Boomers are in a tough spot. They’ve had two of the most severe stock market declines in the past 80 years and now they are in an investing environment with fixed income rates (such as on CDs or savings bonds) that haven’t been this low in their lifetimes. To make matters worse, inflation has been (quite amazingly) relatively stable. Going into the financial crisis, one could have justly guessed that we’d see either prolonged deflation or elevated inflation. Briefly we saw deflation, which became very low inflation and recent numbers suggest we’re back around the target inflation rate of 3%.
Financial management becomes difficult when you are tired of the volatility but on the other hand know that to stay in cash means seeing your purchasing power erode at whatever the inflation rate is (assuming that your cash is earning nothing, which is close enough to accurate these days).
People who’ve identified this duality have won half the battle. For those retiring or about to retire they have to first identify the risks on both sides of the spectrum. But more than anything, the task before them can be boiled down to the goal of having your funds grow at a rate that increases their ability to purchase goods. Secondly, it’s identifying what those goods are and more importantly when they will be purchased. To plan to buy one month of groceries in the year 2017 is a different financial target than the same bag in the year 2032. This is a huge tool for self-therapy during volatile markets and when market prices are on the decline. If you don’t plan to use the money for the next five or so years, often the most responsible thing to do is to not look at it apart from making sure that it is balanced and diversified. Sometimes people can be in investments that should be reconsidered, but often this is of secondary importance to staying in the market.
During early 2009 when the market was sitting on a 50%+ decline, I’d sometimes have freshly minted adults in their early twenties asking me if they should sell out. I’d ask them if the Cuban Missile Crisis keeps them up at night? Are they worried about the nuclear standoff in the early 60s? They’d huff a bit and inevitably say “no”. I’d go on to tell them that when they retire 40-50 years from now that this market downturn will feel closer to a historical event. Not only this but that you’re going to be far more likely to look back at that low point in the market and regret not having put more money in than regret pulling money out. Truth be told, when I look at my career, the advice that I gave to this early twenties investors may have the most dramatic impact of anybody I’ll come across. If I was able to successfully talk them out of panicking out, it could have a big impact – mostly because of how long their investing horizon is.
For baby boomers and their financial management, the mindset is not radically different. The reality is that if you are 62 (the average age for retirement) and you are married or a couple, your joint life expectancy is 92 (meaning the average age of second to die). Of course this can change person to person if you smoke, or are overweight or live in Denver versus the Congo. Generally speaking, retirees face a 30 year objective. If you look at your portfolio, what percent of it will be spent within the next five years or even ten years? Even if you are assuming no-growth and no-inflation, anywhere from 66-83% of it isn’t going to be spend on a short term basis. If you account for larger dollar withdrawals in your later years and that usually stocks grow even in short periods of time, it draws out that in reality, most of your portfolio (as in more than 80%) is not going to be spent anytime soon.
The key takeaway is the baby boomer financial management needs to embrace that just looking at averages you still have a long term objective even if you are retiring. It would be a mistake to paddle around in cash as you are locking in purchasing power losses at whatever the inflation rate is.