By Brad Thomason, CPA
It takes a lot of money to live a long time. You won’t know until the end exactly how much, because you don’t know when the end is going to be. We’ve discussed this before. But it stands to be a lot.
On the day that you decide to retire you will either have enough money to go the distance, or you won’t. The only way to know for sure (or at least something approaching certainty) is to have so much money that it is likely to last well beyond any remotely realistic life span. If you are 65 and can reasonably fund your lifestyle as you know it today for the next 60 or 70 years, then we can all pretty much assume that’s going to be good enough. Probably 30 years will be good enough (though more people live past 95 than you probably think; and it’s plausible to think even more will do so in the decades to come).
But the point here is that you will have enough money to “overwhelm the problem” (of ongoing expenses), or you won’t.
If you don’t have a high enough portfolio balance to play the overwhelm card, you are going to have to do something which you may not want to do. Here are your four basic options:
Option 1: Postpone your retirement date and keep working in your current career/position.
Option 2: Semi-retire. Either cut back on hours (if your employer is amenable) or switch to some sort of different position (or even field) for a few years when your formal career comes to its end.
Option 3: Take a more active stance as an investor, and in so doing take on more hassle and/or risk than is ideal (and maybe more than is even advisable…) in pursuit of higher returns.
Option 4: Gamble that you will die early enough to keep depletion of your assets from being a problem.
Yes, I know none of that is going to get labeled as feel-good information. But it is the truth. And given the title of the post, hopefully you weren’t expecting feel-good anyway. If you were, sorry to be a downer.
But in spite of all of the speculation, professional opinion and advice-giving that is an inseparable part of a modern retirement discussion, there are certain underlying realities, mathematical givens we might call them, that underpin all of it. They are utterly factual, utterly immutable, and as potentially harsh as any other aspect of the natural world’s fabric.
If the question is one of spending, then knowing what’s in the kitty will always be a substantial concern. And one number –projected outflow vs balance available - is almost always bigger than the other. A win or a loss follows therefrom, in the most mechanical, impersonal of fashions. Just the way it is. When faced with the proposition of a potential shortfall, the four items listed above are the most common responses; despite wide understanding that none of them are great.
Information of this type is presented to provide a jumping off point for decision making. If you haven’t retired yet, you can decide to enter these waters, or try to use your remaining years to drive your balances high enough to get in position to make the overwhelm card possible. If you are at or already in retirement, you can consider these various possible paths, and spend a minute contemplating which strikes you as the least of the evils.
Look, no one can realistically make the case that being short of funds is a good thing. So my take on it is, let’s not even try. Instead, I think better outcomes arise when we survey the landscape as it is – not how we want it to be, or in some abridged or fictitious way designed to spare people discomfort – and go from there. Solid ground is a good start for good decisions, even if the solid ground itself is unpleasant.
Plus, even if I tried to spare your feelings, you can do arithmetic as well as I can, and you would know anyway. Right?
So if you aren’t yet in this situation and don’t wish to be, you know what you need to do to try to affect the outcome. And if you are, now you know what your most likely options are.
OK. Now I’ll let you up for air. I’ll try to make the next post a little more cheery.
By Brad Thomason, CPA
In last week’s blog I addressed the fact that simplistic headlines can create misunderstandings about how market behavior plays out. Though short and direct statements are necessary for a headline to be workable, such statements can imply a direct cause and effect relationship which is simply not there.
Today I’ll mention two other topics about investment news that are worth keeping in mind.
The first is a discussion of what often happens when a particular company gets an above-average amount of news coverage for something bad. In these cases, it is not unusual to see the company’s stock price fall. Often, in fact, it falls far further than one would rationally predict if comparing the probable cost of the bad item to the degree of loss in market capitalization.
These events happen all the time, but one from the year just passed that you may remember was the scandal with Papa John’s, after its founder made some less-than-well-received-remarks last summer. Social media blew up, the story was everywhere, and over the course of a month the shares lost 30% of their value. Then the news cycle moved on. People kept eating pizza (‘cause, you know, it’s pizza…) and within a few more months all of the old decline had been recovered. A sharp watcher had a chance to pick up a nice gain for a hold time of well less than a year (remember that the recovery of a 30% loss equates to more than a 40% gain for someone who buys at the bottom of the dip).
