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I DECIDED TO TAKE a peek at our investment portfolio. I try not to look too often. But I was curious to see how our assets were holding up in this bear market.
What did I learn? Our retirement savings were down more than $500,000 this year, thanks to a combination of investment losses and our spending. Most of our shrinking balance is the result of falling stock and bond prices.
Still, our spending this year on travel has increased sharply. We took a five-week vacation to the U.K., as well as a number of shorter trips. As I’m writing this article, we’re on our way to France and Switzerland for three weeks. Later this year, we’re going to Vancouver, British Columbia. My wife is already planning some trips for early next year.
If it was left up to me, I’d probably hunker down for the rest of the year—because that’s what my money instincts tell me to do in this tough economic environment. But it’s not up to me. I have a wife who has a say in our finances. She says, “Let’s continue with our travel plans. We can get through these difficult times.”
When I think about it, she’s right. Here are six reasons it’s okay to stay the course with our current spending:
1. Our current investment losses aren’t real losses. They’re paper losses, also known as unrealized losses. They only become an actual money loss if we sell—and we have no intention of selling any of our long-term investments in this down market.
2. We have a cash bucket. I’m optimistic that our stocks will rebound before we’re forced to sell. The average bear market lasts 289 days. We have enough cash and Social Security income to fund our living and travel expenses for the next five years. In addition, we have a short-term bond fund in our retirement accounts to satisfy our required minimum distributions without liquidating any of our long-term investments.
3. We have high-quality investments that should rebound with the economy. If our portfolio was loaded with sector funds and individual stocks, I might be concerned about the health of our portfolio going forward. But I’m not. All our investments are in low-cost, broad market index funds that track the major indices. When the economy recovers, our portfolio should, too.
4. We have enough savings. I divided our current account balance by 25—the equivalent of a 4% withdrawal rate—to see how much we can reasonably withdraw each year from our somewhat shrunken portfolio. When I added our Social Security benefits, we should have more than enough income to fund our retirement lifestyle.
5. Our spending will improve our quality of life. I took great satisfaction in watching my savings grow over the years. When I was younger, I was willing to make financial sacrifices to propel my portfolio’s growth. But I’m at a point in my life where I want my money to work for me. I want it to make my life better. Isn’t that why we skimped and saved all those years?
Our travel has brought immense pleasure to our lives—more so than having a larger retirement portfolio that, in any case, might not be needed in our later years.
6. The time is right. At age 71, this is a good time for us to travel. I’m in good health. I don’t have any physical and mental limitations. My wife is healthy, too. There’s nothing in our lives that prevents us from doing the things we want to do.
If COVID-19 taught us anything, it’s that life can unexpectedly be put on hold. Sometimes, you have to seize the moment. I believe this is our moment. Delaying our retirement wish list would be a risky proposition, especially at our age.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.
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I 100% agree with your 5 year cash bucket strategy coupled with bonds to cover RMDs. But, I have not found any financial advisor that agrees with this much cash/bond exposure. Perhaps it’s because this portion of a portfolio may not be under active management, and no advisor makes any money on it. And, given your (and/or mine) travel will probably start to slow down over the next decade, meaning a lot less spending.
Ditto to that!
Though not having as big or deep of a ‘Cash Bucket’; I concur with the ‘Carry On’ sentiments, and sleep like a baby at night.
As a 63 single woman of two grown financially independent children (blessed …) with no relational ties other than families and dear friends, been blissfully traveling through Summer. Super grateful to be mentally/physically fit and curious enough to enjoy all our wonderful World has to offer.
We worked hard to do the right thing for decades. US dollar’s strong, and tomorrow’s not a guarantee. Thanks for the affirmations! Seize the moment indeed.
Egypt and Asia next –
While it certainly makes sense to me to prioritize travel and continue to “go for it” I also think it’s important not to rely on things like the average length of stock market downturns or the old 4% rule in charting one’s course.
As Mike Zaccardi points out in another post in this very issue of Humble Dollar:
“This year has been among the worst on record for broad stock and bond index funds. Consider that a portfolio allocated 60% to U.S. stocks and 40% to domestic bonds was down more than 20%through September. Factor in inflation, and that’s nearly a 26% decline.
Charlie Bilello found that only the awful year of 1931 featured a worse return for the 60-40 portfolio. With the Great Depression in full swing, a balanced portfolio lost 27.3% that year. What was different then, though, is that there was severe deflation—to the tune of 8.9% that year, according to the Federal Reserve Bank of Minneapolis. This year, economists at Goldman Sachs expect the Consumer Price Index to rise 6.2%. Result? Adjusting for inflation, 2022 could potentially rank as the worst year on record for the 60-40 portfolio.”
