The Silicon Valley Bank Failure a Hard Lesson for RetireesMar 13, 2023
On Friday, March 10, Regulators took over Silicon Valley Bank (SVB) and put it in to receivership, putting thousands of companies, and tens of thousands of employee paychecks in to jeopardy. Two days later and over 3,000 miles away the same thing happens with Signature Bank in New York.
SVB was the 16th largest bank in the country and the second largest bank failure in US history. Both Signature Bank and SVB had over a hundred billion in cash sitting on their balance sheets. Yet virtually overnight they both fell.
Over the coming days you will hear countless analysis and insights in to what exactly caused the failures. Today, I want to share with you one of the hard lessons that every retiree needs to learn from these failures. What caused Silicon Valley Bank to fail, is unfortunately the greatest threat to EVERY retiree.
Regardless of how much money you have saved, regardless of your investment strategy, we are all just a few decisions away from our retirement failing. And sometimes, like what happened to Silicon Valley Bank, we don't fail because of bad decisions, but simply "life" happening to us at the wrong time.
SVB Failed Because It Had Too Much Money!
See, Silicon Valley Bank is like some of the many lucky retirees that I meet. They have more money saved than they will ever need in retirement. Their Social Security and Pension are more than enough to cover their needs...kind of like the case with SVB. The Silicon Valley Bank was a victim of it's own success, it was so good at what it did that it had more money coming in to the bank than they could loan out. So, like a good retiree, they invested in the most conservative investments they could find, US Treasuries. Nice. Safe. Secure. Guaranteed. What could be better for a bank? What could be better than a retiree who is worried about the markets?
Unfortunately, life always has other plans!
See, in retirement the biggest threat to success is that life will force us to take money out of our savings - at the wrong time. This could be in the form of Required Minimum Distributions, an unexpected expense, or simply that we need to pay for food and gas.
The issue, is when we are are forced to sell when the market is down. When we sell when the market is down, not only do we lock in those "paper losses," but we compound them with our expenses. And this is exactly what happened to the Silicon Valley Bank.
SVB had more than enough money on the books, the only issue, they were locked in to investments. Investments that were contractually guaranteed to go up in value...if only they had waited. If only they were able to hold them until maturity...but the government had other plans. Like RMDs for retirees, banking regulations require that banks have a certain amount of "cash" on the books, and so when some of SVBs clients went under...SVB needed more cash...they turned to everyone for help. The big banks, investors, shareholders...but the clock ran out and they were unable to raise enough cash...so they took the only option available to them...they sold their investments at a loss.
A Two Billion Dollar Paper Loss
In retirement, when we are taking money out of or our savings, paper losses are real! Paper losses can devastate our retirement. Paper losses are what took down The Silicon Valley Bank! See, SVB had low risk investments...but they were not low volatility.
Low risk means that your won't lose much money, low volatility means it doesn't fluctuate in value. Those are two very different things. There are lots of investments that when held to maturity or held long enough...won't lose much money...but their value can fluctuate wildly from one day to the next. And that's what SVB had. They had "safe" investments...that were principal protected and guaranteed by the full faith of the United States Government. A guarantee that by any measure cannot be beaten.
Despite the safety of their investments, when regulation forced SVB to sell, they discovered like so many retirees, that the market has a mind of it's own. And the market did what it does best, it transferred wealth from those without time to those with time.
It was the forced sale of it's "safe" investments, at a nearly 2 billion dollar loss, that did Silicon Valley Bank in. Not because they needed the cash, but because banking regulations required them to sell. No different than the IRS requiring retirees to take Required Minimum Distributions from their retirement accounts and pay income tax on that money. Doesn't matter if you need it. Doesn't matter if it will tank your retirement. The rules say you have to do it...so that's what you do. Otherwise, you will be faced with stiff penalties...or in the case of SVB, be taken over by regulators and liquidated at a fire-sale to the highest bidder.
Cash Flow is King!
In retirement, it isn't about how much money you have, but how much you keep that matters. You can have millions in the bank, but...if the IRS requires that you liquidate it too quickly, or if your forced to sell when the market is down then all the money in the bank won't matter.
At the end of the day, it's not about the assets you own, but the income you can generate that matters the most. It's all about cash-flow! You have to have a plan that generates enough income so that you don't have to sell when the market is down. You have to be able to ride out the highs and lows of the markets, and not get caught in the paper loss trap. That's why it's so important to create an income plan that is designed to generate regular, predictable and dependable income in retirement. This is why you need to have a plan that will help you navigate ALL market conditions.
It's Only When The Tide Goes Out That We See Who Is Swimming Naked
- Warren Buffett
As Warren Buffett is fond of saying, the lesson learned from The Silicon Valley Bank is that it's only when the tide goes out that we realize who is swimming without protection.
What is your plan? How will you ensure that when you take money out of your savings that you aren't selling at the wrong time? That you aren't hurting your long term financial prospects?
At Yields for You, this is what we do, all day, every day. It starts with an investment strategy that is both Low Risk AND Low Volatility, because one without the other is meaningless. Next, we create an income plan that tells us WHEN and HOW to take our income in retirement, so that we don't take it out at the wrong time...and a tax minimization plan to ensure that we play the least in taxes...and finally, if we have done everything right, we are able to have an estate plan that leaves a living legacy.
To learn more about how we help investors NOT run out of money in retirement, register for our upcoming webinar, "How to Not Run Out of Money in Retirement!"
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