The Impact of Galactic Events on Your Retirement Planning

Introduction

On any space mission, numerous dangers and distractions pull the mission off its desired course.  Retirement planning is a long-term mission with many distractions and disturbances that can cause panic or fear throughout anyone’s working career.  Below are a few of these financial “galactic events” and several ways to mitigate their effects.  

Gravitational Pull of Market Fluctuations [ or Volatility?]

Gravitational forces act on celestial bodies and influence their trajectories in many ways.  In a similar manner, several factors can influence markets.  

Portfolio value swings: Market downturns can lead to significant drops in your investment portfolio, slowly eroding your retirement nest egg.

Sequence of Return Risk: When the market downturns in retirement, people are forced to sell assets at lower prices to cover living expenses. This is especially impactful in the early stages of retirement.  

These are just two of the many factors that can increase market volatility.  All of which can cause anxiety and stress about the potential for your nest egg to cover your living expenses in retirement.  

The often Bumpy Celestial Navigation of Economic Policies and Decisions

It takes space agencies years to develop celestial navigation plans.  However, it only takes one piece of space junk to derail any best-laid plan.  A country’s regulators and legislative bodies may have the best-planned economic policy agenda ready for the next legislative session.  But any issues can arise, not least of which are subsequent elections, to derail that plan.  Change on a national level can adversely affect any stage of retirement planning.  

Young adults: There are always questions on the future solvency of Social Security.  Some try to be very conservative and assume Social Security won’t be around for retirement. Others assume significant cuts.  Either way, with the median retirement savings balance under $20k for those 35 and under the solvency of Social Security can be extremely unsettling.

Mid-Career Professionals: Tax policy changes can affect every age group.  But for mid-career professionals who are just entering their peak earning years, this could have a significant impact.  Whether or not your income taxes get raised or cut can change from one election cycle to another.  Staying abreast of tax rates, tax credits, and tax deduction changes will be crucial at this stage.

Those nearing retirement: Medical expenses are a significant concern in retirement.  Although less volatile than discussions surrounding Social Security, discussions surrounding other social safety net programs like Medicare are important as well.  When and how to apply for Medicare can be confusing and time-consuming. 

The Pulsars of National Economic Indicators

National economic indicators can be likened to pulsars.  Pulsars are celestial bodies that emit regular pulses of radio waves.  The economic indicators listed below (among many) regularly emit pulses that can give one an idea of the state of a national economy.  

Gross Domestic Product (GDP): GDP is the total market value of goods and services produced in a country.  Generally, rising GDP is an indicator of strong economic growth in a nation.

Unemployment: Markets will generally respond to the unemployment rate regularly reported by federal agencies.  Economies with a low unemployment rate can be trending in a positive direction.  However, there are many factors that can affect this rate and require a nuanced view.  

Inflation: Inflation can significantly erode the purchasing power you may have in retirement.  While also reducing the amount that can be saved due to higher costs for food, shelter and clothing.  

The Cosmic Collisions of Financial Crises

Scientists theorize that sometime during the formation of the galaxy, an object or several objects crashed into the earth, sending enough molten and vaporized debris into space to create the moon.  These galactic events can send shock waves throughout a galaxy.  

Many who lived through the dot-com bubble and the Great Recession would have felt similar shock waves to their financial galaxy.  The effects are typically felt throughout the equities market, as well as real estate, bonds, and commodities, and can take months or years to recover.  This type of volatility can be quite daunting.

Mitigation Strategies

Unlike some actual astronomical events (e.g., eclipses), no one can predict or know when the next financial “galactic” event will occur.  However, there are plenty of ways to mitigate the effects of any of these types of events.

Diversification:  Spread your investments across different asset classes (stocks, bonds, real estate, etc.) and sectors (industrial, tech, energy, etc.) to minimize risk from any single market movement.  Once diversified, stay diversified by rebalancing your portfolio on a regular basis.  Overall, be adaptable to the current financial climate.

Emergency Fund: Keep and maintain a 3-6 month emergency fund throughout your investment life.  This will provide a necessary cushion in the event of a job loss due to any one of these galactic events.  If given the time and resources, also consider diversifying your income sources with side hustles and/or passive income streams.  

Recession-Proof Your Resume:  Stay up to date on industry trends and maintain your skills to remain competitive in the job market.  Be on the lookout for relevant re-skilling or up-skilling opportunities to jump industries if required.  

Debt Management: Whether you prefer the snowball method or the avalanche method, just be sure to eliminate any consumer or personal debt as quickly as possible and as early as possible.  You’ll be sure to thank your past self for being debt-free when the next galactic event hits.  It’s hard to build galactic-event-proof wealth when passing a big chunk of money to lenders.  

Professional Advice: Don’t be afraid to seek professional financial advice if you feel it is warranted.  Many of these strategies are easy to deal with on their own.  But things can get complicated quickly when trying to address all these strategies at once, especially when you throw in health care planning and the potential changes to Social Security and Medicare.  Consider working with a certified financial planner who can create a personalized retirement plan that considers your individual goals, risk tolerance, and economic factors.

And the number one reason not to panic during a galactic event is time.  There is no need to panic when the market “corrects” 5%-10% at a time.  In fact, this is relatively normal.  Neither is there a need to panic if the market drops even further (think COVID-19 in 2020 when the S&P dropped 33%).  Since 1946 the S&P 500 has declined 5%-10% eighty-four times.  The average time to recover was one month.  The S&P has dropped 10%-20% twenty-nine times since 1946.  The average time to recover was four months.  And even following the three times since 1946 that the S&P 500 has dropped 40%+, the market recovered, on average, in fifty-eight months5.  

So, far from panicking you should agree with the “Oracle of Omaha” Warren Buffett when he says, “Be fearful when others are greedy and be greedy when others are fearful6.”  Galactic events can be world altering, but they can also bring great opportunity.  

The bottom line is that Retirement planning is a marathon, not a sprint.  Start early, be disciplined, be diversified, and adapt as needed.