3-2-1 Newsletter (5-14-2020)
Without further delay, here are three insights, two findings, and one action to think about this week.
3 INSIGHTS FROM ME
I. You choose your retirement with your actions each day.
I believe your actions speak directly to your destiny. They are a direct request of how you want the future to look. In retirement, the actions you take (or don’t) shape your retirement experience. From figuring out how to replace a paycheck with income to meet planned and unexpected expenses to ensuring income lasts a lifetime and determining what happens after the death of a lifelong partner. The steps you take today to address these retirement challenges speak to your retirement. The first action is to plan the actions needed to retire. This begins with a comprehensive retirement savings and income plan outlining the strategies and actions necessary for a satisfying, successful, and worry-free retirement. The most important step today to create the retirement of tomorrow begins with creating a comprehensive retirement plan.
II. The paradox of risk: Too little (much).
Investment risk is one of the primary risks facing those near and in retirement. It’s widely understood that diversification is a good strategy for managing this type of risk. Diversification accomplishes this by spreading capital among different investments, so the portfolio does not rely upon a single investment for all its returns. The rationale is you don’t put all your eggs in one basket because if you lose the basket, you lose it all.
What’s often overlooked when dealing with diversification is over-diversification. Studies have shown that having too many investments is just as harmful to a portfolio as having too few. This is because spreading capital among too many investments can create demands on energy and time that can reduce the ability to effectively manage any of the investments. There is danger in doing things halfway.
The goal is to construct and maintain a portfolio that’s neither under nor over-diversified that allows focused and effective management of all investments. Think diversified but focused.
III. 7 Strategies to Counteract The Coronavirus Effects on Retirement.
The coronavirus has delivered a devastating blow to everyone and their retirement accounts. Here are a handful of strategies to help you regain your financial footing to serve you now and well into the future.
Planning equals success: Those who plan position themselves to withstand future market upheavals and be more successful, worry less and report more life satisfaction.
Social Security claiming age: In most cases delaying Social Security as long as possible increases lifetime income. However, claiming early can help plug current income gaps if needed.
Cut household expenses: Review utilities (electric, heating, cable, and even home insurance bills) to see if costs can be reduced.
Plan to work a year or two longer: Delaying retirement by 3-6 months has the same impact on the standard of living as saving an additional one percent of earnings for 30 years.
Reduce debt: Before retiring, prioritize reducing credit card, student loan, medical, and mortgage debt to free up additional income. Mortgage rates have fallen during the coronavirus crisis; now might be a good time to consider refinancing.
Downsize or retire to a less expensive location: There can be financial advantages to downsizing to a smaller, less expensive living arrangement or relocating to a better (possibly cheaper) retirement location. Towns and small cities, on average, have a lower cost of living than cities, and countries like Ecuador, Panama, Portugal, Thailand, and Vietnam have good lifestyles and low living costs.
Reverse mortgage: If your home is your largest asset and you need cash and have no other way to get it, this may be your best option.
2 FINDINGS FROM OTHERS
I. Stocks Up During a Pandemic? Why the markets went up so much in April?
You’re probably scratching your head, wondering how the markets could be going up when so much seems to be going down, like lost businesses, jobs, and lives. Last Friday, the government reported that 20.5 million people lost their jobs in April. Numbers not seen since the Great Depression, yet the stock market rallied. The S&P 500 is now up 30% from its lows in mid-March and back to where it was last October. How do you explain this behavior? The explanation is simple: markets react to how new information squares with what was expected. For example, if the new information is better than expected, then prices will rise, and if worse, prices will fall. It doesn’t matter if the new information is good or bad in and of itself. What matters most is if it’s good or bad relative to what was expected. Bob French elaborates on this in this short video that should help you understand market movement no matter what’s going on.
Source: Stocks Up During a Pandemic? Why the markets went up so much in April?
II. What Happens After the Market Drops?
Whether the market is up or down, staying disciplined and avoiding market timing are the best investing tips at your disposal. But what should you do after the market drops? According to research by Dimensional Fund Advisors, the results are quite interesting. In short, markets rebound quickly, and higher returns persist long after the initial drop. The analysis informs that markets rebounded after a sharp drop and outperformed their long-term annualized returns over the subsequent one-, three-, and five-year periods. The worse the hit, the better the markets did afterward. Market timing has been proven over and over to not work because you have to know when to get out of the market and when to get back in. Two things very difficult to accomplish consistently. Stay disciplined when the markets turn against you – if you are focused on the long term, you can harvest market returns.
Source: What happens after the markets drop?
1 ACTION FOR YOU
I. Why you need to triage retirement decisions
Incorporating smart financial habits is always beneficial, no matter what is happening in the world. Maintaining them will safeguard financial stability and help reach financial goals.
We’ll look at one financial habit to safeguard financial stability, promote financial well-being, and reveal a new one each week.
This week’s smart habit: Triage retirement decisions.
Retirees face many decisions, all necessary in their own right to achieve a desired retirement, but some are more important than others. How you triage and then treat the most important decisions can make all the difference in the quality of your retirement.
In general, triaging is assigning priority to things based on where resources can be best used, are most needed, or are most likely to succeed.
In retirement planning, triaging the most impactful retirement decisions can be just as important as how they are solved. Focusing on decisions with the greatest consequence of retirement and finding the best solution is critical to overall success. A useful framework to help with this process begins with putting together a list of key retirement planning decisions and assessing the overall impact of each on retirement. In short, decisions with the most impact are prioritized over those with less impact.
For example, if Social Security is expected to fund most of retirement, then timing around when to claim benefits would rise in importance. Similarly, if the majority of household wealth is locked up in the home, then decisions on accessing it would be paramount. And if personal savings account for the bulk of retirement funding, then strategies to convert it into income would be key.
The stakes are high in retirement. There are so many decisions to be made, and they’re complex and often irreversible. Adhering to a strategy of identifying, triaging, and focusing on decisions with the greatest impact on retirement will go a long way toward achieving a successful, fulfilling, and satisfying retirement.
What are the important retirement decisions you face, and have they been triaged?
Have a Question? Want to chat about it?
Until next week,
Mark Sharp, CFP® RICP® EA