Roundtables
The "No Foreseeable Retirement" Trap
February 1, 2009
As reported in the pages of In Business magazine.
Consider Ralph, age 57
- Planned to retire at age 65.
- Lost 42% of his 401K last year, leaving $59,000.
- Profession: manager at a staffing firm manager
- Salary $52,000 + 5-10% bonus potential.
- Wife Alice works part-time; librarian earning $22,000.
- Has a 19-year-old (college) son from his first marriage,
- Has 14-year-old daughter from this (second) marriage.
- Has one CD worth $10,000 in savings.
- Home valued at $207,000 and fully mortgaged.
The Question: What should Ralph do in 2009?
As of October 2008, $2 trillion dollars were collectively lost from Americans' 401(k) retirement accounts, according to the Congressional Budget Office, leaving many panicked about their futures.
The prevailing advice or universal investment formula? Quick answer: There is no single investment protocol.
Rather, there is a smattering of conventional and unconventional thoughts, including "consolidate to cash and put the money in a bank." Or diversify and wait for the market to correct. Or convert to bonds. Maybe buy more stocks, while the market's down, to recapture more quickly the earnings you've lost, when the market goes up?
Buy gold?
Buy the $400,000 house going on auction in Nevada?
Dig a hole in the backyard?
What advice is to be trusted?
To help enlighten the many of us who recently have lost more than we might hope to recover before retirement, because we're in the demographic with the least risk tolerance now, IB gathered a group of local experts with different perspectives.They discussed the issue of where to put the money that's left, focusing on a fictional man named Ralph (see details above), our financial "everyman or woman."
Our Expert Panel
Betty Harris Custer is the owner and managing partner of Custer Financial Services, founded in 1981. Previously, she worked as a senior manager for several nationwide firms. Her company serves business and non-profit organizations as well as individuals.
Michael Dubis is a fee-only Certified Financial Planner and president of Michael A. Dubis Financial Planning, LLC. He is also an adjunct lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate.
E. David Locke is chairman and CEO of McFarland State Bank. Under his leadership, the bank has grown from a small, rural community lender with $5 million in assets to a regional business lender with assets of more than $363 million.
John Nelson is co-author of the book, What Color is Your Parachute? For Retirement. He also is a retirement planning speaker, consultant and coach. Nelson teaches at the University of Wisconsin-Madison.
Pull up a chair and listen in. We think you'll leave us today with at least one new option or consideration.
The Discussion
[IB MODERATOR] JODY GLYNN PATRICK: Our readers report feeling a sense of urgency considering situations like that of our representative, middle manager "Ralph." Regardless of how well or poorly he planned for retirement, the question we are putting to the panel is: Forget the hype: What should Ralph do NOW, this year? Can you help him adjust his new reality or recapture a dream?
NELSON: My first thought was that IB's core reader may be just as devastated, but perhaps in a higher economic status. The age, the uncertainty of future employment, the younger wife, the kids in school — all of that would resonate regardless of economic status.
CUSTER: You could add zeroes — say somebody is making $520,000 — and the lifestyle is going to change at the same level too, with similar pressures. People incorrectly assume that the very wealthy aren't feeling the pressure in this environment. They are, as is your reader, likely.
Addressing the planning part of any financial portfolio, nobody "plans" to have a marriage fail, either. Things happen. And so this person has found themselves with probably having their assets decimated, like the person facing that marriage failure, too.
Certainly all those of us who do planning with clients have seen people suddenly find themselves with about half of their net worth after one of those experiences. With a market downturn like this, and then it's half of the half and, you know — it really isn't [always] a failure to plan, but [sometimes] it is circumstances.
DUBIS: Planning is a philosophy. There is a strategy of just giving answers to those looking for a plan (which, I think, creates a dependency on the relationship), and then there's a process of thinking.
In our modern portfolio lifetime, we've not seen this before. The last time we've been in a state of shock or a crisis was the '70s, so that's about a 35-year timeframe where we haven't had this type of experience, but the experience is on the books.
