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The Stockdale Paradox and Your Financial Decisions

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Viet Nam prisoner of war, James Stockdale, experienced some of the greatest inhumanity towards man that anyone can suffer. He lived to tell about it, and he left lessons that can help us maintain perspective during this pandemic and can provide guidance on managing our financial decisions.

On September 9, 1965, Wing Commander James B. Stockdale was shot down over the jungle canopy in Hanoi, Vietnam. As he was parachuting out of the wreckage, he had the presence of mind to prepare himself for what awaited him when he landed. He said to himself, “Five years down there, at least. I’m leaving the world of technology and entering the world of Epictetus.”

Epictetus was a Greek philosopher who espoused, “There is no such thing as being a “victim” of another. You can only be a victim of yourself. Stockdale returned home a hero after 2,713 days in captivity. He later told Jim Collins, author of Good to Great, “You must never confuse faith that you will prevail in the end (which you can never afford to lose) with the discipline to confront the most brutal facts of your current reality, whatever that might be.”

Jim Collins coined the phrase “the Stockdale Paradox,” as a way to describe the battle we face between optimism and pessimism. We face such a struggle amidst this pandemic. We keep hearing that it will be another 30 days, and then things will be back to “normal,” and then 30 days come and go, and another time frame is thrown out for us to consider. What if it is another three to six months?

According to Stockdale, the optimists did not survive the brutality of the POW camp. They hoped for a rescue by Christmas. Christmas came without relief, and then they said the rescue would come by Easter. Eventually, they died of a broken heart. Optimism is not a good foundation on which to base financial decisions.

Here are some ways to make financial decisions in the framework of the Stockdale Paradox:

  1. Realize the stock market is volatile yet time in the market is a proven strategy in the most unpredictable times versus running to the sidelines.
  2. Revisit your risk tolerance – has anything changed?
  3. Work with a financial advisor or financial coach to reallocate your investments if necessary.
  4. Anchor your investment decisions with your financial plan – if you don’t have a plan, get one completed!
  5. Balance your optimism or pessimism with the reality of the current economic state – learn what you can from trusted sources.
  6. Don’t be a “victim.” We can only control ourselves and how we respond. Respond with knowledge and a plan.

Stockdale’s approach was to find a way of thriving in whatever circumstances he found himself in so he could make it day to day for as long as necessary. While we all hope for a speedy resolution to this pandemic, let’s do our best to be the masters of our fate and control our financial destiny with a solid plan and faith in our economic system.

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5 Reasons to Check Your 401(k) Statement

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The best time to plant a tree was 20 years ago. The second best time is today.”

When was the last time that you actually looked at your 401(k) statement? Perhaps you are still in the post 2008 financial markets meltdown mode of “If I don’t look at it I can’t get upset”. Well, with the recent market volatility you might feel like it’s “deja vu all over again”.

First quarter statements will be in the mail next week and the results may not be pretty. Still, that shouldn’t keep you from checking your statement and discussing your goals with a financial advisor or financial coach. Your financial goals may not have changed however, how you get there may.

It’s just another reason to make sure that you keep an eye on your 401(k). Here are 5 other reasons to open that statement and keep an eye on things.

