Monday, February 8, 2016

The upside of the market downslide

Without question, the investment world is down significantly since the beginning of the year.  And while there certainly is some cause for concern, I believe the situation also presents some opportunities.

Looking at the big picture, I’m concerned that the nation may slide back into a recession.  That, of course, would lead to a loss of jobs, households missing payments, and a return to a whole host of problems so many people crawled out from just of a few years ago. 

But although our nation’s economy has been growing at a snail’s pace for the past few years, I don’t foresee us falling back into the depths of the Great Recession.

The opportunities I see involve new investment dollars.  For example, if you’re eligible for a 2015 tax year contribution into an IRA, this is an exceptionally good time to make a contribution.  You’ve certainly heard the old adage, “Buy low, sell high.”  Well, guess what?  Most things are relatively low right now. 

Is there an investment you were considering six months ago?  I’d say you’re going to like it even more at current prices, especially if you have a long-term time horizon. 

Over the years, I can’t tell you how many times I’ve heard investors lament, “If only I bought ABC stock when it was down to X dollars per share.”  If you’ve ever made a comment similar to that, it may be the right time to take action. 

Yes, Murphy’s law says that the day after you buy something it’s likely to go lower, but there never is a buzzer indicating a market bottom to tell you that now is the precise time to jump in.  But there definitely are a lot of investments you can buy today at a much lower price than just a few weeks ago.

I’ve often joked that, as a financial advisor, I’m paid to worry.  And there certainly is plenty to be concerned about in the financial arena.  However, at the top of my worry list are the people who retired in the last couple of years and are drawing income from their nest egg. 

Why?  Let me run through some math.  For example purposes only, let’s say a retiree needs $30,000 of income per year from their savings.  Suppose they hit their magic number of $500,000 in their nest egg. 

At a six percent withdrawal rate, and assuming they’ve earned a reasonable interest, they can get their $30,000 without depleting their principal.  However, 2015 was relatively flat, so taking their $30,000 would drop the principal down to $470,000. 

So the next year, their nest egg loses value, dropping just over 10% to $420,000.  Now to get $30,000 of income, they have to withdraw 7.2%.  That extra 1.2% may not seem like much, but this is a dangerous path.

The sequence of investment returns is extremely important, especially in the early years of drawing retirement income.  A few down years in the early years of drawing income can cause irreparable damage to a nest egg.

With the investment world on a downward slope, it’s important to make your investment decisions wisely and your withdrawals cautiously.  Deciding to retire and start the withdrawal sequence once you reach a certain nest egg number, such as $500,000 may not be a prudent choice.

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