In advance we could have said to our clients, this type of thing could happen. If you invest in equities or stocks, it's always risky, regardless of the timeframe. But mathematically they tend to outperform bonds. So was the plan proactive or reactive? That's a risk Ralph could face right now. Is he going to react to this or is he going to consider his thoughts in advance of this? Did we have a sound process of thinking prior to engaging in this plan?
Looking into it, I question that, because he lost 42% of his portfolio, and he's eight years from retirement. That's a big bogey. If he lost 42%, he needs 80% to get it back.
That's a mathematical difficulty, because if equities average even 8% to 10%, he's a decade away from recovering, let alone another decade behind the eight ball. So he's got 20 years. That's why the math is very unrealistic.
You know, I find "planning" to be a funny word, based on assumption challenges. What were the assumptions going into it? One assumption evident now is the discussion of rebounds and V-shaped recoveries. People are suggesting, "Well, if you just stick it through, it will come back." Hope is not a strategy. There is no strategy to hope.
And the strategy is what do we know today: That portfolio just lost 42%. There's nothing anywhere in the world to say that can't happen again next year. Planning can't be based on hope.
LOCKE: As long as I've been in the banking business, I've found people and companies generally have plans, but one thing they seem to fail to do during a rosy economic period — when it was hard to not make money — is a little bit of shock testing of their plan. What happens if the plan doesn't work as expected and you lose 20% of your investment assets? What does that look like? Nobody goes there, because they think it's going to continue to grow 8% a year. It's just not reality.
It's that "hope factor." Well put.
DUBIS: Hopefully there's going to be a paradigm shift so people will simply say this "this portfolio is basically like a pill. You have a prescriptive authority, it has a side effect of apparently 42%. You didn't like that. We should prescribe another pill for you." If somebody says, "I don't want any side effect," there's no pill then.
The other risk here with Ralph that is he could react completely and go to cash.
CUSTER: I think that's the bigger risk for most people. Consider bear market mistakes; people start buying into the market when it's peaking and selling at the bottom, because their panic level has maxed, and they can't take it anymore — at exactly the wrong time.
This highlights that they were not invested properly for their own personal risk tolerance or they wouldn't have felt that stress at those levels. Even the highly affluent are feeling stress at these levels. But you're not in panic mode if you're more properly balanced with your own personal risk tolerance.
Maybe Ralph listened to the financial news networks and read the financial press, but never had anybody actually ask him about risk tolerance, and never did some projections as to how much money he was going to need at that magic date of age 65 when he wanted to retire.
And he was going through a couple good market cycles, seeing good gains. If he lost 42%, he was fully invested in the market. And at his stage of life, with a desire to retire at 65, he shouldn't have been.
DUBIS: Betty makes a good point. But a lot of people are hunkering down, maybe not wanting to do anything now. And we don't know if he was all in equities. We're assuming based on benchmarks, but he could also just simply have had a very poorly managed portfolio.
So there's a real risk out there, too, that people will develop paralysis by analysis. And I would argue to your readers that now is probably the best time in the world to reassess [financial] relationships. If you don't have one, think about one, because if Ralph was 100% equities, that's what the market did this year. But if he had half of his portfolio in bonds, we have a bigger problem.
Regardless, he can't recover. He has a major bogey to break here. What was the benchmark? If you were 50/50 and lost 42%, you're off by 15% to 20% of where you should have been. That's a red flag.
NELSON: Poor Ralph is in a pickle, and cannot invest his way out of his problem with even the best advice available. He can plan his way through it, and to do that, he's going to have to look at more than investment management or financial planning. He needs to do some life planning of how long he's going to work, whether or not his wife can work, his state of health allowing him to work longer, and his ability to develop his career going forward.
Rather than slowing down at 57, he needs to be ramping up at 57; that's the only way, holistically, comprehensively, that he's going to get where he wants to go and provide the intended life for his kids.
CUSTER: He'd have to be looking at his core expenses — expenses he had month in and month out — and then at his discretionary expenses. Beyond that are dream goals, now way off into never-never land. Where they could do some pairing to set aside more money for this?
