Newsletter for September 22, 2024: The Biggest Surprise

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The biggest surprise last week wasn't that the Fed cut rates. Nor was it that the Fed cut by 50 basis points instead of 25. Thankfully, the stock market rallied to new highs for the week.

As a personal finance enthusiast and retirement practitioner, the real surprise was seeing retirement researchers raise their safe withdrawal rate recommendations just before the Fed began its multi-year rate cut cycle! In other words, this feels like the personal finance version of “top-ticking” the market.

Surveys show that around 40%–50% of retirees wing it when it comes to retirement planning, spending whatever feels right without a specific plan for drawdowns or life expectancy. Winging it is one approach, but following a dynamic safe withdrawal rate that adjusts with the times is better.

Once you leave work, your biggest battle might be psychological as you struggle for meaning and purpose. The bigger the income you forgo, the larger your worry may become. If you can’t get your mind right about your new status as a retiree, you won’t last long as one.

In my latest post, Raising The Safe Withdrawal Rate At The WRONG Time, I explore why I believe retirement researchers are getting it wrong. I suspect there will be a huge debate when people read my reasoning. Or, maybe there won’t be because I make an open-and-shut case. Let’s see!

The Temptation To Make It Rain

Have you ever looked at someone who makes more money than you and wondered how they could get into so much financial trouble? The classic example is NFL or NBA players who earn millions but end up bankrupt within years of retiring.

Instead of buying one house, one car, one fancy watch, and having one spouse, they go wild with multiple purchases and relationships, which ultimately bring them down. Then they invest in highly leveraged “can't lose” investments that somehow lose often.

I’ve sometimes wondered how rich someone could be after making $50 million after taxes in 12 years in the NBA, if they were a personal finance power reader. If they saved 90% of their income each year and invested it all in the S&P 500, they could easily retire with over $150 million by age 32. A mere 2% withdrawal rate would provide $3 million in gross income a year for life.

Most of us won’t be that lucky. However, over 60% of Americans are homeowners with trillions of dollars in home equity. And now, with mortgage rates coming down, the temptation to extract it and spend it like a baller is growing!

Total home equity in owner-occupied housing by generation

In a new post, Resist The Temptation To Do A Cash-Out Refinance, I argue why it’s better to leave your home equity untouched. Find joy in knowing you’ve built up substantial wealth that can be tapped if needed. Then, focus on making more money and enjoying your life.

But man, have you seen the latest Range Rover Sport? Such a beauty! Must fight the temptation to get into debt to buy a depreciating asset.

Money Addiction Will Rise

Once you hit 40, you’ve likely experienced enough economic boom-and-bust cycles to start sensing what’s next. With the Fed cutting by 50 basis points instead of 25, there’s a chance they’re seeing something more troubling in the economy than the public knows.

But I wouldn't worry too much. If there is a downturn, it likely won’t be as bad as the 2007–2009 global financial crisis. That’s the upside of having experienced the worst—the next downturn won’t feel as severe. As a result, you're less likely to make panic-driven financial decisions.

What I foresee over the next two years is a rise in money addiction, which some of you may not even realize you have! As interest rates drop, economic activity will increase as consumers and corporations borrow to spend and expand. In turn, we could see asset prices rise, incomes grow, and hiring increase.

As you begin making more money from work and investments, you may feel an irresistible pull to work longer hours and take on more risk. For some of you, this will be a fantastic environment. For others with addictive tendencies, not so much.

If you’re not careful, the pursuit of more money could lead you to sacrifice your health, friendships, and family, to the point of no return. We’re still at the start of a long interest rate cut cycle, so there’s plenty of time to plan ahead. However, things move quickly nowadays. Beware.

See: The Biggest Concern After The Fed Cuts Rates

To Your Financial Freedom,

Sam