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LOSS AVERSION IS ONE of the most powerful behavioral-finance phenomena. It’s often defined as “losses loom larger than gains.” It’s been said that the psychological pain from a loss is about twice as powerful as the pleasure from an equivalent gain.
Boy, am I feeling that right now. This year’s market losses have many of us concerned. But this year is different for my wife and me. This is our first year with no consistent earned income. My wife retired last August, which meant she earned a significant salary for much of 2021. I had some modest consulting income last year, and we also had my pension. That easily covered our annual expenses and paid for a large portion of some home improvements.
This year, however, it’s just my pension, a little consulting income and whatever we decide to withdraw from savings. We could turn on one or both of our Social Security retirement benefits. But we still haven’t reached our full Social Security retirement age. I’ll be 65 in September. My full Social Security retirement age is 66 and six months. My wife just turned 64, and her full retirement age is 66 and eight months.
In any case, we’re planning to delay claiming until we’re age 70, so we maximize our Social Security benefits. In the meantime, we’ll need to use savings to make up the shortfall between my pension and our expenses. My wife is healthy and has a family history of significant longevity. There’s been a lot of heart and lung disease in my family. But they were all heavy smokers, and I’ve never smoked. I’m hoping that, and a commitment to healthy living, will give me many more years.
We set up our portfolio with cash and short-term bonds to handle the withdrawals for the next five years. But when I look at the rest of our investments, I see our Vanguard Total Bond Market Index Fund (symbol: VBTLX) is down 9.3% year-to-date. On top of that, we all know what inflation is doing to our monthly bills.
Inflation scares me. A recent article in The New York Times included a personal inflation calculator. I was somewhat dismayed to see that our personal rate was 10%. The main causes: We bought a new car, typically drive more than 150 miles per week, dine out at restaurants a few times a month, and plan some travel this year.
I’m sure my current loss aversion is just my emotional side reacting to this year’s market turmoil. My rational brain tells me to chill. I Googled “how to deal with loss aversion.” The first response I found told me to be grateful. I have plenty to be grateful for.
The second most frequent response I found was to look carefully at what really could go wrong, and see how that would impact you. We built a strong margin of safety into our retirement plan, and we have options if we ever needed to scale back our lifestyle. Finally, the value of our Jersey Shore home has risen about 75% in the past 2½ years. I think we’ll be okay.
Well finished means well started.
When I was in the job market I would look at what the exit from a job would give me. In the end, I have two pensions. The one from the phone company has been mine for 21 years and counting. We should look ahead in life, always and teach our offspring.
I actually received a letter from Social Security informing me I should apply, because the benefits wouldn’t get larger. I’m going to frame it, how many people have that? When they gave a big COLA to us, I of course got a bigger raise because it was based on a percentage increase.
My Roth distributions are gifted to my two sons, for their own Roth’s and I sent them a text yesterday about what a good time to invest with the cost low! They have at least 30 more years to their own retirement.
So, knowing what you need, having and following a dedicated path towards a successful retirement is very important. Start young.
Pension? What’s that? 😉 My wife and I are just a couple years behind you, Richard, age-wise, and in the same recent-retiree boat. She left her job a couple weeks ago – talk about great timing.
We have no choice but to draw down from our portfolio to pay for our retirement. This has always been the plan and now we’re executing, even though the timing couldn’t be worse with the market very unstable and in freefall and inflation running rampant. It’s a real double whammy.
Like you, we have multiple backstops in our plan should we need to cut back. And we’re still going to delay SSA claiming.
How do I deal with any angst I sometimes feel when I see my declining portfolio value? I take solace in the fact that our chosen asset allocation is doing its job to soften the blow. I also think about where I’ve placed my bets on high-upside positions which will most likely deliver outsized gains when the market eventually comes back. And lastly, I have a good position in short term funds that I can draw from as needed. This was always the plan – I just didn’t expect to have to tap it starting from Day 1 of retirement!
Great artlicle. I think we share your feelings.
I know how you feel.
Unfortunately the inflation calculator is behind the NYT paywall.
As a dividend investor, I’m not really bothered by ups and downs in value, just as long as the dividends keep coming in. Most of my stocks have a wide margin of safety, although AT&T did cut their payout in the Discovery spinoff.
Of course, corporate earnings have not yet started to decline. Oils, pharma, and utilities will probably be OK even in a recession.
Richard, your feelings are quite understandable. I share those feelings even though at ages 78 and 83 we are in a different place.
My pension and our combined SS pay all our expenses and discretionary spending and more – unless inflation keeps humming along.
Nevertheless, I irrationally fret over the apparently ongoing decline in our IRAs and brokerage account. So far that loss this year exceeds our total income for last year.
It’s just a scary time and more so if one must draw from assets these days. This too shall pass. Let’s hope it does so before the really scared decide it’s time to get out of the stock market and lock in their losses.