By Josh Katzowitz, WCI Content Director
Dr. LH, a psychiatrist from Illinois, is set to retire on June 8. Many months ago, when she planned the final days of her working life, she probably couldn’t have predicted that the market would have fallen so harshly so quickly. She couldn’t have known that, just before she was to give up the steady paycheck she’d held for many years, inflation would be at its highest point in four decades (making all that saved cash worth less) and that Wall Street was growing closer to an official bear market with a potential recession on the horizon.
Naturally, she’s nervous.
“Yes, very,” Dr. LH told me recently. “I am too young to have gone through the Depression, but all my relatives went through it. I have wondered if the stock market is slowly burning down. Time will tell.”
Since the beginning of the year, the S&P 500 has dropped nearly 19%, the Nasdaq has fallen close to 30%, and the Dow has lost nearly 15%. If your portfolio is stock-heavy, you’ve probably lost a good chunk of your wealth in the first five months of 2022. Your 401(k) might feel like it’s cratering. Your taxable accounts might have sunk to depressing lows. Your net worth . . . well, it’s probably best not to be looking at your net worth.
If you’re a mid-career doc or, even better, if you’re early in your career or just coming out of medical school, this is welcome news. This oft-used quote from Dr. William Bernstein should become your financial mantra: “If you are in the accumulation phase of investing, you should get on your hands and knees and pray for a bear market so you can buy cheap stocks.”
Those docs in their 60s and 70s, though, are probably praying for something else.
Retiring in 2022 with High Inflation and a Potential Bear Market
What if you’re about to retire, and suddenly the market turns nasty? What should a high earner like Dr. LH be doing? In her case, she said she’s been doing less DYI investing and seeking more professional advice. She’s also trying “to have a variety of investments that span from short term to long term, and [trying] to be ready for growth as well as value periods, if possible.”
Chris Hansen, a CFP and the founder of WCI-approved Personal Choice Financial Advisor, had two clients retire in the last month. But Hansen isn’t worried about their finances. It’s because Personal Choice preaches the idea of guardrails, where a client’s rate of withdrawal can oscillate between a ceiling (so that you’re spending enough where you don’t leave behind a bank vault stuffed to the brim with money) and a floor (so that you can decrease your spending so that you don’t actually run out of money).
If the stock market is bullish and the portfolio’s value rises above that upper guardrail, you can increase your retirement withdrawals by 10%. No problem, no worries. If the stock market tanks and your portfolio falls below the lower guardrail, you can decrease your withdrawals by 10%. Either way, you should still have plenty of money for the rest of your life.
“It boils down to if you use common sense, you’re going to be OK,” Hansen told me last week. “Right now, we have high inflation and the market going down. Sometimes things do go badly, sometimes you hit a line where you really are in jeopardy. But our clients have a plan, and they can say, ‘I know that Chris has told me multiple times that when the market tanks and we hit this specific line on the guardrail, here’s what we’re going to do.’ Maybe you’re taking out $9,000 a month. If we hit that guardrail, we’ll change that and take $8,100 a month. We’re going to take a 10% pay cut.”
What you shouldn’t do is get out of the stock market completely.
“Retirees are in a tough spot,” Darrell Pacheco, a CFP in Virginia, told NPR. “. . . When it comes to folks and their money, we know that high anxiety usually tends to lead us to make bad decisions.
“Your best hedge against inflation is to remain invested. Period.”
The 4% Rule and the Sequence of Returns Risk in Retirement
The 4% withdrawal rule, which posits that you’ll most likely have enough money to last a 30-year retirement if you withdraw 4% of your portfolio every year, has been the rule of thumb since the end of the last century. But some who retire in their early 50s are withdrawing less per year, perhaps in the 3% range (or maybe 3.5%). Some who already have a high net worth withdraw more than 4% because they already have more money than they can reasonably spend over the next few decades.
Hansen said he tells many of his clients that they can withdraw as much as 5%, though that can cause a mental block for some.
“Most people don’t want to start at 5%,” he said. “Sometimes we say you can take out $10,000 per month. And they’re taking out $6,000 instead.”
But the sequence of returns risk, where your chances of running out of money are higher if the market falls dramatically at the beginning of retirement (because you lose so much money early in your retirement with no way to replenish it) is applicable to those who are retiring now.
Yet, Hansen said, you need to stay active in the stock market regardless. Trading an 80-20 stock-to-bond portfolio in favor of something like 30-70 after you retire is a recipe for disaster. That’s why he said most of his clients are at least 70%-80% still in stocks.
“If you’re 50 years old, you still need 50 years of return,” he said. “You’re not going to get that from a bond market.”
Particularly since the bond market, with the exception of inflation-backed bonds like I Bonds, has also tanked so far in 2022.
Need more proof to stay in equities? In a study published in the Journal of Financial Planning in 2006, the authors concluded that—based on data from the periods of 1973-2004 and 1928-2004—a withdrawal rate of between 5.2%-5.6% has a 99% confidence rate of sustaining a 40-year retirement if the stock allocation in that portfolio is at least 65%. According to the authors, an “80% equity allocation provides greater purchasing power maintenance at slightly lower success rates, but with 50% equities [in your portfolio], maximum initial withdrawal rates drop to as low as 4.6%.”
In other words, even if you’re set to retire now, you still need to be investing heavily in the stock market.
