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.