When markets don’t accommodate our retirement

Another instalment in a series of articles detailing how to design a secure, income-producing portfolio – by Andreas Calianos

 
Consider a hypothetical baby boomer named Chuck Price, an optometrist who turned 65 in 2020. Chuck has a spacious home in Connecticut and a condo in Florida. His two kids are still in college, but his mother-in-law is generously covering their tuition. His net worth is around $3 million and he’s accustomed to spending around $250,000 a year. He’s excited about working less, and he’s got a plan to go part-time and sell his practice to a younger doctor.

But right around the time he’s planning to reduce his hours, there’s a big market correction. There’s a slight rebound after that, but then another drop. Now investors are spooked and the trend is downward. Chuck becomes afraid. He postpones his plan to reduce his working hours.

It turns out that postponing his partial retirement was a good idea – because, in the next 18 months, markets decline a jaw-dropping 46% from where they had been before that first big correction.

Chuck’s portfolio was mostly in index funds, so his loss mirrors the market. He can’t believe this is happening, but the portfolio that he’s been funding for decades is down almost 50%, right at the moment when he had planned to kick back. Chuck is ripping his hair out. He realizes that he’s going to have work longer than he anticipated. Dr Price starts to take a hard look at his spending. He concludes that it’s time to sell his big house – the kids are gone anyway – but when he goes to talk to a Realtor he discovers that he won’t get anywhere near what he wants for it, because a lot of other people have had the same idea at the same time.

The local market is flooded with houses just like his. He looks into selling the Florida condo. And he finally acknowledges he’s got to tighten his belt – he and his wife will eat out and travel far less, for starters.

Of course, millions of other people are making the same calculations and the same changes at the same time, so the economy slumps. People hoard cash. Retail sales plummet.

Since the Fed and other central banker were already using most of their tools before the downturn, there’s not a lot that rate-setters can do. Interest rates are already virtually zero, and this is creating a new set of problems.

Chuck’s mother-in-law, who had been paying his kids’ college tuition, is making limited income on her savings accounts. She pays thousands of dollars a week for her assisted-living facility, and without any interest on her savings, she just can’t afford her grandkids’ tuition too. So now Chuck has private-school tuition bills on top of everything else.

And, of course, this stress is not only occurring in private homes. Institutions – including the colleges Chuck’s kids attend – have always had a sizable share of their endowments in fixed income. But now, since there’s no income in fixed income, they need the higher-risk part of their portfolio to generate a bigger return. This is a big problem, too, because their higher-risk stuff took a big hit along with the rest of the market.

And so on, throughout households and institutions across the economy.

The scenario I’m painting may sound pessimistic, but does not yet reflect the extraordinary losses fixed income has endured due to historical rate increases which occurred last year. Point is investors are in a vulnerable position with higher rates depressing the value of their bonds and offering significant headwinds to public and private companies who must borrow.  Whether triggered by the boomers’ retirement or a global event, financial shocks happen like clockwork over the long-term.

Indeed, in the words of the late MIT financial historian Charles Kindleberger, who studied over 300 years of data on the subject, financial crises are a “hardy perennial.” We know they’ll happen, but we don’t know when. Trying to time the market, therefore, is simply not our best bet.

It’s hard to remember a time when ordinary financial planning didn’t have market timing written into its DNA. Today, thanks to modern portfolio theory, the notion that financial planning should be easy – that you can plan your withdrawals based on when you’ll need cash, and that markets will provide the price you need – is omnipresent. Nearly everyone has come to believe that markets simply will accommodate their retirement. But the truth is the market owes you nothing.

A friend of mine belongs to something called the 506 Investor Group, which is a private circle of accredited investors who share their due diligence on nontraditional investments. Many of the group’s members have only a small share of their wealth in stock markets and choose instead to invest in real estate and other hard assets. They know that the market owes them nothing, and therefore they do not make themselves dependent on stocks moving a certain way at a certain time to support them.

The future, I believe, lies in some mixture of my father’s old-fashioned approach and the wisdom of the 506 group, both of which affirm the idea that making money will require some work, and that the best opportunities are a little off the beaten path.

And that’s precisely where we’re now headed in the following articles – with the liquidity myths behind us, it’s time to seek out new opportunity.
 
Published by our friends at