News hits of this type often cause changes in market prices which far exceed economic reality, and when that happens, the end of the news event usually sets the stage for the economics to take over again.
The second news-related topic we’ll address today really isn’t so much about news, but rather about the absence of news. For everything that you see in the popular press about financial topics, there’s far more that never gets into the general reporting – and much of what’s left out is way more interesting than what actually gets talked about.
Most people in the US know that the Dow fell in December. Most people don’t know that the metal palladium is up over 50% since late summer. Nor that investing in palladium was just as easy as investing in the Dow, requiring nothing more than a plain old stock brokerage account. But was that price climb chronicled on the evening news?
In fact, closer to home, your friendly neighborhood Target store saw its shares surge by an even bigger percentage than that from the summer of 2017 to this past summer.
Trust me when I tell you these things are not rare: If pressed for more examples, I could go on longer than you would keep reading.
Everyday there are far more stories about investment-related topics than ever make their way into the mainstream news. Sometimes looking at specialty news outlets is the key. Sometimes spending your time digging around in random price charts will help you uncover these not-hidden-but-not-publicized developments. And the reality is that even with those steps there would still be a lot you missed. There aren’t enough hours in the day to find out about everything that happens. But back to the basic point: be aware that the fraction you get from regular news is tiny, indeed.
So to sum up the last two posts, on the matter of news:
1. News headlines have to be simple, but in being simple are usually misleading when they suggest causality.
2.A lot of news attention about a negative event can cause shares to lose an amount of value that is all out of proportion to the economics of the actual event; and in such cases prices often quickly recover when the news goes away.
3.For all the financial news that gets put out, it only covers a small fraction of the stories; and often misses many of the more interesting ones.
Well, that’s it for today, folks. Happy new consumption.
By Brad Thomason, CPA
Many of yesterday’s financial headlines were built on a basic framework that went something like this: Fed Chairman Powell Makes Positive Comments and Dow Surges More Than 700 Points.
I find headlines of this type to be troublesome, understandable and amusing all at the same time.
At the level of factual accuracy, you can’t fault it. Yet that’s not the whole story. It would be equally accurate, as a matter of fact, if the headline had been Brad Thomason Pours Cup of Coffee, Then Dow Surges by More Than 700 Points.
Now, I’m not suggesting that my morning beverage routine moves markets, nor am I discounting the opposite with respect to the chairman of the Federal Reserve. Merely pointing out that such simple statements, even if technically correct, don’t ever tell the full story, and often imply a level of causation that is simply not there. The following paragraph will represent a more nuanced example of what the headline should have said, if more complete assessment had been the goal.
The Fed chairman made some comments this morning which market participants received favorably. This set the initial tone for several hours of trading activity in which prices rose and stayed there. Also on the minds’ of traders, a new jobs report which showed better than expected results. That all said, today’s rally follows a down day yesterday, and it was reasonable to expect some snap back in today’s session irrespective of new news. Finally, the overall behavior of the market today was essentially the same as it has been for the last three week, with prices rambling around in spirited fashion between the 22,000 and 23,500 levels on the Dow. In terms of changes to the established ranges, nothing really happened.
The reason that my paragraph would never be workable as a headline is obvious. But it highlights the inherent flaw in news distributed by way of headline. Because headlines have to be short and clean and simple, they inadvertently give the impressions sometimes that A caused B, end of story.
Compounding the problem, when you hear TV and radio folks talk about it later in the day and they are asked what happened, they usually lead with a repeating of the headline. Instead of clearing up the confusion, they reinforce it.
Unless you are really on your toes you can get lulled into forgetting all of this, with the effect that you come to accept that a single data point was directly responsible for an entire day of trading activity. It wasn’t. But less informed consumers of news don’t realize that and come away with an incorrect understanding of how markets work. And like I said, even those of us who do know better can forget.
Jerome Powell did not reach the end of his comments and the Dow was 700 points higher in the next minute. Yet the basic headline sort of implied that’s what happened.
Anyway, you get the point. Just do yourself a favor anytime you are reading headlines about what caused the day’s market result: remember that you get the point.
Next time, I’ll discuss two other aspects of the news which are worth remembering.
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