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By Michael J. Wiener
Special to the Financial Independence Hub
If you’re thinking of retiring today on your own savings rather than a guaranteed pension, how do you factor in the possibility of a stock market crash? If you’re like many people, you just hope that stocks will keep ticking along with at least average returns. However, this isn’t the way I thought about timing my own retirement.
I retired in mid 2017. At the time, stock prices were high, so I assumed that the day after retiring, the stock market would drop about 25% or so, and then it would produce slightly below average returns thereafter. By some people’s estimations, I over-saved, but I didn’t want to end up running out of money in my 70s and be forced to find work at a tiny fraction of my former pay.
What actually happened in the 4+ years since I retired was the opposite of a stock market crash. My stocks have risen a total of 60% (11.5% compounded annually when measured in Canadian dollars). If I had known what was going to happen, I could have retired much sooner. But I didn’t know, so I have no regrets. It’s better to have too much than too little.
The dilemma is worse today than a few years ago
If you want to retire today, you face an even worse dilemma than I did because stock prices are much higher than they were when I retired. If I were retiring today, I’d factor in at least a 40% drop in stock prices the day after I left my job. This isn’t a prediction; it just represents the possibility that stock prices could return to more normal levels in the coming years.
For many prospective retirees, thinking this way means they will have to save substantially more before they can retire, so this is very unwelcome news. But simply hoping stocks keep climbing could lead to a meagre retirement if markets crash in the near future.
As usual, those who think the way I do and are already over-saving will believe this line of thinking. Those who want to retire sooner on rosy stock market predictions will dismiss my thoughts. In most markets, optimistic retirees fare reasonably well, but with stock prices at nosebleed levels, there is the possibility that optimists will be very disappointed.
Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007. He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Oct. 26, 2021 and is republished on the Hub with his permission.
There is no reason your nest egg can not keep growing as long as you keep going.
An investment advisor put my life savings into mutual funds. Four years later the portfolio had lost $300,000. Taking back what was left I vowed to never let any financial advisor ever touch my money again.
I was 56 years old and in trouble. This money was supposed to supply an income for the rest of my life. I quickly had to learn how to successfully invest money.
By the time I retired at 60 I had learned how to successfully invest. The secret was investing equally in 20 financially strong companies paying high dividends with a long history of ever-increasing share prices and dividend payouts.
It is now 17 years later. My portfolio is now 300% larger and growing despite my taking a six-figure dividend income out of it for the 17 years. Those dividends got paid without interruption through both the 2008 and 2020 market crashes.
My background was developing commercial risk scoring systems. To me, investing in stocks is just another form of commercial risk. Stock scoring software I developed allowed me sort through the 16,001 stocks available in North America and find what are for me the 20 safest paying the best dividends.
If you are patient and careful, you do not need an investment advisor to be a successful investor. Not having an investment advisor eating up 2% to 3% of my portfolio every year over the last 17 years has saved me several hundred thousand dollars in fees, charges, and commissions. Money that is invested and earning me money.
After showing several friends how I invest, at their urging, I wrote books on how to be a successful self-directed investor. I supply my stock scoring software with the books. You can learn more about such investing at http://www.saferbetterdividendinvesting.com.