What will you retire on in a Bear Market?
Bear markets are not good for the $28 trillion of retirement funds in the United States.
“Joseph Gallagher was starting to think about retiring from his construction job in 2008 when the bear market ‘beat me up pretty badly,’ he said.
“Gallagher waited until 2013 to retire. Now, at age 67, he is taking no chances.
“Most of Gallagher’s money is parked in a savings account. ‘There has been too much of a good market the last few years,’ says the Manchester, New Hampshire resident.
“After being brutalized by the 2008 stock market crash, many people fear a replay could destroy their retirement nest egg.”
But wait a moment…
Since January 2009 when Bitcoin was launched, the US dollar has lost 20% of its value through inflation alone. If there had been no inflation the current $28 trillion of retirement funds in the United States would be $33.6 trillion. By contrast Bitcoin has risen in value from zero to around $6,000 today.
So if Joseph Gallagher has managed to save $500,000 since being beaten up by the 2008 Financial Crisis, building his nest egg in US dollars has cost him $100,000. Remember this 20% cut has taken place during the longest stock market bull run in recent history.
The bulls of the S&P 500 are running no longer. Its peak was on 30th January 2018 at $2,827.43. Over the year it has wavered and is currently 2 per cent off its January high.
“Bear markets occur on average every five years. If a long bear market hits early in retirement, the damage can leave retirees without money for their later years.” Source: Ibid.
Financial planner Mitchell Kraus, of Santa Monica, California gets clients to examine fixed expenses, such as mortgage payments, before retirement begins so they can evaluate whether they would be able to cut back in a downturn.
“If we have a bear market and you have a lot of fixed expenses, you could be doomed,” Kraus said. Source: Ibid.
What message does this have for those wanting to build a nest egg?
Lesson one: Even if the stock market becomes bullish 20% of your savings will be devoured every 10 years simply for building your nest egg in US dollars.
Lesson two: The stock market does not look so bullish any more. If we have another decade like 2000–2010 your chances of surviving on your savings are around 6% according to a T Rowe Price analysis. Source: Ibid.
The key to all successful investing is diversification. For holders of US dollars that means looking beyond the currency for something that is better at holding its value.