People often ask divorce lawyers how they do it. My stock answer is that it’s like any other financial transaction, except that the transaction is wrapped in layers and layers of emotion.
Usually, that emotion has to do with the relationship and the breach of “trust.” But in markets like the current one, emotions related to financial insecurity and financial ignorance make matters even worse.
Year to date the market is down 13% as of the close today. Interest rates on mortgages have jumped from 3 to 5%. Inflation is expected to be 6.3% this year. So, if you are divorcing and over age 40, there is reason to be concerned. Meanwhile, I spoke with colleague last week about the second home market and he reported that he can’t settle a divorce because each spouse thinks the other one will make a killing on a shore property because the market is so hot. I offered that interest rates will probably dampen the market to which the response was that the buyers in resort markets are paying cash of $2 – $5 million to secure their piece of paradise.
The inspiration for this opus is Lindsay Bryan-Podvin’s post today on Vox about money and emotions. In a nutshell, Lindsay reminds us that “Emotions drive most decision making” and tells us that research shows our emotions toward money are pretty well formed by second grade. And perhaps the deepest fear people develop in their first seven years is fear of understanding how money works and our financial lives are organized. If doctors dealt with trauma patients the way most of us deal with money, every patient would be dead from indecision.
It’s a bad market. But guess what? If you had $100,000 invested in a SP500 index fund 30 years ago, you have a million today. If you didn’t get that $100,000 together until 20 years ago, you still have $400,000. If you waited another decade you have $322,000. In the Philadelphia region if you bought a house 30 years ago for $225,000, you can probably put a $650,000 “for sale” sign out and reap your $380,000 reward. We are coming off a remarkable run of wealth creation.
Yes, the future is uncertain, but on two subjects we should all agree. Obsessing about markets and trying to time market events achieves nothing. Did you or your financial advisor predict that we would have our first worldwide pandemic in a century? Did the Kremlin let you know in December that Putin was going into Ukraine? If yes on the latter question, step forward and claim a Russian oligarch’s yacht because you bought oil in December and you have just about doubled your investment in six months.
A year ago, when we were all being vaccinated, one of our client’s had lots of stock in a start-up that had just gone public. It opened at $60, shot up to $80 and now rests just under $20. By the way, the company is exceeding revenue targets but even that good news is getting a chilly reception on Wall Street. Meanwhile we have a client with a property at the shore that appraised for $1.8 million a year ago and now seems to be worth at least a million more. These outcomes are the product of fate more than anything else.
Aerosmith got it right. “Life’s a journey not a destination.” The average life expectancy in the U.S. today is 80 years. If you get to 65 you have a 40% chance of reaching age 90. So where are you today and where will your divorce leave you in that financial plan once the pie gets cut? That’s the only question that does matter. Yes, smart people can sometimes predict markets. Early in my career I represented a fellow who called the October 1987 flash crash and got a lot of press because he had moved to all cash. But it really took no genius to figure out that tech stocks were overvalued in 2000 and that real estate was crazy in 2007-08. Alas, no one predicted the flu or Ukraine. And even the people who saw the 2007-08 problems didn’t really predict the kind of meltdown that nearly occurred. So, every investor needs to realize that the goal is to avoid running out of money before reaching 90 while chasing the gold in the meantime.
Unfortunately, despite nearly 6 million people in the financial services business, not many will be of much help. They are trained to talk to you about returns and dollar cost averaging, expense ratios and the like. Real financial planning for humans involves thinking and budgeting. And it involves setting emotion aside. That can be difficult.
So, here is the path you need to follow. And before it even stops, you probably need to look at two paths. In the last 20 years the number of senior citizens being divorced has exploded. You will need one path labeled “Together” and another called “Apart.” Two people together do live more cheaply than two in separate households.
- How long is the expected work life? Many clients like to say they plan to work indefinitely. I respond that the fates often interfere with that plan and that work after 70 is by no means assured. Henry Kissinger is still at it at 99. Michael J. Fox was diagnosed with Parkinson’s at 29.
