...what didn’t change much was the fundamental lessons: have a diversified portfolio, don’t buy more house than you can afford, don’t take on more debt than you can support, or trade on the margin.
These are hopefully just common sense but of course we know that for many people this was not common sense. I can see a big big problem coming with people spending beyond what their savings can safely generate. My thought all along has been 4%, or less, of whatever you got (more like withdraw 1% every quarter). I'm not real clear on where the willingness to take huge risks with withdrawal rates comes from but I think the willingness to take a lot of money out "now" and hope for the best or expect to take out less later or something else is going to do a lot of people in.
Even in the best of times, or perhaps more appropriately worded in very normal times, plenty of people spend their way to financial oblivion. I can tell you first hand this is very difficult for people to grasp. To the extent that a lot of people have these blinders there stands to be societal problem waiting for us at some point along the lines of the US government spending too much or the problem that might be awaiting the entitlement programs.
I do not do a good job of explaining the potential consequences of this to the people who need to hear this the most. The more you take out the further you are pushing the envelope. Taking 10% out at age 62 for a "one time" thing that coincides with a nasty market decline could become a game changer before you even get started. A slight tweak up to 6% withdrawal rate could become a game changer.
I suspect that this sort of behavioral issue does more people in than poor performance. Maybe people live $200,000 lifestyles when then work but only save for $80,000 lifestyles in retirement and they just don't realize it but whatever the case this afflicts many people. I think it would be much easier to alter the behavior than get better returns but altering behavior might itself be too big of an obstacle.
9 comments:
This government is certainly spending beyond its means! Bush and now Obama are putting us all deeper into it. I am concerned about the US. Not sure how we dig ourselves out of the hole. The issue is many in the US expect the government owes them for some reason and our politicians think they are doing good with more tax and spend.
My in-laws are living examples of the failure to adjust retirement lifestyle to economic reality. They retired a couple years ago from fairly low-paying, no stress jobs. Their retirement accounts had swolen with the rise in the market mainly by taking on too much risk. Their "financial planner" had them in more than 20 different mutual funds, all of the bond funds leveraged. Plus, the "advisor" was charging 1% of the portfolio's value. They spent like the increasing value of their portfolio would continue forever. They were given the o.k. by their "advisor" and so off they went.
At most, they should have spent no more than 3% (4% minus the advisor's fee). Realistically, they should have been spending about 2-2.5% as they have good genes and probably will live long lives.
Now, with just 45% of what they had a few years ago, MIL calls crying every time they get a statement. Now they want to talk with "cheapskate" son in law (me) about what they can do. They won't want to prepare a budget to determine what they need from their portfolio to cover shortfall from social security. They certainly won't want to entertain spending less since they "deserve a nice retirement."
I suspect that "cheapskate" son in law will have to eventually support in laws. At least wife now understands the impact of not living within your means. I love my wife, so I'll have to do what I have to do. I'm sure you all will understand. It won't kill me, but this "cheapskate" won't like it.
6:57, thanks for sharing. at this point we probably all have at least a friend of a friend story to relate if not a direct one like your in-laws.
my parents had financial struggles when they were younger (and still together) which was a motivating factor for me.
Protectionism update, and it ain't pretty.........
http://www.washingtonpost.com/wp-dyn/content/article/2009/02/16/AR2009021601099_pf.html
It appears to be "common sense" to compare a government finances to household or a corporation which allows a judgement that a government may be spending too much or too little but upon closer inspection this simply does not work and is, in fact, misleading; e.g., households, corporations, etc can not create the money to pay their bills nor obligate you to pay for the privilege of living where you live just by the fact of you living there.
Governments can and do modify social environments, including economic ones, and part of the problem now is too many folks did not pay attention to how those environments were being affected the past eight years so current events seem like a terrible surprise, a sudden change for the worse. But they are not, no one should be surprised, and many weren't and aren't; e.g., our host and http://tinyurl.com/aejhpn among a host of others.
Case in point (from http://www.bls.gov/webapps/legacy/cesbtab1.htm )
Monthly job creation for the past eight+ years has been 21,600 on average ... x 97 months = 2.1 million jobs created since Jan 2001.
It requires about 140,500 jobs per month to keep up with growth in the civilian work force so x 97 = 13.6 million jobs required meaning we were roughly 13.6 - 2.1 = 11.5 million jobs short as of Jan 2009.
By way of contrast, the eight years before that the monthly job creation rate averaged 240,300 so x 96 = 23.1 million jobs created Jan 1992 to Dec 2000.
In a nutshell we were in serious trouble years ago but easy money fooled us. Now we (the so-called private sector) aren't spending and the argument is whether the government should step in to make up the difference or whether doing so would just put us deeper in the hole.
It is quite astonishing how many people certain they have the right answer have popped up (too bad they disagree with each other) but, regardless of your stance on this, the current 'stimulus' isn't even close to making up the shortfall so we're talking pain-killer rather than a cure.
Shorter version: protect yourself.
RW,
What exactly do you mean by "protect yourself"? Could you elaborate?
The title of today's post reminds me of the locker room in junior high. Heh, heh. We need a little levity on a day like this.
Nice article by Richard Shaw today...
http://seekingalpha.com/article/120851-will-spy-reach-2002-levels
A chart of SPY would show that the blogger apparently isn't aware that we're currently below the 2002 low.
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