  1. It’s probably your biggest retirement asset. If you have a 401(k) consider yourself one of the lucky ones. 25% of Americans who can invest in their company’s 401(k) don’t. One third of American workers have no retirement savings at all. Even if your 401(k) balance is in line with most Baby Boomers who have saved an average of $70,000, that still represents a big chunk of change any way you look at it. Next to the equity in your home it’s probably the biggest asset you have. All the more reason to pay attention to it and make sure it is working for you even if you never add another dollar (which I hope you will, especially if your company provides a match).
  2. Asset allocation still works. After the great meltdown of 2008 the so-called market moguls were/are ready to write of the benefits of Modern Portfolio Theory. Why? Because there were some nuances of the 2008 crisis that couldn’t be accounted for in Modern Portfolio Theory like… corruption in the financial system! It still makes sense not to put all of your eggs in one basket or asset class. Diversification still makes sense and it still works. This recent market volatility will prove that point if you are properly allocated. Read more here.
  3. Social Security is only one leg of three legs you need. One third of retirees end up relying entirely on Social Security. That doesn’t have to be you. Social Security will be there for you but you will also need your retirement accounts like an IRA  and your 401(k) as well as any taxable savings you have. If you are one of the fortunate few who have a pension as well as a 401(k) then you have a four-legged retirement savings stool. Congratulations. Otherwise it’s a three-legged plan. That’s OK. Take advantage of tax deferral. It’s like a miracle.
  4. You may not want to work the rest of your life. Even if you think you will work until you drop either by choice or by necessity keep this in mind…half of current retirees surveyed say they left the work force unexpectedly as a result of health problems, disability, or getting laid off. If you think you’ll just “work forever” instead of planning for retirement, you may want to think again. (Source: Employee Benefit Research Institute)
  5. Tax deferral is a gift you can’t afford to pass up. I remember Bank Day when I was in elementary school. The local bank would give each of us an envelope to put our deposit in and then a representative would come by each week and take it to the bank and then bring back the envelope with our “bank book” inside. I remember being excited to see the “interest” on my money in my little blue “Bank Book”. I wasn’t taking anything out of it so it kept on growing. Tax deferral works the same way. Uncle Sam can’t tax the money in your 401(k) and IRA accounts until you start taking money out of them. Hopefully that will be after you are 59 ½ and in a lower tax bracket than you are now.

    In the meantime the growth in your accounts keep on “truckin'”. Say you invest $1,000 and earn a return of 7%–or $70–in one year. You now have $1,070 in your account. In year two, that $1,070 earns another 7%, and this time the amount earned is $74.90, bringing the total value of your account to $1,144.90. It’s the gift that keeps on giving. Your money grows through compounding and tax deferral. Find out more about tax deferral and compounding here.

So open up that 401(k) statement and face the music whether it’s good or bad. In either case you can still take action to revive this important retirement vehicle. Become informed about asset allocation and tax deferral and then talk to your plan sponsor or financial advisor about advice on the mutual funds in your plan. Remember, it’s never too late to plant that retirement savings “tree”.

Question: What keeps you up at night when it comes to retirement savings? Leave your comments here.

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Coronavirus – The Good, The Bad and The Ugly

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Coronavirus. It will become part of our lexicon for many years to come much like 9/11 and the great recession of 2008. Having lived through all of those I can say with confidence that, “this too shall pass”. And, we will emerge on the other side better off in several ways as we have before. Some changes will be permanent, and others will be a mere inconvenience. Here are 5 lessons learned as a result of the Coronavirus pandemic.

  1. You can accomplish a lot remotely – We have had wonderful interactive technology for many years. Companies and school districts are finally figuring out that people can meet virtually, ask questions, show documents and get signatures via WebEx, GoToMeeting, and Skype just to name a few. If you think senior citizens are averse to technology, guess again. They are comfortable once you explain how things work. Financial Advisors are using remote technology more and more due to long distances or just because clients don’t want to drive across town for a meeting. They are comfortable using their laptop and webcam.
  2. Good hygiene is important…all of the time – I don’t know why it takes a pandemic to get people to wash their hands properly. It appears that it does. Using hand sanitizer, covering your mouth when you sneeze and cough. I guess those are good outcomes as long as we remember these acquired habits long after Coronavirus has passed.
  3. Markets come back – Take a look at the chart below. As you can see, we have had several health crises over the years. See how the stock market has rebounded each time? America and Americans are resilient. We bounce back strong as well. Keep your financial goals in mind when you are tempted to panic and sell and run to cash.

    Ask yourself, are your retirement goals still valid? If so, stay the course. You may have to make a few tweaks but for the most part, you will ride out the market turbulence in good shape. In fact, there may be some stocks on sale that could boost your portfolio. Talk to your financial advisor.

