Death by Wealth Shock

Think you don’t have enough health worries?  Let me add another one: “wealth shock”.

 

Associated Press medical writer Carla K. Johnson recently reported on a study that showed middle-aged Americans who suffered a sudden, large economic setback—dubbed “wealth shock” by the researchers—were at 50% greater risk of dying in the following few years than a similar group who did not have such a loss.

 

To qualify as a wealth shock, the loss had to be a drop in net worth of 75% or more over two years or less.  The average loss among the study group was $100,000.

 

The research does not show a direct cause-and-effect relationship.  Depending on the type of loss, it may lead the victims to delay obtaining critical health care services or increase their stress levels, and those could be the real causes of early death.  But clearly, a substantial drop in net worth is not a good thing.

 

This might be especially pertinent right now as the stock market swings wildly day by day, and people start to stress over their investments after years of healthy, almost entirely uninterrupted growth.  Are we on the verge of another recession?  Are millions of us at risk of wealth shock?

 

Allow me to offer some advice to avoid that fate.

 

If you are at least five to seven years from retirement, it’s best to continue doing what you were already doing with your investments (assuming that was investing for growth of principal in a manner that fits your tolerance for risk).  There’s plenty of time to recover from even a sharp downturn in investment value; just don’t withdraw all your money from the investments and hold it until the market recovers.  That equates to selling low and buying high, a sure strategy to lose value.  And don’t check your balance everyday.  It only causes stress.  I rarely checked my retirement account balance during the Great Recession.  I’ve been checking very regularly over the last year as the market marched upward.  It was exciting, in a good way.  But I’ve stopped that now.

 

If you are less than five years from retirement and haven’t already moved a portion of your retirement funds into a safe place like a certificate of deposit or money market fund within an Individual Retirement Account or your 401(k), gradually start doing so.  These will be the funds that will keep their value and from which you can withdraw what’s needed for the early years of retirement.  The rest can stay invested for greater growth (which, of course, comes at greater risk; but since you won’t need the money right away…).  That way you won’t have to cash out stocks—which may have lost some value per share and thus causing you to have to liquidate more shares to get the amount of money needed.

 

The key for most people will be their tolerance for risk within their investment portfolio.  I would guess that someone with a higher tolerance level would have some measure of immunity against wealth shock.  They know the risks of the investments they choose but also the possibility for growth and the magic of time in recovering from a financial blow to those investments.  Someone who doesn’t start out comfortable with the idea of being in the stock market or scares easily at market downturns would, I imagine, be at higher risk for wealth shock.  And the elderly, by virtue of being more immediately reliant on those funds, would be at the highest risk of all.  Self-awareness of your wealth shock risk factor might be your best protection.

 

Here’s to your financial and, perhaps consequentially, your physical health.

 

Until next time,

 

Roger

 

“Sleep a little.  Doze a little.  Fold your hands and twiddle your thumbs.  Suddenly, everything is gone as though it had been taken by an armed robber.”  Proverbs 6:10, 11 (CEV)