2926: Put Your Money Fears in Perspective by David Champion with Can I Retire Yet on Retirement Advice

[00:00:00] This is Optimal Finance Daily, Put Your Money Fears in Perspective by David Champion with CanIRetireYet.com. And I'm your host and personal finance enthusiast, Diana Merriam. Without further ado, let's get right to today's post and continue optimizing your life.

[00:00:22] Put Your Money Fears in Perspective by David Champion with CanIRetireYet.com.

[00:00:30] Suppose I stepped into a time machine that took me back to my drab corporate cubicle circa 2019.

[00:00:38] Say I was greeted there by an oracle who foretold that in a year's time, a deadly pandemic would paralyze the globe, and that by 2023, violent conflicts would threaten to engulf Europe and the Middle East in regional or even world wars.

[00:00:56] Given that knowledge, would I have retired? I'm pretty sure the answer is no. I would not have risked a retirement whose success depended on financial markets so vulnerable to the caprice of world events.

[00:01:10] How could my portfolio survive a once-in-the-century pandemic and two existential wars, much less provide returns sufficient to fund 40 years of retirement?

[00:01:23] Obviously, I could not have known then what I know now.

[00:01:27] In fact, I did cast my lot to the whims of the financial markets.

[00:01:33] Yet despite five years of regular withdrawals, my portfolio is worth more today than it was the day I retired.

[00:01:41] Does this mean the bottom can't yet fall out of the markets, say, in the next five years?

[00:01:46] The wars in Europe and the Middle East could spiral out of control.

[00:01:50] Or a new one in the Far East might draw the United States into a costly, even existential conflict.

[00:01:57] But as Mark Twain once said,

[00:02:00] Worrying is like paying a debt you don't owe.

[00:02:03] I have spent most of my life worrying about things that never happened.

[00:02:08] Hero to Zero

[00:02:09] I'm asked all the time how I handled the transition from being a wage earner to a zero-income self-funding retiree.

[00:02:19] The answer is that the first few years were terrifying.

[00:02:23] Imagine my horror in early 2020 when the S&P 500 lost over a third of its value in just two months.

[00:02:32] But the fear of outliving my savings has abated.

[00:02:35] With five years of data in the rearview mirror, the upshot is that with no earned income and with an annual withdrawal rate averaging 4.1%,

[00:02:46] my net worth is 6.3% higher today than it was when I retired.

[00:02:52] Again, and this is the crucial point here,

[00:02:55] I can report this outcome despite one of the scariest rides in recent history.

[00:03:01] The fact that I am five years older puts me further at ease because I now have less time to spend down my savings.

[00:03:09] Magical Thinking

[00:03:10] If thought experiments, personal anecdotes, and or pithy quotations aren't enough to convince you the way forward is safe,

[00:03:20] you can try to make a reasonable forecast.

[00:03:23] One approach is to backtest a portfolio against the historical record.

[00:03:28] The 60-40 portfolio

[00:03:31] Suppose you retired in 1987 with a 60-40 U.S. stock bond portfolio worth $354,000,

[00:03:40] the equivalent of a million dollars in today's dollars.

[00:03:44] If you had stuck religiously to Bill Benjen's 4% rule,

[00:03:49] not only would you never have run out of money,

[00:03:51] your portfolio would be worth roughly $1.3 million today.

[00:03:55] Yet the period from 1987 to today featured a slew of market meltdowns.

[00:04:03] Black Monday in 1987,

[00:04:05] Russian debt default in 1998,

[00:04:10] dot-com crash in 2000,

[00:04:12] subprime mortgage crisis in 2008,

[00:04:16] and the COVID-19 recession in 2020.

[00:04:20] In each case, the markets bounced back,

[00:04:23] with an average recovery period of just 21 months for the 60-40 portfolio.

[00:04:28] The risk of not retiring

[00:04:31] If you have amassed savings sufficient to fund your spending needs for 30 years or more,

[00:04:37] and you have the willingness, ability, and discipline

[00:04:40] to dial down your spending from time to time,

[00:04:43] you should be able to withstand all but asteroid-level events given this track record.

[00:04:50] And if an asteroid does strike,

[00:04:53] then working longer might be the biggest mistake you ever made.

[00:04:57] Timing your retirement is like timing the market.

[00:05:01] The naysayers among you might scream,

[00:05:03] you haven't considered sequence of returns risk.

[00:05:07] Suppose that instead of 1987,

[00:05:10] a year followed by a long period of relative prosperity,

[00:05:14] you had retired in 2000,

[00:05:16] at the dawn of the dot-com bust.

[00:05:19] The longest-lived of the aforementioned meltdowns,

[00:05:22] this one would have held your portfolio underwater for 41 months.