Certainly the wife would have to reconsider her part-time status. Re-entering the job market for full-time employment when we're at all-time unemployment is also difficult, but, nonetheless, that still certainly something she should consider. And he might have to be thinking how to upgrade his earning power.
DUBIS: This bothers me: In my assessment, this is the first time ever in the history of humankind we've attempted to live on the planet longer than work on the planet. So whether we had a 40% loss in equities or not, the math wasn't going to work prior to this.
Maybe Ralph had a $100,000 portfolio. He's got maybe $74,000 coming in a year and a boatload of debt in eight years. How could he have retired? And this is a common issue. Turn on Home and Garden Television; you think it's easy to remodel the front of your house. That's a $60,000 job. Yet our mindset is that this is a normal paradigm of living.
I think Social Security kind of messed with everybody's head. Take it early at 62, and we'll go 38 years of not working. That's a mathematical impossibility, unless you're loaded.
IB: The life expectancy then was ... 72?
DUBIS: Correct. It was a 5-12 year actuarial rate. Now we're going 38 years or 30 or 25. It's still mathematically extremely difficult.
NELSON: So the industrial age idea of a leisure-based retirement will turn out to be a blip on the historical radar screen. Before the industrial era, people didn't do that. They worked as long as they were healthy. And after this bubble of time, we'll be returning to some older ideas and going on to newer ideas about how to be economically viable through this extended life span. The boomers will create it.
CUSTER: Even if we added up the aggregate of all the people we've worked with, maybe only 5% to 10% of the population plans, and I'm probably being aggressive. The pioneers are those coming to see you to think through "I want a different life for the future. I understand the longevity risk." One of the lemonades out of lemons of this market crisis is the potential for a cultural shift. It could be a total paradigm shift.
Everybody is impacted. If you had market risk, you are impacted. Every asset class is down, except cash and short-term treasuries, but that's cash basically. A client asked me, "How would we have avoided it?" I said, "Well, we bought a timber farm and a forest fire came through. That can happen when we own this asset class."
I think we're going to see a flood of people seeking some tools that I think will give people the perspective they need to think about what is important. John, your retirement readiness model tools are very valuable for anybody, irrelevant of whether they should see an advisor or not.
IB: So is the book more relevant, John, though you wrote the advice before the economic downturn?
NELSON: In fact, the criticism that I got on the book was that instead of focusing on leisure-based retirement, I was saying "look at working in retirement." The harshest critic ripped me up and down because he was a believer in the old paradigm, while in every chapter I'm saying "If there's something you'd love to do, maybe make a little money as you go along." And though some people didn't like that message a few years ago, now it's pretty obvious that it fits a lot of people.
DUBIS: David, you see a broader scope of folks as the president of a bank, I would guess. Do you have people giving you feedback internally of how they feel about all of this? Are folks doing okay?
LOCKE: Since last fall, it's been pretty obvious that people are confused, scared, and they're looking for help. They're looking for a place to turn. Bankers seem to get all kinds of questions, so people I've known over the years have stopped in or called. Bottom line is, they're scared.
DUBIS: I think we've got to get used to being scared. We came out of a 25-year bull market. And I'm not saying get used to scared meaning everything is going to be bad. We could be in a secular bear market now. We don't know. We just don't know. So I think the issue is that the only certainty is uncertainty.
LOCKE: The best advice is, "Keep it in perspective here." Most people get a lot of information from CNBC or whatever they happen to be watching on television at the moment. Listening to the news media today will scare the pants off you.
So I try to advise people to just keep it in perspective. We still live in the United States, the most resilient economy on the planet, and we will bounce back from this. I try to talk about what's going on in Washington and the money that the Treasury has committed. I mean, I never thought in my lifetime — and I've been in banking 42 years — that I would see the central banks and Europe and the Fed do what they did in some of the coordinated cuts and — then — some of the infusions that have been made by the Treasury Department. So what that says to me is, they're serious about stopping what's going on here and making some change.
