Man, I don’t know about you but I’m feeling a major decline in the economy. Hearing from folks all over who got laid off and weren’t expecting it.
You can see it too in the Personal Consumption Expenditures the Fed reports. It’s in the NEGATIVE category now, which is typically indicative of a soft, if not, downright recessionary economy.
Maybe this doesn’t impact you. That’s great! But I still think there’ll be some info of value in this email.
First off, remember I am self-employed. So, while I can’t lay myself off I can certainly be laid off by people not using my services, not watching my videos, not buying my books etc. So let me share with you what I’m doing in preparation for a hard economic landing, which I fully believe is coming. (You can’t raise rates that much, that fast, without some negative results. And yes, while I don’t think the Fed is nearly in control of the economy as many, a sudden increase in interest rates does have an impact, for sure.)
So, say your income stops coming in. Guess what amigos, you still have bills to pay. Where does that money come to pay the bills? Cash. You are now being rewarded for having cash. Last I checked my Schwab money market account was paying something like 4.5%.
How much cash should you have? Well, enough to cover your expenditures until the income spigot turns on again. The question you’re going to need to answer is “how long will that take?”
Be honest here. 3 months? 6 months? A year? I don’t know. But I’d err on the side of caution. There won’t be a massive bailout like what happened in 2020 to get cash in people’s hands which means you’ll need more time to get your cash flow turned back on.
Where does the cash come from? Well, if you’re fully invested, as I WAS, with no cash liquidity, you’re going to need to think this through. Am I comfortable taking the risk of using my investment holdings to cover my expenses while I search for new income?
After 2007-2009, I said “never again.” I’ve talked many times how when the bottom fell out in the Great Recession it fell out everywhere and all at once. 57% declines in stocks. Huge real estate losses. Banks reneging on previously established Home Equity Lines. Credit card interest rates increasing to 18% even though, well for me, I thought I had 0% fixed for the life of the loan. What a fool I was for not reading the small print.
Oh, and don’t forget, finding work back then wasn’t easy for many people either.
In preparation for the slow down, I’ve parked a decent chunk of my portfolio into the money market to make sure IF things go south, I have a resource to cover me that won’t be down 57%. In 2007, I thought I could take the risk of leaving everything in equities. In 2009, I realized I couldn’t. A lesson I learned much too late.
Things are different now, of course. I have tons of equity in my home. More investable assets too and very little consumer debt. But guess what?
Our spending has increased relative to our income. Obviously, if things go south, we’d cut back big time. We’re already starting to do this in preparation. But man, you get used to a certain lifestyle and it’s not easy going away from that. But you’re going to have to realize you may need to tighten. Again, we’re doing that now, just to be prepared.
Now I’m not all in cash. I do have some individual stocks and a big position in a Federal Home Loan bank bond with a 6% coupon. I’ll also add some more equities to my portfolio shortly but I’m heavier than I’ve ever been in cash. Getting 4.5% makes it a whole lot easier to be in cash though, I have to say.
What if you though need to draw down your retirement portfolio to fund your expenses while waiting for your income to pick back up? Is that retirement-killer?
NOOOOOO!!! Hear me out. Let’s say you’re married and your Social Security benefit at Full Retirement Age is $3000. Your spouse stayed home to raise the kiddos so her (how dare I assume it’s a woman, amirite?) benefit is going to half of yours.
At FRA (67 for most of us), you’ll get $4500 a month in Social Security. That’s $54,000 a year, in today’s numbers. That’s not going to be enough in retirement you say. You sure about that? Don’t tell these people. Their spending is WAY lower than what you’d think and yet the vast majority are reporting they’re content in retirement. In fact, as I say in that video, they are increasing their non-discretionary spending on things like charitable giving and travel. Can’t do that if you’re running out of money.
If you’re single, simply take away the spousal benefit for Social Security and you have a baseline of $3,000 a month to work with. Will that get you a new Mercedes Benz? Nope. Will it put food on the table? Yes sir, it will.
Now, it’s highly unlikely you’ll spend down your entire retirement portfolio but just say you did. You have equity in your home no? Of course you do! That’s why I’m so adamant on considering how reverse mortgages could help your retirement. You can see the interview I did with Don Graves the other day here.
Maybe a reverse mortgage isn’t for you. That’s fine. I’m just showing you there are plenty of options to make ends meet in retirement without having 7 figures of investments.
If this were not true, how on the Good Lord’s green earth (more CO2 = more green btw), would so many people continually report they are happy in retirement? Something stinks in Denmark with all the fear being batted around about retirement inadequacy. Where. Is.The. Evidence???
Side note. You know how the naysayers all say “it was better back in the old days when everyone had a pension”? Yeah, check this out.
Everyone had a pension, eh? 🙂 Just plain silly. And back then, not only did most people not have a pension, they had no Social Security either. Social Security, love FDR or hate him, it matters not, has allowed people to have a decent retirement. And that’s a fact.
If you think politicians, via a “blue-ribbon committee”, are going to take away your Social Security benefits, I’ve got nothing for ya. I’d just ask you when has the government every taken anything back after it’s been used for so long? The answer, of course, is never. Government grows by adding things. Government shrinks by taking away things.
As much as I’d love government to shrink, I’ve come to the realization that this isn’t going to happen. I’m at peace with this now.
Will taxes be raised to cover the deficits in Social Security? Yuppers. Will they be raised on YOU though, maybe a little bit via payroll tax. That’s only fair after all. But certainly not enough to put you in a pauper’s grave.
Allright, so let’s land this plane. Get these two books and get them now if you haven’t already.
Spend Till The End by Larry Kotlikoff and Scott Burns. What opened my eyes after reading this book was how consumption smoothing actually works. You spend more while you’re young, in terms of kids, housing/mortgage, insurance, etc. As you age you spend less. Crazy, right? (See my forthcoming book, “Relax and Retire: Debunking Inflation Fears” where I show this exact situation in detail.)
And of course, Frederick Vettese’s book “The Essential Retirement Guide: A Contrarian’s Perspective”. This book is chock-full of details about retirees consumption dropping like a brick in water all over the world.
So, try to relax, amigos. The world isn’t falling apart. This is not Jerusalem of Jeremiah’s time, for Heaven’s sake. Could it be? If God so deems it then of course. Would your portfolio save you from that?
In fact, another side note. You should really read Jeremiah. He invested in land when the land-values were way down due to the threat of Nebuchadnezzar invading. Pretty interesting stuff that Bible. Lots of great tidbits. Almost like it was…divinely-inspired…(my shocked face!)
Anyway, despair not. We know how the story ends anyhow. There are trying times to come, and that’s a fact. But being prepared is never a bad strategy. If it turns out your preps weren’t needed, what’s the downside? The opportunity cost of more growth in your portfolio. Eh, you’re still getting 4.5% in money market for the time being. Not too shabby.
P.S. Don’t forget to join my locals channel. We go LIVE every Friday at 4pm Eastern.