Friday, November 14, 2008

Retiring Early in Turbulent Times

When I retired in my forties in October, 2007, the stock market was near its peak, the economy was strong, and employment was good. Since then, the market has declined over 40%, the economy is likely in recession, and unemployment is at 6.5%, the highest level since 1994.

Obviously, the past year wasn't the greatest time to retire early. However, we did survive our first year, and I think the prospects of staying in retirement are still good. Here's a brief financial assessment of how well prepared we were for the financial crisis during our first year of retirement living.

What Has Worked
  • Reviewed options with our financial advisor, in advance. About a year before retiring, I started working with our financial advisor on retirement scenarios. I covered a +/- 20% range retirement incomes, paying off or keeping the mortgage, and different financial returns. As a result, we had a good idea of how much was needed to comfortably enable retirement in different economic scenarios.

    Our advisor's analysis showed the biggest risk of failure was a bear market during the early years of retirement. Although we prepared (see next bullet), we didn't expect a scenario as bad as the one we are now experiencing.

  • Put expected near term expenses in cash or cash equivalents. We were conservative and kept approximately five years of expected expenses in CDs, bonds and money market funds. Theoretically, we can wait five years for the stock market to recover. However, in year four, I may start to be anxious :-)

  • Health insurance coverage. I was eligible for our company's retiree health insurance plan, which provides the same coverage as when I was employed, but at four times what I paid as an employee. It would have been hard for me to retire without guaranteed health care coverage, since a major medical incident without coverage can be very costly.

  • What Didn't Work
  • Lump sum diversification. After transferring part of my company retirement funds to an IRA, I invested the cash portion (about 50%) in a diversified stock portfolio, right at the peak of the stock market. Since historical data investing as a lump sum was better than dollar cost averaging, I had convinced myself lump sum was the right approach.

    Unfortunately, this part of our savings has declined 40% along with the rest of the market.

  • What I Wished I Had Done
  • Pay off the mortgage. I wrestled with this one for a while and finally decided keeping the mortgage was worth the tax benefits for at least the next couple years. If I had sold some of the stock portfolio to pay off the mortgage, I would have avoided almost all of the 40% decline for that part. Ah... hindsight is 20/20 :-)

  • What Was Really Lucky
  • Did not diversify most of my company stock. Since the majority of my retirement account is in company stock, the plan was to sell it in stages and reinvest the proceeds into a diversified stock portfolio. It has taken longer than expected and I have kept most of the sales proceeds in cash. The delay has been fortunate since my company stock is only down 16% versus 40% for the market.

    Of course, I was very lucky. Most experts would recommend against have the majority of one's savings in one stock.

  • Financially, our first year in retirement has be very good, given the poor economic situation. I expect our second to be equally challenging. Hopefully, I will still be able to give a positive assessment a year from now :-)

    For more on Reaping the Rewards, check back every Friday for a new segment.

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

    Copyright © 2008 Achievement Catalyst, LLC


    Anonymous said...

    This IS interesting...especially since, if the rumors that have been reverberating around the shop are true, I soon will be joining you in retirement. I, however, am not in my hireable 40s but in my unemployable 60s, and so a layoff will mean early retirement at a time when my investments have lost over $100,000.

    Mercifully, I did pay off my house. Taxes and insurance have gone up so high, though, it remains to be seen whether I can keep it without a regular income that far exceeds Social Security. COBRA, which will carry me over the 18 months until I'm eligible for Medicare, costs EIGHTEEN TIMES what my present coverage costs; obtaining full coverage with Medicare will cost only 10 times what I'm now paying...assuming I don't come down with something that requires drugs expensive enough to toss me in the "doughnut hole."

    My plan is to try to limp along on early Social Security, freelancing, and selling yard-saled junk on Craig's List & Ebay until I'm 66; then return the two & a half year's worth of early SS payments to the government so I can reset Social Security payments at the "full retirement" level. By then, I hope, the market will have improved enough that I can take some money out to live on.

    If things don't get better, though--and soon--I'm looking at an old age in poverty, rather than the middle-class life I expected and worked for. How can I express my joy with our soon-to-be former presidential leadership? :-D

    Anonymous said...

    Well, you made me feel a little better (misery loves company, right?) I retired March of 2008 and have been watching the market go down ever since. But at least it had already gone down for 4 months before I retired. Not that it makes any difference financially, but there is something psychological about the date you retire and measuring the drop from that point--rather than the peak (which was your measurement date--ouch!)

    I didn't pay off all my mortgage before retiring but had made it much of the way--about 60% of it. I had been recently thinking, my rate is so low, I shouldn't have done that, then I'd have more cash cushion to wait out the market. But alas, I would have allocated some of that to the market, I'm sure, so I love your point about the fact that you're glad you paid it--otherwise you would have lost it in the market, and STILL had the mortgage!

    Thanks for the silver linings, I could use them today.