CUSTER: I agree that the greatest risk is that people get so panicked that they do move all to cash, because certainly one of the things that is inevitably going to happen from that huge infusion of all this capital is inflation. And so people are going to have to be focused on a longer term inflationary environment as well, and that mandates that, based again on their own personal risk tolerance, folks have got to have some money in equities. Maybe not all of it in the highest risk equities, but certainly inflation is going to be a factor again.
DUBIS: The cash issue is the risk to cash right now, I think; it's the same type of loss on a purchasing power basis that the market experienced in one year. It's just that we won't feel it for five or 10 years if we have hyper inflation; maybe 15 if it's a little bit higher inflation.
And then the other issue that nobody really talks about, although John addresses it in his book: Retiree inflation is not CPI. It's higher. We have a higher level of inflation for folks working into retirement than what you read in the paper.
LOCKE: The other advice I've tried to give to those people I mentioned who are scared — some are worried to the point where sometimes they're physically affected, can't sleep, whatever — and if it's to that point in your life, go to cash. I mean, if you're worried about the market that bad, don't let it affect your health.
Put it all in cash for a while. I don't think interest rates are going up for the foreseeable future. Look where you've got the 10-year treasury today, and rates are down, and they're not going up for a while, no doubt.
So for someone to go to cash and eliminate their worry ... as the market turns around, and one of the indicators of the market turning around is, of course, going to be consumer spending, because consumers drive 60%, 70% of our economy. As things do turn around and stocks start to come back, you can gradually go back into stocks if you want.
I'm not in favor of being a market timer. I've got a 401(k) too, but this is an unusual time, and unusual times sometimes require unusual action, and I hate to see people get to the point where they're physically ill because they're worried.
DUBIS: They should have a "no-decision zone." I've advised clients who inherit or whatever to consider a no-decision zone. The market is irrelevant; I'd say, "You don't just put this money into the market wherever. Become proactive instead of reactive. Because what you're saying to me is 'I got this chunk of money; what do I do with it?' That is the absolute wrong question. 'What do you want to do with your life?' You have this chunk of money, one of the resources you could apply to it." When folks focus on the bucket of money as their life, that's the wrong paradigm.
IB: Is this no-decision zone a time to sit down and talk with your trusted advisors and say, "Wait a minute... let me redefine my life with these new parameters and expectations?"
DUBIS: Businesses, when they are fundraising, don't immediately deploy that capital. They spend all this time building the plan so they can actually get the capital. So pretend you're a business. Think like that — go back to the scenario analysis and risk management: What can you handle on the downside? Risk tolerance is the common phrase we use, but I do view every client's financial situation as if it is a business, because there's direct correlation.
You don't just deploy capital without a plan. The no-decision zone is kind of a planning best practice, if you will, but it works. There's this risk of in (stock market) and out, in and out, which I don't like either, but there are folks out there doing this, because they're so afraid of making another mistake.
In their mind, they might have believed, like Ralph might have believed, "I made the worst mistake because I lost almost half my portfolio." Now he might be thinking, "I can't handle any more mistakes."
So if he goes all to cash, and the market shoots up 15%, it's going to be tough for Ralph if he doesn't invest. I don't even care if he doesn't see an advisor: He should get together with some friends and have an authentic discussion about how he feels. I do get worried for some folks who are ill, and I have run into that. Then it's time to look for the support of your friends and family.
NELSON: So if Ralph has been managing his own portfolio, the unusually good market over the last couple of decades made him unrealistically overconfident about his investing ability. And the unusual downturn, one that almost no one expected, has now made him unrealistically underconfident. He wasn't as smart as he thought he was, but he's not as bad as he probably thinks he is now. He wasn't as irresponsible a planner as he probably thinks he is at the moment. And so the real answer is for him to get some outside advice, whether that's a professional or whether that's through a trusted friend or some other source. But the last thing he wants to do is stew in his own juices.
