment returns you need to keep pace.

Step One Know what not to invest:  Keep at least five years’ worth of your anticipated withdrawals in money markets and short-term instruments, away from short term volatility of stocks.  And, have all dividends earned flow to your money market to provide even more liquidity.  By having a carefully targeted portion of your holdings outside of short-term price volatility we experience with equities, you buy yourself time….time to hang in there with your equity holdings long enough (without panic selling during temporary market corrections) to capture long-term returns.

Step Two Global Diversification: Play the higher probability percentages of owning a strategically allocated, globally diversified portfolio of thousands of businesses using low cost index and asset class funds which are built to capture the returns of various asset classes is a cost-efficient manner.  By strategically diversifying your holdings in this manner, you position yourself to not only capture the returns of global capital markets as a whole, but also the potential of even better returns by taking advantage of the risk premiums which have been provided by certain asset classes throughout history.

Step Three Rebalance: Markets move a lot which changes your allocation without you doing anything.  To ensure a consistent level of risk exposure, on a very strict timetable, objectively evaluate your current vs. your target Retirement Bucket allocation to determine if there is a need for strategic and disciplined rebalancing.

If you want to confidently liberate The Retirement Bucket you’ve so carefully built, and live the life you’ve earned without depending on the income from work to support you, implement this simple mindset and system to manage normal and necessary market volatility.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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I appreciate the trust you place in us. Thank you!

(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.)