Price increases at the wholesale and retail level – check out the numbers here — have rattled investment markets, and with good reason. The widely forecast U.S. economic boom was expected to be fueled by continued low interest rates.
That assumed people would return to the job market as employers expanded their businesses. But employers are struggling to fill job openings. Many people are not eager to return to work. The three main causes are pandemic concerns, low wage rates for many service jobs and, yes, expanded government benefits that allow some people to postpone re-employment.
While this is going on, President Biden is pushing his $4 trillion package to fund infrastructure improvements and provide the most substantial boost to the middle class since the 1930s. Putting aside the merits of his case, the prospect of such an enormous increase in federal spending is adding further jitters to an already nervous market.
With continued inflation and market volatility likely in at least the short run, it’s essential that retired investors develop enough liquidity in their portfolios to avoid having to sell investment securities – at least for six months and perhaps longer. This defensive posture may reduce overall returns but it avoids being forced to sell holdings when market values are depressed.
This is not the advice I would give younger investors. First, markets may bounce back quickly. We don’t have a lot of experience recovering from a pandemic, and the resilience of the U.S. economy has proven itself many times over the years.
But retirees need to be more defensive, both in their investing and spending plans.
Look at the four primary spending needs – day-to-day living expenses of things you need, discretionary spending on things you don’t need but would like to have, travel and other bucket-list items, and emergency spending, most likely involving health problems.
Guaranteed income from pensions and Social Security should be enough (I know they’re often not) to cover essential needs, with anything being left available for “nice to have” items. Retirement funds would cover big-ticket items, and this is the place where cash from your holdings would be especially nice. Home equity is the ideal piggy bank for emergency spending needs, although wealthier investors can likely squirrel away cash for unexpected events.
Going on a financial diet may be unpleasant but can produce great results. With a slimmed-down spending footprint, you can handle a market correction. And if things don’t get that bad, you’ll wind up with more money at the end of whatever cycle we’re now entering.