Ten Ways to Run Out of Money Part 3

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I’m pretty sure this one is directly related to the first issue, life expectancy. And the assumption that there is no way you will live to see the market recover from a downturn or a crash. This is more of the assumption that the present moment is all there is. Things won’t change from “this”, whatever “this” is.

So, here are some numbers in a nice chart:

The average Bear market lasts about 3 years, 3.1. Can it be worse than that? Yes. A plan that includes a clear view of expenses and assets can make the ride much smoother. If you had a cash bucket or war chest or savings account with three years of living expenses, the average Bear wouldn’t change a thing. I count 28 Bear markets in that graph. Only 7 were over 4 years. I’m not saying that a Financial Plan is going to make the scary sight of 1973 on that chart go away. I will say that having a plan helps. Having “done the work” helps.

Let me know if any of this resonates.

Ten Ways to Run Out of Money Part 2

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This is a tricky issue because the change isn’t very big in any given year. The long term average for inflation is 3.25%. That’s averaged out from 1913 to April of this year. If we refer back to the previous discussion of life expectancy, it starts to make sense. Over a single year, the cost of the car only goes up 3.25% or $812, but over 30 years the price goes from $25,000 to $65,259.

So the solution to this problem is:

Let’s focus on the bottom part of this chart. It’s showing asset class return and an inflation rate of 2.2% The lesson here is that the only way to beat inflation is to have money in the market. That’s the easiest way to beat the decline in spending power. If you look at the top chart, it’s showing returns for equities (stocks) and fixed income blends. The outcome is in favor of a diversified portfolio.

This lesson ties in with the previous one. Current retirees can often think of the day they quit going to work as “the finish line.” The instinct is to keep the money they have accumulated “safe.” This is perfectly understandable, but it ignores the potential for 35 years of “retirement.” Sitting on the money in cash that long almost ensures problems in the later years.

Ten Ways to Run Out of Money

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The first way to run out of money is to Ignore your Life Expectancy.

A common issue is a tendency to under estimate their life expectancy. A woman aged 65 has a 50% chance of living another 26 years. The male expectation is another 24 years.

Plan to live to age 100. That may be the “worst case” scenario for many. I would suggest you plan another 24 months at the same time. You don’t want to run out of money, but you also don’t want to leave a mattress stuffed with money.