Temporary Losses and Permanent Gains

Family Update

We came back from Pittsburgh on Monday. I’m glad to be working in my office again instead of remotely. When we got back our puppy went completely nuts. I have never seen an animal express that kind of joy before. Every year we also measure all the kids. My middle son, Alex, just turned 12 and he grew more inches than anyone else. I would also like to point out that my wife is incredibly patient and kind. Do you want to know what it looks like to move a six-person family?

 

Should I Sell My Stocks? Clearly, with the current economic situation, I am here to be the voice of reason. First of all, I want you to say to yourself (out loud if you so choose):  Markets temporarily go down and permanently go up. As you can imagine, I’m getting the same questions over and over again. Here are the answers to some common ones: Common Question #1 “Dave, I’m taking money from my portfolio each month. Do I need to stop that disbursement since the market is down?” No. Remember, we are assuming an average of 5%. Did you get more money last year when the market was skyrocketing? No. You get what a diversified portfolio has averaged. Common Question #2 This time is different. What do we do Dave? This time isn’t different. I wrote an article about this about a month ago if you need to refresh your memory. Common Question #3 “Do I need to worry?” No.  This volatility has zero bearing on your long-term financial future. Common Question #4 I’m too old to invest. This is all I have. What do I do? It is very easy to remember when the stock market goes down, but most people do not remember that the Dow Jones was 21,000 during Covid and now it is at 30,000. If you give into the fear, and put all of your money in cash, you are actually increasing your chances of running out of money. The most important variable when it comes to retirement planning is the fact that your money keeps working for you. Common Question #5 “Should I get more conservative with my investments until this all blows over?” No. I’m going to give you cold, hard data that will debunk the concept that timing the markets in this situation might help. I want you to know that I am not remotely worried. I’ve been through this before and it always ends the same way. Betting against innovation and progress is ALWAYS a mistake. Here is a profoundly important chart.

 

What does this mean? The chart is pointing out that, from 2000-2020, the stock market had averaged 5.6% per year. But if you missed the 10 best days, you would have lost two-thirds of the overall profits. Think about that! Out of 7,300 days, missing the best ten, you decimated your long-term returns. You cannot time the market. I often hear, “I’m going to wait until things settle down.” When is that exactly? After the market has two amazing days, or three? Oops, you just messed up your whole life-long investment strategy. You can do this! Be Blessed, Dave

 

Joe and Frank: The Tale of Two Savers

Family Update

We are in Pittsburgh visiting Grammy and Pop. My four kids look forward to this trip every year. We always come up for one of the kid’s birthdays. This year Alex turned twelve. He loves games so we played:

Shuffleboard

Croquet

Ping pong

Playing cards (spades and hearts)

and much much more

For some reason, I can’t figure out how to upload pictures on this computer. Extra pictures of pets and kiddos next week!

 

While the story below is fictional, it is based on real scenarios I’ve witnessed during my career.

Joe and Frank both retired 25 years ago, 1993. They were both 65, both married, and both had $1,000,000 in savings. Their stories are remarkably similar in the beginning, except for one big difference — Joe made his decisions based on fear, and Frank based his decisions on realistic expectations.

When Joe retired he went to his local bank and said, “I’m retired now, I can’t afford to lose anything. I want to put all my money in a money market account.” In 1993 money markets were paying an average of 3.9% and Joe felt pretty good about that.

Of course, there was no way he could have known that interest rates would drop so low later on in his retired years.

As the market fluctuated, Joe became more and more fearful. “I don’t want to spend any of this money unless I HAVE to. I know Ellie wants a new kitchen, and I would love to visit the grandkids in Rhode Island, but … I’m not making a salary anymore. I have to be very careful with this.”

Over the next 30 years Joe scrimped and saved. He never once needed to take more than a few thousand dollars out of savings. When he died in 2016, there was quite a bit of money still there. Over 25 years of compounding interest inside the money market account had turned his $1,000,000 into $1,800,000.

Joe and Ellie never made the trip to visit the grandkids. Ellie never got her updated kitchen. In fact, they spent most of their retirement trying to live with less and less.

They never ran out of money, but they also never got to really enjoy their retirement.

Now Frank looked at things differently.

“I’ve worked my whole life so that I could enjoy the fruits of my labor in retirement. We are going to put a pool in the backyard. Both Mary and I love to swim and it will keep us active and healthy. We are going to travel as much as we can for as long as we are healthy enough to do so.”

Frank went to a local advisor and said, “I want my money to keep working for me since I am no longer working and making a salary.”

The advisor suggested a diversified portfolio of stocks and bonds.

So Frank put 60% of his savings into stocks and 40% into bonds — a very common portfolio asset mix.

Frank then started taking out $50,000 a year from his portfolio, or 5% of the original value. His friends called him crazy. “You are too old for investing,” they’d say. “You are going to run out of money!”

But Frank knew he was reasonably safe to spend the money his investments were earning.