But retirement and figuring out how much to withdraw, whether you’re in a bull or bear market, isn’t an easy question to answer. Oftentimes, it’s tough to mentally tell yourself it’s OK to take out the appropriate amount of money. Especially, if like Dr. LH, you are hoping your retirement portfolio can beat inflation until she’s 95 years old (even though her net worth today is in the six figures).
After a recent bad day in the market, she said, “Feels like everything took a beating today.”
You could almost hear her sigh on the other end of her message. Dr. LH hasn’t ruled out returning to part-time work if money gets tight. Yet the journey to make her money last in choppy retirement waters is making her, and everybody else in the same boat, a little motion sick.
What I’m Reading This Week
A Lucrative Side Gig
Here at The White Coat Investor, we espouse the idea of paying off student loans as quickly as possible by living like a resident for 2-5 years and saving 20%-25% of your income. Or maybe you can just sell clothes online.
That’s what Oliva Hillier, a medical student at Oakland University in Michigan, did.
Worried about having to repay loans from her four-year tuition fee of $220,000, Hillier began a side hustle by flipping trendy clothes on the Poshmark app.
“If I wouldn’t have had this business, I wouldn’t even have a savings account,” Hillier, who is beginning a family medicine residency, told CNBC. “And I’d have to take out loans to cover my living expenses, on top of tuition.”
Hillier said she made $85,000 from her side gig last year, and it allowed her and her husband to pay a down payment and closing costs (about $25,000 in total) on their new home.
Here’s how she managed to do it, via CNBC.
Though the markets are faltering and high inflation seems to be choking the economy, here’s another look at just where we’re coming from. According to the New York Times, modern times are pretty darn great for a huge swath of Americans. Especially for those 22 million Americans who are now millionaires (up from less than 15 million in 2014).
As David Streitfeld writes,
“This boom does not get celebrated much. It was a slow-build phenomenon in a country where news is stale within hours. It has happened during a time of fascination with the schemes of the truly wealthy (see: Musk, Elon) and against a backdrop of increased inequality. If you were unable to buy a house because of spiraling prices, the soaring amount of homeowners’ equity is not a comfort.
The queasy stock market might be signaling that the boom is ending. A slowing economy, renewed inflation, high gas prices and rising interest rates could all undermine the gains achieved over the years. But for the moment, this flood of wealth is quietly redefining retirement, helping fuel Silicon Valley and stoking a boom in leisure and entertainment. It is boosting corporate profits by unprecedented amounts while also giving just about everyone the notion that a better job might be within reach.”
Blame the Celebs!
Who’s to blame for the recent cratering of cryptocurrency? Matt Damon, obviously, according to SiliconValley.com.
As one astute Twitter user noted, “If you bought $1,000 of a Bitcoin ETF when Matt Damon's ‘Fortune Favors the Brave!’ crypto ad premiered on October 28 last year, you would now have $554.”
If I were in that boat, I would certainly not be liking them apples.
Money Song of the Week
The biggest news to come out of Bon Jovi’s latest tour is that 60-year-old singing superstar John Bongiovi Jr. has struggled mightily with his voice. A few weeks ago, I saw the band live, and yes, the rumors are true. Though the band tried a plethora of tricks to hide his vocal flaws (keeping him low in the mix, turning up the volume on the mics of those performing backing vocals, the band playing in a lower key, and letting the crowd sing along on some of those high parts), it’s obvious that Jon Bon Jovi has lost something vital.
Fellow musicians have speculated that his voice sounds tired. Others wonder if his past battle with COVID has permanently affected him. Or maybe he’s just not the same singer he was when he was a 24 years old.
Which happens to be the age when he put out the most iconic song in the Bon Jovi catalog, Livin’ on a Prayer. It’s a song that details the struggles of Tommy, the dock worker who's an aspiring rock star, and Gina, the waitress, and how they’re holding on to what they’ve got and how it doesn’t really make a difference if they make it or not because they’ve still got each other and they’re still going to give it a shot.
As UK-based guitarist Sam Russell wrote on his blog, “What I love with these lyrics, is you hear Tommy and Gina working together as a team. In the first verse, Tommy is down on his luck, and Gina re-assures him. In the second verse, Gina cries out in the night and Tommy reassures her. Living in a time when various special interest groups seem determined to make men and women hate each other, it’s beautiful to be reminded that men and women work best as a team, together, working toward a mutual goal.”
That, of course, includes working together to become financially independent. As an aside, Jon Bon Jovi was worth $410 million in 2016. He’s been married to the same woman since the late 1980s. There’s something to be said for that.
Anyway, I was never a huge Bon Jovi fan, but I’ve seen the band live a few times over the past couple of decades, and Jon Bon Jovi, no matter what you think about his singing (now or even back in his heyday), has always been one heck of a frontman. As you can see in this video, taken at a live show from 1988 that shows Jon Bon Jovi at his most energetic. He might not be fun to listen to these days, but he's always been fun to watch.
Tweet of the Week
You’ve gotta be prepared for that market turbulence. And it’s better to learn when you’re still in diapers.
Proud dad tweet. Taught my 3 Y.O about investing this morning. He could either have half a gummy prior to nursery or he could leave it there and have 2 in the afternoon. He chose the latter. So proud! I ate them both once he left though because #volatility
— VIK (@Vik60421368) August 3, 2021
If you’re set to retire soon, are you worried about the current market? What are you doing about it? If you’re early- or mid-career, are you ecstatic about the potential for a bear? At this point, would you drop $200 on a Bon Jovi ticket? Comment below!
[Editor's Note: For comments, complaints, suggestions, or plaudits, email Josh Katzowitz at [email protected]]