- Where am I going to live and is that a sound physical and financial decision? Mobility is a question that changes over time. But for many clients who want to keep the “big house” I ask whether that’s a smart financial decision. The $225,000 house of 1992 is today worth $650,000. The same money (if cash) invested in SP500 for 30 years is today $3,000,000. Note also that real estate runs in streaks. My neighbor sold his house in 2018 for $355,000. Zillow looks right in estimating $514,000 today. Realize as well that there are usually two steps; downsize first and chances are by 80 years + you may need to live in what we politely dub a “community.”
- What’s my bare bones minimum expense level? Sure you would like to stay somewhere warm after Christmas. Most people do. But how much does that cost and can you afford to do that in years like 2022 or 2042 if the economy is down. Understand, you only get to run out of money once after you retire. The financial services all like to tell you that you will need 80-90% of your pre-retirement income. That’s the lazy person’s way out and, by the way, the more money they hold on your behalf the more money they make. You need a real budget based on your utility bills, your car insurance, your mortgage.
- What’s a reasonable return on the money I do have? Until recently all the “smart” people in the investment community have said you can reliably take 4% of your savings each year, leaving the rest invested. So, if you will retire with $1 million 4% is $40,000 a year plus your social security and any defined benefit pension money you might have. $40,000 is $3,333 per month. That withdrawal from a 401K or IRA will be taxable. On that withdrawal bank on roughly $3,000 ($250 a month) in federal taxes before you start spending. A portion of your social security is going to be taxable and a piece will be deducted for Medicare Part B. You should also look at AARP or others for additional premiums for expenses under what is Part D (Medications).
Some tough news. Morningstar research indicates that 4% withdrawals may be too high and that 3.3% is the more conservative route. This is getting lots of press lately especially given the market decline. You will also see lots of articles about using annuities as a means to mitigate or avoid the problem. We wrote an article about this published on May 12.
Some good news. Interest rates are on the rise. Historically, investors were told to shift away from stocks and toward bonds as they age as a means of avoiding risk of down markets. Not bad advice generally but two years ago a 10 year Treasury bill paid less than 1%. Today we are at 3% and 4% is what most would call “normal.” Interest rate increases are healthy for the fixed income side of your portfolio and provide some comfort in choppy stock markets such as we are seeing today.
5. Having done the scary work of Steps 3 and 4 what “indulgences” can I buy. New car/used car? Club membership? Dining out? Hello Fresh meals dropped off at the door? Purina?
6. Is there untapped equity? The reverse mortgage market pays you the equity you have trapped in your house before you sell it. The fees are high but this device is gaining popularity and acceptance according to today’s Wall Street Journal (6/6/22 pg. R6). Why be sharing a bowl of Meow mix with the kitty when you have $400,000 of untapped home equity? Just be certain to make your real estate taxes and insurances are paid because there are nightmare stories about lenders foreclosing on retirees because they were not.
7. Don’t freak out unless absolutely necessary. Years ago the investment house Glenmede used to pitch putting your investments with them using the voice of an affluent customer who opined that “My lifestyle is very important to me.” The implication was that Glenmede had that lifestyle “covered” and perhaps they did. In the end, this is your life. This is your money. The data show that as we get older we do spend less. Not lots less. Unfortunately, health care needs climb just as you realize that you really won’t need a new tuxedo for New Years’ eve. But for most of us, the days of buying the “must have” Rolex or Hermes clutch give way to replacing the clutch on the Ford.
8. Beware, beware, beware. We have written this before. Very few retirees have the resources to fund the needs of the next generations. If you do, good. But job 1 is getting yourself to the finish line without becoming a burden to your kids. Almost every 40 year old adult looks at an 80 year old parent and can find expenses gramps can cut. Maybe you choose to drop the club or your weekly lottery ticket from Gus to help the next greatest generation with their needs. But don’t break your bank trying to fulfill their needs even if your granddaughter is acclaimed as the best ballerina south of the Juniata River.
In the end, with rare exceptions, our stock portfolios did not double in the last decade because of our genius, nor did our houses go up by a third because of our occupancy. If you had a house or savings, the economy has been kind to you. But, history has taught us that the Wall Street bear does periodically bite even when we are not confronted with a worldwide pandemic or a senseless effort to recreate the Soviet Socialist Republic. Neither Wall Street nor its nabobs know or care how you live. That’s something that you need to take care of after setting aside your emotions related to money and actually planning for retirement.