Friday, October 15, 2010

Retiree Financial Lessons from the Recession

When I retired in my forties in October 2007, I didn't expect a severe economic crisis to happen over the next three years. The decline in the stock market significantly impacted our ability to stay retired. Our retirement savings had dropped over 40% by early 2009. Fortunately, it appears the worst is over and, while slow, an economic recovery is underway. Similarly, our retirement savings are growing once again and have been increasing for the past two years even though we have withdrawn fund for living expenses during that time.

Although I wish this recession had not happened, I am glad that it happened early in our retirement, while we were better able to meet the financial challenges. Also, we learned the following lessons, which I'm sure will continue to help us through out our retirement years.
  • Keep short term fund needs in safe investments. We were fortunate to have about 5 years of living expenses in cash, money market funds and CDs. While these funds may have very low returns, we are guaranteed to have 100% of the principal when needed. Psychologically, we felt better not cashing investments that would have be sold at a loss. In addition, we were also able to give our investments time to recover.

    We continue to keep about 3-5 years of living expenses in cash, money market funds and CDs.

  • Have a margin of safety. When I retired, we had almost 23 times my annual salary saved. Based on our calculations, we believed 20 times was very good and that 12 to 16 times was the minimum. In March 2009, our savings had fallen to 13 times my salary. At that point, I was very concerned about the feasibility of continuing my retirement. I'm sure I would have gone back to work if our savings had fallen to 8 times salary, which could have happened if I had retired at 13 times my salary.

  • Be prepared to reduce amounts withdrawn from savings. As our retirement savings fell, we took significant steps to reduce our savings withdrawal rate. First, we reduced our monthly living expenses primarily by paying off our mortgage. Our living expenses have been reduced by about 30% with 24% resulting from eliminating our mortgage payment. Second, I took on some part time jobs to generate wage income which will cover over 40% of this year's living expenses. In the future, I plan to work much less and only cover about 20% of our living expenses.

    Going forward, our plan will be to increase spending in the higher return years, and cut back during the lower return years. In the near term, I also plan to do 1-3 part time jobs for interest or as needed.
  • Hopefully, in 2011, the economy will recover sufficiently so that we can return to our planned retirement spending. However, if economic conditions should worsen, we'll be ready to meet the challenge.

    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.

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