Want Your Own Private Recession?

When in retirement you can have your own personal recession. How? Well look at the numbers.

  • Inflations of 4%
  • Fees of 2%
  • Pension of 4%
  • Market Drop of only 10%

Total drop in your nest egg value is 20%.

Even though the market dropped only 10% in this example your nest egg has dropped 20% in value and you now have your own personal recession. It’s that easy and that is why it is so important you avoid large losses. A maximum of a 10% stock market loss seems to be a good rule of thumb but even then you are in recession in this example.

It is unlikely that all your nest egg is in the stock market but if the stock market drops like it has this month and is down 20% your nest egg could well be down 10% overall – even in a diversified portfolio.

A diversified portfolio does not protect your nest egg from losses. It may reduced your maximum loss and that is all.

Now the nest egg has to recover from that 20% drop. It will have an up-hill battle even if the market turns bullish and gets back that loss. Your nest egg will still have to contend with:

  • 4% inflation still eating away at your nest egg during the following year
  • Fees of 2% being taken out throughout the following year
  • You taking your 4% Pension either as a lump sum or through the year

Without taking into account inflation, fees and pension for the following year, the market will have to return 25% for you to get back to even. However if you account for these drains on your nest egg it will take over 40% returns in the next year to get back your capital.

I am assuming you are starting out in retirement when capital preservation is paramount to get you into the long run of retirement. If you suffer these sorts of losses starting out your nest egg will not last as long as you do.

Can you see how hard it is to maintain your capital let alone make actual returns on your investments when in retirement?

Here’s what you can control:

  • 2% Fees – have a serious talk with your financial planner.
  • 4% Pension – have a serious talk with yourself and budget your money.
  • When to exit the market or use other techniques to minimize losses – develop a strategy to protect your nest egg in retirement with your financial planner.

You really have to change your focus. It is not just about the markets. Its all about your nest egg and how it is affected by the inflation, fees, pension and the market. You need to be egg-centric 😉 (I thought that was clever).

You are not an investor. You are a retiree trying to preserve your nest egg’s capital in retirement in the bad years and with luck maybe get a small return in the good years.

You have to say to yourself it is all about me, me , me! You need to be very selfish about this. Whatever happens you need to ask what is the effect on your nest egg. Nothing else matters because this is what you are going to live on for the rest of your life.

To avoid your own recession you must avoid drawing down your nest egg to spend on other things at every stage of your life. Too many people think they can take a few thousand dollars out of their nest egg without harming it. That means don’t use it to help the kids if they get into trouble with their mortgage. It means finding ways to help your parents other than raiding your nest egg. Being selfish now may mean you are not a burden to your kids later on.

Unfortunately taking money out of your nest egg is just like the stock market dropping and reducing your nest egg. That money will no longer be in the nest egg to earn a return and maintain the capital base you need to earn your pension with.

It’s all about getting your nest egg into the long run. Once there you may find you have surplus cash and can help your kids and parents if you want to. But not at the start.

Play it safe and be selfish if that means you can avoid your own private recession.

One Response to “Want Your Own Private Recession?”

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