  4. Even online retailers run out of goods – Have you tried to buy toilet paper or hand sanitizer recently? My wife and I have been trying for two weeks to buy hand sanitizer. People are being irresponsible and buying more than they could use in a year. As a result, people that truly need supplies are not able to buy them. Amazon is not guaranteeing quick delivery times. It’s a wake-up call for people to use common sense and to be considerate of others, especially the elderly. Remember the Golden Rule!
  5. We are part of a greater community – The sight of younger people heading off to Spring Break in large numbers despite the health concerns does not cause one to feel good about that generation or how they were raised. People defying the health agency edicts to shelter in place because “I’m healthy and I won’t catch this virus” do not promote a feeling of being concerned about our neighbors or promoting the greater good by making sacrifices in a time of need.

    If we learn one thing from this crisis I hope it is that we are part of a larger community of man that encompasses the entire country and world for that matter. Be a global citizen and stop looking out for “number one” at the expense of everyone else. One day you will wake up and find your self dancing by yourself.

We will get through this and, I believe, we will all be better human beings as a result. Let’s have some self-awareness and realize that we can be better and we can do better. I look forward to “seeing” you on the other side of this and sharing positive experiences.

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5 Ways That You Can Retire on Your Terms Even If You Are Getting Started Late

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Being a CERTIFIED FINANCIAL PLANNER®, I am naturally more in tune with the truthfulness or, should I say, the intentions of retirement advertising. It’s all about hitting the pain points. Not much fun, right? At least buying a new car or a house is fun. Yet sometimes the important things in life are not “fun”. Retirement planning is one of those things.

When you need a new car, you check out the rates at the credit union. If you need a mortgage you also check rates. In other words, you shop for the best rate before you shop for your car or your new home. When was the last time you said, “Hey Honey, we haven’t saved enough for retirement. Let’s go down to the credit union and meet with a financial advisor.”? Probably never. I wish people were as in tune with their retirement planning as they are with getting a new car or a new house.

To compound matters, the big financial companies, that can afford to advertise on TV like to make you succumb to what I call the Lump Sum Scare. You know, they tell you that you need a lump sum of several million dollars or you won’t be able to retire – ever! I know better. If you haven’t saved “enough” and that is a relative term. It’s as personal as your fingerprints, you can still retire, be they different terms than maybe you are thinking about right now.

Let’s look at 5 ways you can retire on your terms, even if you are starting late.

  1. Work longer, retire later. Don’t forget, each year that you continue to work increases not only your Social Security benefit, if you have a pension it could increase that benefit as well. It will also allow your retirement investments to continue to grow (401(k), IRA accounts, and taxable investments)
  2. Work a second job or part-time after retirement. The first step is to figure out what your income shortfall will be and then you can start considering the type of part-time work you will need to supplement your other sources of income in retirement
  3. Reduce monthly expenses. Yes, this can be a painful process but in many cases, it will be necessary. This is why the budgeting step is so crucial. You don’t know what needs to be reduced if you don’t know what you are spending. Check out my “Budgeting That Makes $ense” course for a great way to develop your own successful budget. You can also get a free copy of my  Budget Tracker tool to get started. Most retirees don’t need to live on their pre-retirement standard of living. It will probably be somewhere between 70-80% of what you are spending now. Once you have your budget you can figure out what can be reduced or eliminated.
  4. Increase the contributions to retirement accounts. Use the power of compounding and time to work in you favor. Even a small increase of $50 to $100 a month can have a dramatic effect on your retirement savings depending on how long you have until retirement.
  5. Sell an asset. Again, probably a tough decision. Maybe not, if that vacation home is going unused now that the kids have grown and are not as interested in using it as they were once upon a time. Or maybe you want to downsize and get a smaller, less expensive home or move to a part of the country that is less expensive than where you live now.

Don’t be brow-beaten by TV and social media. Meet with a financial advisor or check out my coaching offer and decide what your retirement terms look like, even if you don’t have a big lump sum saved. You can still retire on your terms. Even if you are starting late. Get my free guide to retirement when you are starting late here.