Jun 8, 2006

I'm Feeling Queasy

The first year I worked full-time was 1969. I earned $7500, more or less, for a full year's work. So far in the three trading days this week, my stock market invested assets are down $14,000. My, how times have changed. I find it amusing that smart financial people say that it is wise to hold your investments and not react reflexively when times are tough on Wall Street. While I generally agree that the average invested is wise to ride out the ups and downs of the market, clearly these people don't follow their own advice. The slightest provocation sends these folks on a selling spree. Luckily I don't need my investments at the moment so I can wait the market out. It always comes back, and often with as little reason as when it declines. But that doesn't make the madness on Wall Street any easier to bear. What really is worrisome in this roller coaster market is that I know several people who are depending on a withdrawal rate of 8%+ of their nestegg to live. Most advisors that I have read suggest 4% to 5% is a sustainable withdrawal rate over time. Above that and you are asking for trouble. Dave Ramsey, a man I have great respect and admiration for, routinely suggests people can live on 8% of their investment and still not touch the principal. I think Dave is just plain wrong on this one. If you withdraw 8% of your retirement money in a year in which your IRA savings declines 10%, you have depleted your nestegg by about 18%. Back-to-back down years and you have a problem from which is tough to recover. I also know several people who retired in the late 90's or 2000 and were pretty much wiped out by the last few years, because they depleted their nestegg, while the market was in decline. They are back at work for the long haul because they overestimated what they could expect to earn in the market. Personal finance is like having a half-gallon of Ben and Jerry's Chunky Monkey in the freezer. It is great if you use some moderation. Get greedy and your stomach will hurt. Tag:

1 comment:

DarrellH said...

I'm enjoying your writing. Every post has something intersting to say. I'll come back and read more. I hope you continue to write!