Bankrupt in Just Two Weeks, Ep #144

Jun 15, 2020

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Can you imagine this nightmare? You’re newly retired and then a global pandemic comes along and threatens financial markets all over the world leaving you bankrupt in only two weeks. Listen to this cautionary tale in the retirement headlines segment of our show today. But what is more important than hearing the frightening scenario is learning what you can do to prevent yourself from taking this kind of risk.

Outline of This Episode

[3:22] How did one man go from retired to bankrupt in just 2 weeks?
[7:40] How to protect yourself from risk
[9:15] Few use the CARES Act to tap into their retirement savings
[11:50] Should you cover non-discretionary expenses with Social Security or an annuity?

Retired to bankrupt in 2 weeks

How could someone go from retired to bankrupt in two weeks? This Wall Street Journal article notes that one investor reentered the stock market after the 2008 financial crisis by investing solely in leveraged exchange-traded notes (ETN’s). ETN’s are similar to ETF’s but they don’t own the assets they track. The investor’s ETN’s were earning 18% a year until the bottom dropped out. It’s important to remember that highly profitable investments come with added risk.

How to protect yourself from risk

Hearing a story like that may cause you to think twice about risk, but to stay on top of inflation we have to take on some risk. Instead of running from risk, we must understand it. If you want to maintain your purchasing power your money has to grow beyond inflation. You can do this safely by creating a war chest of cash and bonds that has several years’ worth of income. Your war chest will allow you to ride out the market dips so that your portfolio has time to recover. Listen in to learn what else you can do to protect yourself from risk.

Few use the CARES Act to tap into their retirement savings

If you’ve listened to this show in the past few months you have heard the different retirement benefits of the CARES Act. One of the provisions waives RMD’s for 2020. Another allows individuals younger than 59.5 to access their retirement portfolio without penalty. According to this Investment News article, few people have taken advantage of this aspect of the new law. Even those who did dip into their retirement savings didn’t typically take too much out. This leaves me cautiously optimistic about people’s retirement plans.

Should you cover non-discretionary expenses with your guaranteed income?

Mike has an interesting question. He asks if his essential expenses should be covered by Social Security or other guaranteed income. I think it’s a smart idea to pair non-discretionary expenses with your known income. Although I like Mike’s idea, it’s not what I do.

I create a budget based on expenses then subtract guaranteed income. The deficit is what needs to be covered by the retirement portfolio. Find out more by listening to this episode of Retirement Starts Today.