Wednesday, April 29, 2020

Margin of Safety Recalibration

When I retired at 49 in 2007, we had about 2 years of of expenses in cash in taxable savings as a  margin of safety.   The rest could be invested.   Then came the Great Recession.   Our investments declined significantly.  It was tight to live on the 2 years of cash we had and pay all our expenses, which included a mortgage that was our largest expense.  So we sold some of our investments, at a  significant loss, to pay off the mortgage and reduce our annual expenses.   It was an eye opening experience.  In hindsight, it was a blessing to have a bear market early in our retirement.  We learned a lot about a sufficient margin of safety.

Fast forward to 2020.   We moved to keeping 4-5 years of cash in our taxable accounts, and kept our debt at zero.   When the market moved sharply down this time, we had a significant margin of safety to ride out the decline.   Much less financial anxiety that 2008.

For now, it looks like we may have over prepared, as economies are coming out of lockdown in the next month.   However, I still plan to maintain a 4-5 year margin of safety, for the next bear market or economic downturn.

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

This is not financial, saving nor retirement advice. Please consult a professional advisor.

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