Thursday, May 30, 2013

Living with volatility after retirement

Since graduating from university and entering the workforce, I have spent less than I earn from employment almost every year. In other words, not only have I always had money coming in with which to make new investments, but I have never had to consider selling assets in order to fund my living costs. One consequence of this is that I have never been in a position where I have to consider what would happen to our ability to fund our retirement should we see an extended period of economic contraction, high inflation, deflation or higher taxation which result in the real value of our pool of assets shrinking.

Since I will be (more or less) leaving the workforce at the end of September, I am now starting to think differently. I have to. With no income coming in each month, I have to consider how I will deal with the times when the value of our assets decreases, possibly for several years in a row. I no longer have the luxury of just waiting for my savings to repair the damage done when the investments lose money.

A few points to guide me:
  • markets are volatile - they will go down as well as up and a twenty percent fall in price is normal and not something to panic over. Most of the time such falls are an opportunity
  • individual equities carry greater risk of causing a permanent loss of value than individual properties or index funds. Allocate carefully
  • cash may be a losing asset, but it is also insurance against bad days and a means of taking advantage of lower prices. I aim  to keep at least two years' worth of expenses in cash/near cash at all times
  • I am not smarter than the market
  • the residual post-retirement payout from my firm and Mrs Traineeinvestor's part time earnings should meet our family's expenses (including mortgage payments) until at least the end of 2014. Dividends from now until the end of 2015 will cover at least one more year's expenses and take us to the end of 2015
  • all my mortgages are P+I. In the course of time, they will be fully repaid and each time one is paid off my cash flow increases
  • when it comes to properties, cash flow is king. It is better to cut the rent in bad times than have a vacancy
  • if things get really bad, we can downsize our home, cut some of our discretionary spending or even go back to work
  • FIRECalc tells me it will work, as do my own spreadsheets (at least they did before my computer disaster)

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