Belt Tightening when the Market is DownSubmitted by Mission Financial Planning on May 15th, 2020
When MFP builds financial plans, we usually create a model that assumes clients maintain their current standard of living throughout their life. Our models adjust for: kids moving out, loans paying off, post-retirement projects, big purchases, and/or travel. We also plan for basic living expenses to stay the same, adjust for inflation, and (sometimes) consider the natural reduction in spending as we age.
When you’re living off of your investments, what happens to spending plans when there’s a substantial market decline and your investments are down? Should you slash spending during depressed times, to preserve cash and to prevent eating into investments?
Cutting your spending to equal the losses in the market is a frequent response. If the market is down 25%, it’s a natural knee-jerk reaction to try to cut expenses by that much until the market recovers. But a year or two in deprivation mode doesn’t have as much of a long-term effect as you might think.
Research shows that in many cases you would be better off with a series of small, permanent adjustments than a temporary slash-and-burn approach. A smaller adjustment that can be sustained over your lifetime may cumulatively be much more impactful.
In dramatic years like this, if your retirement withdrawal rate has been aggressive, you may want to back withdrawals down to safer levels while you weather the COVID storm.
If you’re not retired, trimming spending allows you to put more into retirement savings or build up cash reserves.
Learning to live on less is a great discipline; and the COVID crisis has been a spending reboot for many of us.
Schedule a call with Mission Financial Planning to review your spending plan and discuss how the market volatility may affect it. We may want to implement a Dynamic Spending Strategy, setting up triggers for adjusting spending when the market warrants it. Sharon and Jared look forward to speaking with you and assisting with your financial concerns in this financially trying time.