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The 3 lessons for your retirement from the Silicon Valley Bank debacle

13/03/2023

Banks can fail, as the story of Silicon Valley Bank shows. While the collapse of SVB does not raise questions about the stability of the global financial system as a whole, it is yet another reminder that banks work with their customers' money. With the money in our accounts that we use to pay our monthly bills. With the money we park in a savings account as a buffer for unforeseen circumstances. With the nest egg that we try to build up through an investment portfolio for a comfortable old age. With the money we want to give our children and grandchildren a good start in life.

Here are the top 3 lessons regarding retirement planning after the Silicon Valley Bank bankruptcy:

Liquidity

Liquidity is an essential factor to consider in retirement. The availability of cash or assets that can be quickly converted to cash without significant loss of value is critical.

As a retiree, if you no longer receive a regular professional stream of income, you rely heavily on your savings to support yourself. Therefore, liquidity in retirement is critical to cover unexpected expenses such as medical bills or emergencies. However, you must strike a balance between the need for long-term liquidity and income and inflation protection. Maintaining an appropriate level of liquidity based on a financial plan provides peace of mind and financial security during your retirement.

As we have seen at SVB, it was very difficult to create additional liquidity. Public markets often offer more liquidity and transparency than privately traded securities or annuities.

Cash flow / Expenses

Managing cash flow and expenses becomes even more important in retirement as you depend on your savings to cover your living expenses. The lack of a regular stream of income means that managing expenses and cash flow becomes more challenging, and unexpected expenses can have a significant impact on your financial situation as a retiree.

The stress on an investment portfolio during retirement can be significant and is determined by the percentage of total annual withdrawals divided by the value of the portfolio. A higher level of "withdrawal stress" indicates much more stress on a portfolio's ability to consistently meet that same level of withdrawal. That's why it's critical to have a solid understanding of cash flow and expenses to effectively manage your portfolio in retirement.

You need to remain flexible and may need to adjust your withdrawal rate to cover your expenses while ensuring that your portfolio remains sustainable over the long term. Controlling cash flow and expenses in retirement is critical to minimizing the strain on your portfolio and ensuring that you can maintain your financial security throughout your retirement years. It is part of a process that is often reviewed during retirement.

In SVB's case, the alarm bells might have sounded sooner if they had put their bond holdings in the market, giving them a longer runway to raise additional capital. That's why it's important to inventory your investments and make sure they have realistic valuations to meet your withdrawal needs.

Risk

The risk should not be static in retirement because your financial needs and goals change over time. While capital preservation and income stability are critical goals in retirement, it's important to balance these goals with the need to grow investments to keep up with inflation.

A static approach to risk can leave you as a retiree vulnerable to unexpected economic downturns, which can lead to a significant loss of wealth. You should periodically review your risk tolerance, investment objectives and financial situation to adjust the risk of your portfolio accordingly. It is important to have a framework on which funds are low risk and which funds are high risk and the balance between the two. Sometimes life events or economic events can shift the balance between the two. A dynamic approach to risk management can help you achieve your financial goals as a retiree while minimizing downward pressure on your portfolio.

SVB linked its deposits and part of its loans to the same customer base, which increased the company's risk. There is a reason why regional banks offered 3-5 percent interest and the top 4 banks barely 1%. There are always risks in retirement, identifying and defining the risks you can live with is key.

Rethinking these three key components of your retirement plan is key to reducing the overall risk to your plan. By making sure you're in a safe place with liquidity, stress on your portfolio, and the amount of risk you're taking now, you've covered 90% of the areas where you could potentially "hurt" as a retiree in a successful pension.

Expat Beleggen is a financial advisor that helps expats achieve their financial goals. Contact us today for a no-obligation conversation: hello@expatbeleggen.com