One of the worst things that can happen in the early years of retirement is to get hit hard in a market sell-off. And what’s critical isn’t the amount your account loses; it’s the timing of the loss.
If you suffer a big loss at any time during your golden years, you will have less cash/principal available to you. But what is less obvious is the fact that if it happens early on, you’ll have less money growing over a longer period.
And as you’ll see, it is the growth that is the issue.
If you run the compounding numbers and assume a drop in your portfolio of 10% or 15% in the first few years of retirement, you’ll see it has a negative effect on your account value for the rest of your life. There won’t be as much money growing, and down the road you’ll have less principal than you might have assumed.
And the earlier in retirement it happens, the greater the long-term negative effect will be.
That’s five years of virtually no growth while your account came back. And if you cut and ran, and established losses – as many did – your future account value took a giant, permanent hit.
Anyone who has already crossed over from the working world can tell you that the money side of the equation is scary. There are no more paychecks coming in. Except for whatever growth you can generate, what you have is all you’ll ever have.
With this scenario in mind, I have to question the wisdom of boomers’ spending habits early in retirement.
Experts tell us that in the first few years of retirement, our rate of spending actually increases above what it was during our last few working years.
It’s been described as a celebration or release reaction to being out from under the daily grind. Now we have the time and money to travel and do the things we put off for so long.
But the costs of taking those trips of a lifetime or building your dream home can get out of control. And after the spending party is over, just as with a sell-off, there is less principal growing for future expenses.
But unlike sell-offs, we can anticipate our spending and plan for it – or preferably limit it.
Before you add all those expensive extras to that dream house, take off on that five-digit around-the-world cruise or join that golf club with the huge buy-in fee, take a step back. Celebrate your new freedom the same way you’ve behaved for the past 40 years: thoughtfully.
The words “all you’ll ever have” have to be in the back of our minds and must guide our spending and saving decisions now – and hopefully in retirement.
We should enjoy our newfound freedom, but take it easy out of the gate. It will be a long time for most of us until that last checkout. We’ll need everything we can muster to pay all those bills.
So keep as much cash growing for as long as you can.