Frank spent the $50,000 each year on things that made him and his wife Mary happy. They spent an entire month in Australia. They traveled up north for each of their grandkids’ birthdays. Frank even bought himself a 1969 cherry-red Chevy Camaro.

When Frank died in 2021, his kids gathered and looked at his investment statement. He had taken out $1,250,000 over those 25 years. Were his kids angry or resentful? Not at all. They remembered all the crazy adventures he and Mom had with that money. All the family vacations, the special occasions made more special by their presence. They also remembered the times they’d needed help and had been able to turn to their parents.

How much money did Frank have left over in 2021?

At Frank’s death a little over $4,725,890. That is not a typo. He started with $1,000,000, took out $1,750,000, and ended up with over four times the amount he started with. He also ended up with more than twice as much as Joe.

The Moral of the Story: Being “safe” with your money may not actually be safe at all!

A well-diversified and balanced portfolio of stocks and bonds is a powerful wealth creation tool. You may be able to spend more of your retirement savings than you realize, and enjoy more of your retirement years.

Please pass this story on to friends and family. It might just possibly change someone’s life.

Be Blessed!

Dave

 

The Dangers of Downsizing

 

Family Update 

School is over and it’s time for a trip to Pittsburgh to see Grammy and Pop. There is so much to do up there, and the weather is so nice and cool. All four of them, at one time or another, have expressed an interest to live up north. They figure you get to see the changing seasons and the beautiful snow. 

What they don’t understand is that snow is only pretty for a day, and then it turns into a gray, gross sludge. Winter lasts from November until about April in Pittsburgh. I think they would change their tune if spend a year there.  

 

A lot of Baby Boomers find that the majority of their assets is equity in their home. In conversations with me, they say something to the effect of, “Dave, a big part of our retirement plan is to downsize our house.”

Let’s think about that idea for a second.

Let’s assume:

• You own a single-family house in the area.
• You enjoy living there. You’ve made it your home.
• You decide to downsize in order to fund your retirement and lower your budget.

Ok. So now let’s think about your options. Where are you going to move?

• A smaller (probably worse) single family home
• A townhouse
• A condo
• A manufactured home

That’s not to say there aren’t situations where downsizing makes sense. There are. Keep reading and we’ll get there.

But first, let’s assume your house has been your sanctuary for most of your adult life. You love it, but you’re considering downsizing to have more money for retirement.

Downsizing for savings is often a daydream, not reality.

For example, let’s say you own a $500,000 single-family home with no mortgage.

You decide to move into a townhouse. A decent townhouse will cost you $400,000 at an absolute minimum. Don’t forget about the HOA fees. That could be hundreds a month. And don’t forget about moving costs, paying the realtor a commission, redecorating or making minor repairs ….

You now own a $400,000 townhouse (which maybe you don’t like as much as your last home), paying a few hundred a month in HOA fees.

Sure, you have $80,000 in the bank (after fees, commissions, closing costs, etc). That $80,000 can produce about $300 a month in dividends and interest. You are almost exactly where you started. Maybe you are saving a couple hundred dollars a month.

Is it really worth it?

Another example: Let’s say you own a $500,000 single-family home with a $200,000 mortgage. You are paying $1,300 a month on the mortgage which you’ve had for over ten years.

You decide to move into a $300,000 condo. No more mortgage, no more expenses.

Actually, that’s not entirely true. Barring some kind of real estate miracle, a $300,000 condo is not going to be as nice as the house you just sold.

Now come the HOA fees. Condos are notorious for high fees, which can change at the drop of a hat. Also, don’t forget, you may get a letter from the condo board that says: “We decided to replace the roof and we’re going to charge you an assessment of $8,000.”

But now you have no mortgage! That saves you $1,300 a month in mortgage payments (minus the HOA of $300). So you now live in a condo that you don’t like as much as your house which needs a ton of work and you have an extra $1,000/mo.

Is it really worth it?

When does it make sense to downsize?

Here are some examples where it might make sense to downsize.

Your current home is too big.

The kids moved out and you are left with a 3,000-square-foot home with a big yard. Downsizing in this situation often makes sense. While you might not save a ton of money, maintenance-free smaller townhomes can be very attractive.

You plan on a major downsizing.

Moving from a $400,000 home to a $100,000 manufactured home will create a significant difference in budget and spending needs going forward. Few people like this option.

You have the opportunity to move in with a family member.

This can be especially attractive if your child or relative has an apartment attached to their home, or a mother-in-law suite. This is a fantastic way to lower expenses and increase cash in the bank (not to mention bringing your family together).

You have no other retirement assets.

This is not ideal, and not the situation for most retirees. But, for those folks facing this reality, selling their home and downsizing to a much smaller space can help them live comfortably throughout their retirement.

So, before you think that downsizing could fix all your retirement worries, really consider the long-term financial ramifications. Do the math, consider the emotional consequences of moving, and move ahead with caution.

Be Blessed,

Dave