Several years ago, a couple came into my firm to take advantage of the free consultation we offer. They sat down with us and explained their financial situation. They were retired, had $866,000 in investments, and were drawing $60,000 a year from those investments to cover their cost of living. “Wait a minute,” we said, “You're taking out $60,000 a year? That's 7.5 percent. That's very, very high. Your investments cannot support that. It won't be very long before you run out of money.”
“Yes, but here's what you don't understand,” said the husband. “We retired in 2007 with one and a half million dollars. At that time $60,000 was 4 percent of our investments and we could handle it. The problem is that 2008 came along, and we lost nearly half our investments. Now we have $866,000, and even though the market went down, our expenses didn't, so we're spending the same amount.”
Thinking they were all set for retirement, this couple had sold their existing home and bought a beautiful $750,000 lakefront home. They put the $300,000 they received from the sale of their house into the new house and wound up with a $450,000 mortgage. Every month they had a $2,700 mortgage payment.
“We know you're not clients yet,” we said, “but after analysis, we have to tell you that you can't afford that house. You're going to have to sell it. You can take the equity you have in the house and buy a new house. Your house will be paid for. That will reduce your expenses by $2,700, and then you should be okay.”
“But this is where the family congregates,” said the wife. “The kids and the grandkids come all year round. They come for Christmas, for Thanksgiving, for birthdays. It's become the family home.”
“We understand, but you can't afford it anymore. You've got two choices: You can sell this house, buy a new one, and afford to eat steak; or you can stay in this house and eat Beanie Weenies.”
The wife thought about it for a moment. With tears in her eyes, she said, “For now, we'll eat Beanie Weenies.”
They finally did put their lake house up for sale. They got to the point where they could no longer afford to stay in it. Unfortunately, by then it was 2009. Prices had fallen so low that they were going to have to sell it at a huge loss. Not only that, but the prospects of selling the house were bleak. A severe drought had caused the lake to recede a hundred and fifty feet. They no longer had lakefront property.
This couple worked hard and earned their retirement. Then, in one year, they saw their investments drop from $1.5 million to $866,000. Their problems snowballed from there. These folks were unprepared when the market tanked. They didn't have a defensive plan. One bear market changed their lives.
I don't mean to scare you, but I do want you to recognize the good, the bad, and the ugly when it comes to investing at this time of your life. I want you to be prepared for bear markets. I want you to protect your investments. I want your money to last as long as you do.
It's important that you understand that the game has changed. You're not only moving from offense to defense, but if you've recently retired, or are planning to retire, you're in the most important period of your investing life, and you need to make these years count.