[00:05:26] Yes, the story would be different,

[00:05:30] and you'd have ended up with a portfolio worth just $345,000 today

[00:05:35] had you applied and stuck to the 4% rule.

[00:05:39] But how could you have known?

[00:05:41] Trying to time your retirement is like trying to time the market.

[00:05:45] If you happen to get it right, it'll be blind luck.

[00:05:48] More likely, that extra three years you worked

[00:05:52] returns something closer to the 8.8% your 60-40 portfolio has averaged since 1987.

[00:06:00] Social Security to the Rescue

[00:06:02] Have I mentioned the least risky,

[00:06:05] inflation-adjusted annuity you've already paid for?

[00:06:09] Yes, I'm talking about Social Security.

[00:06:12] The whole point of Social Security

[00:06:14] is to supplement your savings in retirement,

[00:06:16] to serve as a safety net.

[00:06:18] To the unlucky Y2K retiree,

[00:06:22] Social Security would have come through in spades

[00:06:24] the instant they became eligible to file for benefits.

[00:06:28] Try to avoid regrets.

[00:06:31] A proverb I invoke frequently on long-distance hikes,

[00:06:35] to the enduring disgust of my hiking companions,

[00:06:38] is that while it's good to learn from one's mistakes,

[00:06:42] it's better to learn from the mistakes of others.

[00:06:44] That's why I always insist they go first

[00:06:47] when negotiating a narrow canyon or a cliff's edge.

[00:06:51] The same can be said of regrets.

[00:06:53] According to at least one informal survey,

[00:06:57] 70- and 80-year-old retirees

[00:06:59] counted the following among their top five.

[00:07:02] Number one, not retiring earlier.

[00:07:06] And number two,

[00:07:07] not spending more in early retirement.

[00:07:10] While oracles of the kind introduced

[00:07:13] at the beginning of this post may not exist,

[00:07:15] these older retirees are a pretty close second.

[00:07:19] What can we learn from them?

[00:07:21] For one thing,

[00:07:23] their money fears were overcooked.

[00:07:25] For many who still work,

[00:07:27] the only thing standing between them and their dreams

[00:07:29] is the perceived vulnerability of their nest eggs.

[00:07:33] As is the case with so many of our fears,

[00:07:35] we exaggerate it to our detriment.

[00:07:42] You just listened to the post titled,

[00:07:45] Put Your Money Fears in Perspective

[00:07:47] by David Champion with CanIRetireYet.com

[00:07:51] and I'll be right back with my commentary.

[00:07:54] Stepping away from earning an income

[00:07:56] and actually drawing down on a portfolio

[00:07:59] is a nail-biting transition for most retirees.

[00:08:03] Even when you know logically that you have enough money,

[00:08:07] even when you're confident in your asset allocation

[00:08:10] and your drawdown strategy

[00:08:12] and you've thought through all the ways you can be flexible,

[00:08:16] even when you come up with plans B, C, and D

[00:08:20] in the event the market does what the market does,

[00:08:24] it's still a very hard transition.

[00:08:27] You've spent your entire working life

[00:08:29] earning and saving money.

[00:08:31] Those are ingrained habits

[00:08:33] and you're good at them.

[00:08:35] At the flip of a switch,

[00:08:37] that whole dynamic changes

[00:08:39] and for many people, it's very uncomfortable.

[00:08:42] I experienced this in a small way

[00:08:44] when I retired from my corporate career.

[00:08:47] I have not yet started drawing down on my portfolio,

[00:08:51] but I went from having a full-time job

[00:08:53] with a six-figure income

[00:08:54] plus a side hustle and a risky business I started

[00:08:57] to just having the side hustle and a risky business.

[00:09:01] Even though my expenses were minimal

[00:09:03] and I was able to cover them

[00:09:05] with just four hours of paid work per week,

[00:09:07] my income dropped by about $100,000.

[00:09:11] It was a shock to the system

[00:09:13] to no longer have such a large gap

[00:09:16] between my earning and my spending.

[00:09:19] Initially, scarcity mindset set in

[00:09:21] and I became hyper-vigilant about my spending.

[00:09:24] But over time, I was able to relax

[00:09:27] and get accustomed to my new normal.

[00:09:30] It's been almost four years.

[00:09:32] My risky business, which is the Economy Conference,

[00:09:35] is much more financially stable

[00:09:37] and I've become much more confident

[00:09:39] and comfortable with making less money.

[00:09:42] What I've lost income-wise

[00:09:45] doesn't even compare to what I've gained.

[00:09:48] I now have full autonomy over my time

[00:09:50] and I get to work as little or as much as I want.

[00:09:54] But that'll do it for today's episode.

[00:09:56] Have a happy rest of your day

[00:09:58] and I'll be back with you again tomorrow

[00:10:00] where optimal life awaits.