DUBIS: I think the thing that everybody has to do in any aspect of our life is to think through, "What is the process of thinking I'm taking to the table on this decision?" Stop looking for answers. Google gives you answers, and it doesn't help anybody. It's the process of thinking to get to the answers that matters. And you can look in hindsight and say, "So maybe Ralph isn't feeling so good because maybe he knew everything he was getting himself into." Maybe he did. I mean, I don't know we can assume that in the file.
IB: Maybe his risk tolerance was high.
DUBIS: Super high. Who knows? But I would say that planning is funny, right? I mean, life's infinite in its potential, so the word "plan" is just funny to me. I would much rather spend my time on making sure we understand the assumption challenges in advance, because that's all we've got. Because as I walk out the door, I could get hit by a bus: "That was a great plan, Mike [Dubis]. Good job."
NELSON: So that the part of planning that involves making projections is pretty suspect at the moment. But the part that results in action steps is really worthwhile. That's the distinction.
DUBIS: Planning works because of that, not because of projections. But John brings up a good point: On November 21st, I think the Dow bottomed at 7,500. I was in Disney World miniature golfing; it ruined about two hours of miniature golf with my wife. (Don't ever bring your "crackberry" miniature golfing).
Within that short period of time, and an insurance person will understand what I mean, this was a six standard deviation — meaning that it was so mathematically and statistically improbable of happening, not even an insurance company would have insured that risk. They would have said, "This isn't going to happen, because this event, in this short of period of time, at this level of volatility, is just unfathomable."
It was an unknown event, is really what happened. It's just like terrorism. Look at any new policy now: insurance doesn't exclude a terrorism risk because it's an unknown. [And now it is a "known."]
LOCKE: Who would have thought six months ago that three of the five largest investment banks in this country would be out of business? Nobody. Things that have happened are unprecedented.
CUSTER: The specifics are unprecedented, the actual market cycle is not. Look at the S&P from about '97 and then the tech rally on up, and then the fall from that, and the rally back up, and now this fall.
We're kind of back on the same level that we were, and everyone is talking about the lost decade where the S&P, over the last ten years, has made no money. In fact, it's lost on average about a percent a year.
We've been at this level before. What we haven't seen are some of those shock things, similar to September 11th when we hadn't seen that before, similar to when we found out that the people at Enron were lying to us, as were a fair number of other corporations.
All of those. So the one thing I keep telling clients too is, yes, this does seem unprecedented. And because of the perfect storm aspect of it — where it's such a credit crisis as well as an equity crisis that is what's really impacting people so much — because we have seen terrible things happen before, and we have recovered from them, I tend to be a glass half full kind of person.
I personally am feeling, whether it's a U-shape (I don't think we're going to have a V-shape recovery), but I think we will have a recovery. Maybe it will be just a recovery in a secular bear market as opposed to a start of a new bull market.
But I really do trust that if we can allow people to stay [in market], and if their own risk tolerance will allow them to stay invested with an appropriate portion of their money that should be invested in riskier investments, they will recover. And I don't necessarily think it's going to take a decade to do it.
IB: Do you think those with a higher risk tolerance will invest more than appropriate in aggressive stocks to get it back?
DUBIS: High risk tolerance doesn't necessarily mean gambler. Risk tolerance is a measurable assessment. The problem with financial planning or investment management is that it's a social science. Hard science brings two chemicals together, which reacts the same way all the time. In the social science, we oftentimes get different results. So again, it goes back to the scientific process and advance.
So somebody is going to say "I want to double up," that's going back to the analogy of, "I want a more powerful drug, not a weaker drug."
And that's really the question: If you're getting treated for your portfolio (because now we're in triage for a lot of folks), what kind of drug do you want? Because this drug could really have some side effects again.
Markets are funny that way. You know, V-shape, U-shape recovery — I have no idea. We really don't know.
IB: Or "W": Come up and then plummet again.
DUBIS: Well, there's a lot to that.
LOCKE: Don't you think we're going back to a more conservative time?
DUBIS: I think an age of thrift.
LOCKE: Yeah, I think we're going back to a more conservative time where people will actually save some money, which would be a novel idea.
