The first modern stock market crash occurred in 1907-08, precipitated by the 1906 San Francisco earthquake. To begin rebuilding the largest city and financial center west of the Rockies, the U.S. government furiously moved capital from East to West, when moving capital literally meant moving gold by ship or train.
Other stock market crashes occurred in 1929, 1987, 2008 and 2020.
In 1929, the market didn’t hit bottom until it had fallen 89.2%. In 1987, the peak-to-trough descent was 36%. In the 2008 crash, losses were more than 50%. In 2020, losses have been as much as 37%, following a run-up of more than 80% from the end of 2015 to the end of 2019.
At some point, each market recovered, which should provide some relief and perspective to investors and retirees, who may have their savings invested in a 401(k), IRA or other retirement vehicle.
All of these lessons learned, and then applied, occurred on a national or federal level. But, what lessons can you, the general public, apply on a personal level?
Clearly, one of the most valuable is how important it is to have cash on hand or to be able to access cash fairly quickly to ride out a financial storm, regardless of what kind of storm it is, where it’s coming from or how long it will last. In 2008, credit dried up, making it very difficult to get a loan or even a week’s worth of cash out of your local bank, further fueling the financial panic. By contrast, access to credit in 2020 is not the problem. Indeed, after the 2008 crash and subsequent Great Recession, financial institutions (those that survived) became better capitalized. For evidence, just read the widely publicized story from March 23, 2020 of a New Jersey pizzeria owner who took out a $50,000 line of credit to keep his employees on the payroll https://finance.yahoo.com/news/amid-coronavirus-n-j-pizzeria-181056191.html). Money is readily available for most businesses and consumers with acceptable credit.
Relief for older homeowners
Capital is also available for older homeowners who now may be facing financial uncertainty because of job losses, stock losses, health issues or other setbacks brought on by the coronavirus crisis. One financial vehicle for making capital available is a reverse mortgage loan, which allows older homeowners to convert some of their home’s equity into cash. The home, in effect, becomes a buffer asset, outside your financial portfolio — and you use a reverse mortgage loan to access it.
Unlike a traditional mortgage where the borrower’s current income plays a large role in gaining loan approval, a reverse mortgage loan uses different criteria. Namely, a borrower has to be 62 or older, own and live in their own home and have sufficient equity in the home. The borrower doesn’t need to boast a certain credit score to obtain a reverse mortgage loan, but credit history is reviewed to ensure the borrower can meet the home maintenance, property tax and homeowners insurance obligations of the loan.
For many older Americans, a reverse mortgage gives them the help or extra cushion they need to secure and keep their retirements on track.
Preserve your investments
Aside from giving older Americans the cash they may need to get through a current crisis, a reverse mortgage can also protect investment portfolios from sequence of returns risk. This can occur if a retiree suffers the unfortunate timing of beginning their retirement in a bear market. When a declining market is compounded by a retiree’s regular withdrawals (a 4% annual withdrawal rate was the old rule of thumb needed to live on), long-term damage to the account can occur.
To minimize this sequence risk in a down market, the retiree would pull cash from more conservative sources of funds, like a savings account, guaranteed annuity or a reverse mortgage, until the market rebounded at which time they would resume making withdrawals from their investment portfolio.
Using the home as a buffer asset to draw upon in market downturns is a smart way to make retirement savings last longer. A retiree starting with a similar investment account that doesn’t execute this buffering strategy could be at greater risk of exhausting their savings sooner.
Each stock market crash takes on a life and direction all its own, some scarier than others, but in the long run, the stock market has proven amazingly resilient. However, it never hurts to have a solid, effective and productive source of cash ready to support you and everything you’ve worked for when markets start misbehaving.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
(March 12, 2020) Reverse Mortgages, ‘Buffer Assets’ Can Assist Retirees in Volatile Market