The Best Time To Start Was 20 Years Ago

A couple of days ago on NotePD I used the phrase "the best time to start was 20 years ago, the second best time to start is now." While the context the other day was fitness, the phrase applies to pretty much every aspect of personal finance too. Today it relates to sequence of return risk which is the risk that the stock market has a large decline pretty close to a planned retirement date. 

Using 2022 as an example, if an indexed 60/40 stock/bond portfolio is down 13% YTD and someone retired on Dec 31, 2021, would that be problematic? What about someone who retired on Dec 31, 2007? For a plan with no margin for error and then there is an error, like a large unexpected expense, then yeah, that would be problematic. General thinking is that this risk is more relevant to early retirement when spending in usually more, you do more things at 65 and 70 than you do at 75 and 80, and your life expectancy is longer. 

Getting the start of your retirement right is crucially important on several levels. It is important to mitigate risks like sequence of return risk, it is important to figure out your lifestyle groove for how you're going to spend your time and how you'll maintain your health.

Focusing on the sequence issue there was some good reading today. Tony Isola talked about his very high weighting to equities in his own portfolio, married to the belief of having 3-5 years of cash needs set aside to mitigate an adverse sequence of returns. Is 3-5 years the right number? Some will want a much shorter and I know from the comments on a recent Barron's article, a lot of people believe 10 years is the right number here. There is of course no single right answer for everyone. Have too much cash and there is potential opportunity cost from not having some of that money invested, have too little cash and you might have to sell while market is still down.

Christine Benz also weighed in sequence of return risk. She had a couple very interesting points but there was one quip she made that I want to address. She talked about the rough year for stocks and bonds saying that for 2022 "cash is the only position in the black." Right before that she talked about how in previous bear markets, diversification meant at least one thing was going up citing value stocks in 2000 and government bonds during the financial crisis. 

I want to point out that aside from resource stocks and select defense industry names going up there have been plenty of alternative strategy funds that have gone up this year. I don't think that part of the market interests her, I can't recall her ever mentioning alts but admittedly I only see a fraction of her content so if you know different, please comment. We write about these all the time and of course the ones I mention are far from the only ones working. Success on this front comes down to putting in the work ahead of time to understand how they work and how to size them into a portfolio as well as accepting that a great alt will probably not do very well as the market is rocketing higher. That's what diversification is, you don't want everything to go up together because if they do, then they are all likely to go down together. If you own 50 stocks that all correlate at 0.80 or greater to the S&P 500, then you've certainly addressed issuer risk but you've done nothing for market risk. 

Back to Benz' article, she mentioned "pre-tirement" which is a new phrase to me. Basically, you keep on working but stop saving for retirement because you have enough already. You instead spend that money for traveling and the like as if you were retired. 

There was also a mention of an "encore career" which we talk about here all the time usually using different terms like monetizing a hobby to converting a volunteer gig into a secondary career. For my money, the key to success on this front is to start now, start early, start cultivating opportunities early, no matter how old you are. It is never too early to start.

I talk about this often within the fire department. There are tons of opportunities for healthy retirees to work on large wildland fires in roles having nothing to do with fighting actual fire that is on the ground. There's work related to setting up camps, checking in vehicles, getting daily planning documents put together and printed, setting up communications and on and on that although seasonal can be quite lucrative. One of our contacts at the state sent around a solicitation with a list of possible training classes they could offer. I indicated interest in 7 or 8 of them, two would be related to my role as fire chief the others would be to broaden my skills if I ever needed to do that. 

I've talked about my interest in being a Liaison Officer (LOFR) which is pretty high up on the org chart. I have the classroom work done and if the opportunity is available to me, it is probably for having been the chief a good sized, well liked department for ten years and counting. The LOFR helps departments like mine get through incidents that threaten their communities. I love the idea of helping departments in the way we've been helped when we've been threatened. Great but what if I am wrong and it is not available to me? 

There are countless opportunities further down the org chart that sound very interesting, positions observing fire behavior and relaying changes in conditions, another one is working where vehicles check into the incident which sounds pretty good to a guy who loves taking pictures of fire trucks. 

 

I could go out right now as an EMT on our ambulance and continue to do that for as long as I am able to pack test (annual physical requirement of being able to hike 3 miles wearing a 45 pound pack in 45 minutes or less). The reason to go into such detail is to help paint a picture where true immersion in whatever your thing is, becomes the best path to building the "encore career" that you want, not having to settle for a work you really don't want to do. 

One buddy opened a restaurant in town. It is wildly successful. He is older than me and of course running a restaurant is very hard work but he loves it. Loving the work associated with your encore is a great outcome.

What is the realistic income potential of an encore you might like to do? How far would that income go toward covering your fixed expenses? This equation starts to bail you out of some sequence of return risk because you are relieving some of the burden from your portfolio. If your encore can cover half of your fixed expenses, they you probably need fewer years set aside in cash or at the very least, your margin for error increases dramatically. 

Yes if you're a CPA you can probably find seasonal work doing taxes as an encore, it certainly would be familiar but in case just going part time/seasonal in your primary career doesn't sound that appealing, find a passion and pursue for the love of the thing and I bet the rest will take care of itself in terms of presenting opportunity.