CUSTER: Well, certainly credit may be used in a more frugal manner, not only by the consumer using credit, but by the institutions giving the credit being more frugal. Yet we have to get off the place where we are right now, where credit is frozen.
LOCKE: That's the perception, that credit's frozen. That's what you hear in the media. As a matter of fact, and I know this isn't on target, but I've got to tell you this quick story: A couple weeks ago, I was asked to go to an editorial board visit at The State Journal. I and two other bankers sat with reporters and the editor, and the first question from one of the reporters, — the first question — was, "Well, okay, you guys got $700 billion now. When are you going to start lending money?"
The three of us kind of looked at each other and thought, "Holy smokes, who's going to take that question?"
All I could do was pipe up and tell them there's a big disconnect between what the media tells about the capital that's been injected into about 185 banks, and lending. I mean, all I can speak for is my own institution, but our lending activity last year, our loan growth in '08 was 24% growth — huge growth.
We haven't stopped lending. We're still lending. And our loan delinquencies? Madison is a great economy, one of the best in the country, so less than a quarter of 1%. Unbelievable.
They got to keep things in perspective again. I told customers that, too: Don't believe everything you read in the newspaper and see on TV, because the reality is sometimes a little different than what you're being scared into believing.
NELSON: I think a Wall Street Journal article suggested that the front lines of the recovery is at the community banks because you know your customers and you're still doing business. It's kind of the untold story though, you're saying.
LOCKE: We're where the rubber meets the road. And I don't care whether you're talking about President Obama or the governor — everybody talks about creating jobs, because that's where it's at.
You know, there's still a lot of banks, especially community banks as opposed to somebody in New York with a branch here, where it's business as usual. We never got into subprime lending. We might have been boring, but we stuck to what we knew, and now that's coming back into vogue, I think.
DUBIS: Well, there's this paradigm issue of what are people thinking. I want to echo something you said, simplifying things as much as possible. I'm not very good at it; I was raised by Jesuit attorneys — so I just simply can't not talk — anyway, I will often ask folks, "Do you believe the world will be in a better place ten years from now than it is today and will people be willing to work to get there?" That's essentially an underlying assumption of capitalism. Capitalism isn't always a fun word, but it is the grease that runs developed markets.
And if you say "No" to that, then perhaps your world view is such that you shouldn't be in equities. But if you believe people want to work to have a better place in ten years, the markets will be free to deliver to that value. If it's not the case, if it's 10 or 20 years from now, and equities didn't rebound, something big — with big, big problems — has happened.
Then, cash won't matter. I don't even know if you'll be lending anymore. I think if we go 20 years without an equity rebound, I'll be out of work and fishing a lot more.
IB: But what are the true costs of this recession — for example, what happens to not-for-profits as a result of folks like our Ralph's wife going back to work and not volunteering at retirement age? What happens when baby boomers can't afford to retire?
DUBIS: We're seeing some data ... I think we're seeing a lot of this right now.
CUSTER: Well, they're having their struggles obviously with their own finances, just as we are certainly having a diminishment of contributions. And what you're talking about is volunteer power. If people are going to have to replenish resources and not be thinking about that new kind of retirement where they would work for the pleasure of working....
NELSON: So the social benefit organizations were hoping for the retiring boomer dividend, and if the boomers aren't fully retiring, the dividend just won't show...
IB: And yet those are basic service needs that help support an economy that's gone through a shock period.
So what happens to those resources, where they're all so underfunded? And then what happens to our economy? Is it further depressed?
DUBIS: I think the research is going to have to see where the sources come from. Because I think even prior to this crisis, there was a big chunk of the population that was overextended anyway, and they just simply weren't donating. They probably could have, if they hadn't overextended themselves.
But I look at Madison as a supportive community. Maybe other parts of the country will be harder hit than here. But it goes back to dollars and cents too. I mean, the nonprofits need to raise money.
LOCKE: John touched on something interesting, too — made me think a little bit about giving advice to people close to retirement. This [economy] has hurt them, and if they're not going to work a little longer, maybe [they can] find something enjoyed as a hobby, where one can actually make a little money — to continue to work for a while and phase into this hobby that's income producing is a pretty smart move, I think.
