Managing Nest Egg Expectations

How much of your nest egg are you willing to lose?

This question is one that I always ask my students in the adult learning courses I teach and my new clients and prospects alike. Every time I ask the question I get the same deer-in-headlights looks, and the answer seems difficult to produce. After I press for an answer, 99% of the time folks say the same thing: NONE!

“How can that be?” I ask inquisitively. If your portfolio has any portion of it in something other than cash, CDs, or other guaranteed investments, “None” cannot be your answer. The head-scratching begins again, and someone usually says something like, “I don’t really know. I’ve never been asked that question before.” Then the dialogue begins, and we start to drill down on what this really means to their personal situation.

Wall Street and Big Brokerage do not engage in this type of negative thinking, as it’s anything but sexy, exciting, or emotionally stimulating. Conversely, they tell you what you need to do, what you need to buy, and how much money they are going to make for you. Does that sound about right?

I understand that 2008 seems like an eternity ago, and that had you just stayed the course, like those on Wall Street told you to do, you have likely made back all the money you lost in the market crash and maybe even have some additional gains in your account. Unfortunately, as you are entering the MOST critical time in your financial life, the retirement phase, you cannot afford to sustain heavy losses if another 2008 happens.

The last market crash was deep and painful, but only briefly so. Don’t you recall how the federal government rushed to the rescue to bail out those giant companies? Many of those companies irresponsibly squandered billions of dollars, while others were victims of the aggregate collapse and fiscally in peril as a result. The federal government came to the rescue and decided which companies were just too big to fail. Those that were fortunate enough to make the list were provided with economic stimulus from the government to avoid bankruptcy (i.e., AIG and GM). Other 100+-year-old companies, like Bear Stearns and Lehman Brothers, were less fortunate.

Next, the Federal Reserve began the process of quantitative easing, initially buying billions of dollars in dysfunctional mortgage-backed securities and followed by flooding the world with 85 billion dollars of U.S. Treasuries every month, subsequently driving the 10-year U.S. Treasury bond to 200-year record lows.

The result was good for our 401(k)s and other securities-related investments. Today, we are experiencing all-time highs in the U.S. stock market, and that warm and fuzzy feeling keeps us mostly unconcerned that the stock market will ever reverse its course. In my 23 years as an advisor and educator, I am certain of few things, but the market’s cyclical nature will forever remain a real threat.

When the next downturn in the market occurs and possibly devastates your plans for smooth-sailing throughout retirement, are you prepared to be defensive? What have you or your advisor built into your financial plan that enables your portfolio to prevent significant losses?

If you are familiar with the concept of sequence of returns, then you understand that the timing of bad events creating significant losses in the five years prior to retirement and the first five years of retirement are critical to the long-term success of your portfolio for the rest of your life! Isn’t your priority the same as all others in retirement? Not running out of money before you run out of life.

We face challenging times with global markets and geopolitical events affecting us at every turn. I have absolutely no idea what the markets will be like over the next several years, and I don’t think anybody really does. I am certain, however, that as long as these good times have reigned, they can’t last forever.

If we have some difficult times ahead, will that bode well for the current construct of your portfolio? My mission is not to suggest you do anything irrational but, rather, get you to create a plan of action. You must answer the question, “How much of my nest egg am I willing to lose?” and do what is necessary to help ensure your plan is as fail-proof as possible. Once you have this structure in place, retirement will not only be much more predictable but also certainly more enjoyable!


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