Wednesday, March 18, 2009

The Recession Has Stress Tested our Financial Situation

When I took early retirement in October, 2007, I thought we had a comfortable margin of safety. Even if the market returns were below normal, I believed we had sufficient retirement savings to manage. However, I didn't expect a downturn the magnitude of this recession, which has stress tested our finances. At this point, we are currently surviving the stress test. Here's my assessment of how we're doing.

  • Did we save enough? At the end of 2008, the answer was still yes. When I retired, we had retirement funds equal to 21 times my yearly salary. At the end of 2007, we had 23 times my yearly salary. By the end of 2008, our retirement funds had been reduced to 16.7 times my yearly salary. From previous calculations, I had estimated that 20 times salary would be a reasonable margin to enable a comfortable retirement.

    While a retirement fund of 16.7 times salary is still (barely) acceptable, a continuing bear market in 2009 will likely change our answer to no.

  • Was our debt low enough? In hindsight, the answer is no. Although I had planned to eliminate all debt, we did not pay off our mortgage when I retired. I mistakenly thought our retirement fund of 23 times salary offered the opportunity to delay paying off the mortgage for a couple years. In retrospect, we should have paid off the mortgage, by selling some of the funds invested in the stock market. Ah, if I only knew then what I know now :-)

  • Were our savings diversified appropriately? The answer is mostly yes. Due to our conservative investing approach, we had about 5-1/2 years of expenses invested in CDs, municipal bonds and money market funds. Although questionable as appropriate, we had 50% of our savings in my company's stock, which did not fall as much as the stock market indices. The rest of the funds were in a diversified managed stock portfolios, which declined the same amount at the indices.
  • At this point, the feasibility of me staying in early retirement depends on the economy and stock market beginning to recover in 2009. If that happens, we will try to pay off the mortgage. If we can't afford to pay it off completely, we will payoff part and try to refinance the remainder at a lower rate, hopefully around 4 -1/2 %. In addition, we will continue to maintain 4 to 5 years of funds in cash equivalents, bonds and CDs.

    If the market continues to decline significantly in 2009, I will seriously need to consider returning to full time work.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial, investment, saving or retirement advice. Please consult a professional advisor.

    Copyright © 2009 Achievement Catalyst, LLC

    1 comment:

    Bret said...

    It sounds like you are about where I want to be in a couple of years, but with the house paid off.

    Although, I would rethink the 50% of your savings in the company stock. I think 10% would be more appropriate for someone who is retired.

    I'm glad you did well with this, but it sounds pretty lucky that your company wasn't GM, Bear Sterns, Citicorp, etc.