NELSON: Yeah, instead of taking up a pursuit that costs money in retirement, find one that's revenue neutral or makes money, and the impact on cash flow is significant. Your choice of how to invest yourself in retirement has enormous financial consequences.
DUBIS: Betty made a good point: Anybody going into retirement needs to run that cash flow. And not just say, "I spent $5,000 a month." Get down to the amount spent on the dog. Get a Quicken program or an Excel spreadsheet and note fixed and variable income and consider things that pop up every five years.
That's another problem: people do not plan for a truck or a roof or a boiler replacement at $10,000. If it was monthly savings, it would have been $60 a month over the course of five to ten years. But all the sudden it's there.
In the last five years, I got more calls from folks saying, "What bank should I get a line of credit from for my truck?" instead of asking "Can I pull it out of my Vanguard account?" That's what I would have liked to have heard.
Especially folks five, ten years into retirement are grossly unprepared for what it really costs. Real estate taxes alone, even if you pay off your home, in Dane County at least, — assume about 1.8% or 2%. You're sitting on a home you've lived in for 40 years, it might be worth $400,000. That's $8,000 a year, and you were making $60,000. That's just such a big bogey when you go into retirement because it's always there.
LOCKE: We have older folks in McFarland that had to actually sell their homes because they can't afford taxes.
DUBIS: What is downsizing, though? Really? A lot of folks, when they say they downsized, go to a super nice condo that's just as expensive, probably more, because of the assessments, upkeep, and condo fees.
NELSON: One big difference, though, is that the physical arrangement of the condo may allow them to age in place more successfully than in the house. If it can keep them in their residence instead of having to go to assisted living, then that is good planning. One floor, maybe not geographically isolated, no external upkeep needed: all those kinds of things.
In declining health, they might be able to stay in there for years longer than they would have in the home they raised their family in. So the downsizing or downshifting thing is more than just what it would cost. How do you use it through the years of your retirement?
IB: Okay, lots to think about! But let's go back to our poor guy, Ralph. Any final thoughts or advice for him — and us?
CUSTER: Well, I would say the biggest risk would be overreacting to this, either direction, by thinking, "This market is as low as anybody could have ever expected it to be, so I should deploy lots more money into the market and know that I'm going to ride this thing back up," or conversely to say, "I'm just going to have to get extremely conservative and move all to cash."
It's a time to be looking at values, as well as investments and assets, and truly think about what is most important about money. Because it isn't the money that's important — it's what you do with the money.
Then leverage that conversation forward. For every response [to that question], ask "What's important about that?" Eventually you get to what you are really thinking about, to your purpose on the planet. And those are important conversations to have, certainly with a significant other or with a financial planner or a trusted banker or an attorney or a CPA.
And when you really get down to what's most important in your life, then you can actually look more realistically as to how you plan for this life to go on. At age 57, Ralph may have another 40 years ahead of him or more.
That's the other aspect he's got to be thinking about, because even before this downturn in the market, he was not in very good shape from that perspective.
So people have to be thinking about really having that whole conversation with themselves first, then with significant others, to get to a place where they know their priorities. And try not to overreact too strongly, especially to the visual media, as they're keeping you interested by frightening you, and making this alarmist.
And yes, this is a difficult time, but we've been through difficult times. History is filled with difficult times. With planning, with thoughtful actions, people will get through this, and they just need to try to not overreact.
DUBIS: I would add that financial planning does work. It's just how. What is your house philosophy in advance of it? Was it proactive? Was it a process-driven exercise? Was it one where you, as the consumer, felt you understood it? I think you have to be proactive, prospectively, and challenge the assumptions. It's only then that you'll take ownership in it. Reaction is often a result of not having original ownership of it, and that takes time. People need to give themselves time to breathe and figure out, "Is this an event that's going to require me to rethink my future?" A no-decision zone certainly is a good example of doing that.