Focusing on equity market losses without taking into account high inflation that many are forecasting to be with us for years to come and with it the very real possibility of a multi-decade bear market in bonds (something few investors alive today are even aware of as a possibility, let alone having had experience living with) seems inadvisable to me. Better to plan – now and always – for equities to lose up to 50% of their value and stay down for up to a decade and for bonds to have little or no real return going forward in setting one’s spending rate. It seems to me that only those with true liability-matching portfolios – e.g. enough in individual TIPS and annuities to cover essential expenses (along with SS and any pensions) for their projected life expectancy can afford to be equanimous.
I totally agree with traveling and pleasure activities while you can. You never know how long you will be able to do that.
We traveled a lot in our 60s but has slowed down a lot in our 70s due primarily to my wife’s health although I am more limited too.
#6 is the big one for me. We’re 62 and not retired yet, but we’re traveling as much as we can and plan to continue to do so while we’re relatively young, healthy, and fit.
My mother-in-law helped take care of her mother and her twin sister for several years until they both passed in 2007. She was in her late 60s then but had to take responsibility for her widowed father—both her siblings had died. Well, Grandpa lived until he was 102 and died in 2016, and I hoped she and her husband could finally have some fun, visit their kids and grandkids more, take some trips. But by then, dementia was already evident in her, and now, at 82, she has Alzheimer’s. They have plenty of money but life never really gave them much space to enjoy it. It’s sad.
Closer to home, my husband spent nearly six months earlier this year going through diagnostic procedures and specialist appointments to check out some symptoms. Thankfully, it turned out to be nothing life-threatening—manageable minor issues. But it reminded us again that health and life are never guaranteed and to take opportunities where you can.
Although I agree with your overall conclusion, I beg to differ on a couple points. I think point #1 is mistaken. Losses are losses or do you only look at the original cost of your investments and ignore gains and losses. Also, re-point #3 there is no guarantee that stocks will rebound with a stronger economy. A lot depends on inflation and interest rates. Higher interest rates may result in much lower stock multiples for the foreseeable future.
However, I agree that these points are outweighed by 4, 5, & 6.
Not all losses are losses, because unrealized losses in the current value of a retained asset are not the same as realized losses on the sale of an asset at that current value. If you retain an asset that is currently down in value, you also retain the opportunity to benefit from any future increases in value. You don’t have that same opportunity when you sell at a loss, regardless of whether you’re comparing the sale price to the original cost of the investment or to any point in time when it was valued at a higher price.
You are correct if the investor sells and doesn’t reinvest in the same asset class. However, that is a different assumption from what is presented and goes against basic asset allocation strategies. I agree that you don’t want to sell in a bear market. I was assumed that the investor will keep all funds in the same asset class.
I’m guessing but I think most if not all the losses are from unrealized gains. If you are going to count the unrealized gains you must also count the unrealized losses.
From an economic viewpoint the gains and losses are incurred when stock price changes not when you sell them. Think of reporting your financial position to the bank for loan. You would report fair value.
there is an old adage on WS ‘sell your kissers and keep your winners’.
Or look up ‘loss aversion’. There is nothing inherently good in holding your losers at least in holding a stock portfolio of individual stocks or active mutual funds.
But again I agree with you that you don’t generally want to reduce your stock allocation in a bear market.
Dennis, be thankful you have your wife around! Glad you’ve decided not to hunker down, and your article outlines your sound reasoning. Our thinking is similar.
Dennis, you are indeed blessed to have so much money at this point in your life and such a wonderful person to share your time and travels with!
You might end up losing more than most people have even saved!
Dennis, would you mind sharing your annual travel budget? I am 9 years younger (62), and attempting to get a better handle on what to budget for international travel during retirement. We travel fairly frugally, eating out only at dinner typically, but look forward to several 2 – 3 week international jaunts as you describe.
I’m writing this from the breakfast table on a cruise ship. My wife and I have been retired for 10 years. Our original annual travel budget was $20,000. We kept our expenses there for the first 3 years. We increased it to $25,000 for the next 4 years. Then came Covid and we didn’t travel for 2 years. ($50k in the travel bank unspent). This year we’re spending $32,000 and have plans to spend $35,000 to $40,000 next year. I’m 73 and while still healthy, a few medical things have begun to appear. We hope to continue traveling, but as we all learned over the last few years, there’s just no guarantee.
Saw a great t-shirt recently that sums it up for me. It said, “this isn’t your practice life”.
Wow. My entire annual spending is $20,000-$25,000 a year.
FWIW our normal travel spending before COVID was $20-25,000 a year.
The strong dollar helps makes international travel particularly economic at the moment.
I like to read an optimistic outlook. Even though our investments are not for our living expenses, the stock markets are upsetting. I looked a few days ago and our paper losses are over $400,000 this year. Keep up the travel Dennis, you won’t regret it. Because of my wife’s bad back at age 83 we have modified our travel, but have yet to give up.
Great article Dennis. It looks like your years of proper (and detailed) financial planning is paying off. I agree with your reasoned conclusion to continue on with your travels. If market conditions worsen, I have no doubt you will properly reevaluate again.