I would say, too, that capital markets are funny. They won't repeat. People need to understand that. Yet inside it, they're founded under capitalism, and capitalism — we can go to Wikipedia and it will be ten pages long, but it can be summarized in one sentence: One is not rewarded without providing value to others first.
That's a good thing. And for the most part, there are good people on the planet — not just in the United States, but on the planet — who want to do that. And so in my world, I am a cup half-full or an optimist too. I'm also an economist, so that's really tough. I think my role is to lay out what are the issues that we think we know, that are probable or within reason, and then decide on it. There is no wrong answer, I think, if you take a proactive approach to this.
And I go back to a couple of the comments I said before: The more we can get comfortable with uncertainty, the more we can focus on what we can control and what we can't control. I'd probably have people learn from this that this level of uncertainty is always going to be here, now. Betty just highlighted a lot of reasons why. So let's get used to it so then we can focus.
I think then, at the end of the day, just as a book I'm reading now suggests, "breathe in real deep, then breathe out and smile."
And I'll tell you, that's a very uplifting, great way to start everybody's day. So beyond all the planning advice we give you, I just try to start every day with a smile.
LOCKE: I just jotted down three things, too, for the IB reader. The three things that I'd pass along is (1) adversity always builds character. Sure we're in an adverse time, but it's about character. (2) Don't flinch. Now is not the time to flinch. (3) And whenever you have challenges, you have opportunity.
And for those people who really feel they're remiss if they don't have some exposure to the stock market, there are options with no downside risk, such as the index CD, indexed to the S&P 500. It's FDIC insured, and if you hold it until maturity, which is five years, you can't lose a dime, even if the market goes down, because it's hedged. The bank does that. The depositor doesn't.
You have to think long-term here. You can't do it for two or three years. But a number of people have done that because they wanted the exposure to the market.
IB: Thank you, David. John?
NELSON: I would just say, in the big picture, that the economic and financial crisis that most people are facing is the perfect opportunity to develop a new vision for the rest of their life, because the old vision they had may well not work anymore.
And so it's really a great opportunity to remember that they have three basic kinds of resources to make that vision happen.
One is basically financial, as we've been discussing. The second resource is their psychosocial aspect, both their psychological strengths as well as their social networks and their families.
Use that as a resource to create the life they want, and that includes working longer and hopefully working at something that they're good at and want to keep on doing, because they may have to do. There are instruments, there are tools to help one do that, traditional career development kinds of tools and beyond.
The third resource that we really need to pay attention to is our health. If we do want to have the opportunity to work longer and to live this new vision of a life, with this new kind of retirement and so on, we need to start paying very good attention to our health, because it's not enough to live longer; the goal is to live longer in relatively good health.
And likewise, there are actually scientific-based assessments and tools we can start using now to identify what our greatest health risks are, what our most productive health changes or behaviors would be, and that undergirds both of the others because it's very expensive to get sick, and it also interrupts our ability to keep working.
So that's this comprehensive or holistic life plan idea, and now is the perfect time.
This roundtable discussion is a thoughtful approach for IB to take editorially, as opposed to just echoing how bad things are and how people are coping. "Coping" is kind of a negative word; this is a much more proactive approach.
And in fact, one of the things I want to make sure to echo was David's comment that Greater Madison is a strong regional economy loaning money to successful businesses that are employing people.
LOCKE: But the rah-rah days where everybody gets a loan and an ATM card is history. So things are going to be more conservative, which I think is a good aspect. What was going on...I mean, you could see that that it was not going to continue forever, just couldn't. No way.
NELSON: And yet there will be successful companies and employers in this market.
IB: Thank you all. This form of panel discussion, versus individual interviews, offers the kind of reflection we were soliciting.
Many readers in our audience are getting hit emotionally from a lot of different ways right now. We appreciate the framework of this economic event as an opportunity to reexamine our personal as well as professional plans.
That permission is certainly welcome from the trusted advisors we have around this table because while we have to focus on our market environments, the worry over retirement options can contribute to analysis paralysis and panic.
Thanks for reminding us, through our representative Ralph, that these times are unprecedented, and we can take different approaches to fit...and plan...our values.
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