Silicon Valley Bank and Your Retirement Accounts
What happened with Silicon Valley Bank and Signature Bank, and what does it mean for our retirement?
What happened with Silicon Valley Bank?
Silicon Valley Bank, a niche bank that focuses on the tech sector and funds startups in Silicon Valley, found itself in an unexpected situation. They were so successful at helping the startup community and that people were just throwing money at them left and right, that they, the traditional business model for banks of, loaning money out and making money that way was something that just wasn't really viable for them because, As much money as they wanted to loan out, they had more deposits.
As a result, the bank found themselves in a bit of a pickle.
As a bank, their primary job was to make money, and they began looking for alternative ways to do so. And they went with the most conservative investment they could find...United States Treasuries. A lot like many retirees today. Rates are attractive and if held to maturity they won't lose value.
Of course, the key word is held to maturity!
Banks like retirees are not in full control of their assets.
Due to regulations the bank was forced to sell some of their conservative investments at a loss, even though they would have been fine if they had held onto them. And so the real tragedy is that they were forced to sell by the government to sell their investments at the wrong time, at a price that was disadvantageous for them.
Required Minimum Distributions Are The SVB of Retirement
I find the parallels between what happened with Silicon Valley Bank and what happens with so many retirees, what I believe to be the biggest risk in retirement, which.
Being forced to sell our assets at the wrong time. I find the parallels uncanny in their similarities. Silicon Valley Bank they had these assets, they had really low risk. They were investing in treasuries, right? Really low risk. It was basically the equivalent of a bank CD except from the United States government.
And it's right, it's princip that you pro protected. You're not gonna lose your money and you're gonna get interest, right? What's not to like about it? Other than the fact that if you need to sell it before it reaches maturity, then you are subject to interest rate risk, right? You are subject to the whims of the market, and that's what happens at the Silicon Valley Bank.
They had. They had investments that were too conservative for the market, and the market was like we can get better rates elsewhere, so you're gonna sell it at a loss. And the same thing could happen to us in retirement. In retirement, the IRS comes along and says we've got required minimum distributions, right?
You have to take money out of your retirement accounts, and we decide how much you have to take out and when you have to. Like the banking regulations for Silicon Valley Bank that said, you need to have liquidity on hand to cover your depositors, and if you don't, you're going to have to sell assets to raise the cash.
I see that as being, the same. And so what happened was, Just like the IRS comes to of retiree and says you gotta pay taxes. You gotta take money on your retirement account and pay taxes. Doesn't matter that the market's down, doesn't matter that it's the wrong time.
Doesn't matter that if you just held on six more months, you would be fine. And you'd be able to pay it and you'd be, your retirement would be fine. No, you have to sell it today. You have to pay those taxes today. And if you don't, we're gonna penalize you. In the case of Silicon Valley Bank they took them over.
They forced them to sell it at a loss, and then they took them over and put them out of business. In retirement, we don't want to be put out of business, and so we need to make sure that we're never in a position where the I R S comes to us and says, you have to take this money out of your account and liquidate it and pay taxes on it even though it will hurt your retirement.
And I think that they're like, the parallels are uncanny and the lesson is the same. Just like the bank needs to manage and hurt it's cash, right? It's cash reserves and make sure that it always has enough money on hand and that it can always sell its assets, it has enough cash flow to cover its depositors.
In retirement, we need to make sure we have enough cash flow right, and we have our assets invested in the right way so that when we need to take our money out, we're not taking it out at the wrong time. We're not compounding those losses that are in the market and we don't turn those paper losses into real losses. And that's why I go through in the article that I just published, you can read about it here: https://www.yields4u.com/blog/the-silicon-valley-bank-failure-a-hard-lesson-for-retirees
The Role That Fear Played in SVB Collapse
I think a fear played a small role in what happened. I think it, it exacerbated the issue, we had this issue that Silicon Valley Bank, all of a sudden had to write off a bunch of investments. A bunch of loans, and so that all of a sudden made its balance sheet lower. And so they knew they need to raise cash. And they were looking for ways to raise. Now here's what happened; the analysts who were watching Wall Street, the analysts who were watching the banks, they saw this coming along and they were like, is this just the start of something else? Is there more to this than what meets the eye?
Their fear, their, pondering of, is there something else, their trading of what they were doing of signaled other people that this bank may be in distress, which caused people to start taking their money out. So the people who were in the know started taking their money out.
Now Silicon Valley Bank, unlike other banks because they cater to the tech sector because they cater to startups, right? And the very nature of startups is you, especially Silicon Valley startups, is that you get a huge chunk of change.
From venture capitalists and then you spend it over the course of the next few years. So the vast majority of the depositors in this bank had millions, tens of millions of dollars sitting in their accounts. Whereas your average, typical bank, you think Bank of America, you think, you think, any of your, hometown banks those banks are, pre primarily catering to people who come to deposit their paychecks. So they don't have tens of millions of dollars and they're, they, it's not like you have 3000 fines that. Hundred billion, right? Or 200 billion. In the case of Silicon Valley Bank, it was just only 3000 depositors.
That's a lot of money concentrated in a very small number of people, and so it doesn't take very many of them getting scared to drive up that capital requirement and go from it being like we needed 2 billion to, we need, 10 billion or whatever that number was because their cash started flee.
And so there was essentially a run on the bank by a small number of people who were big enough to make movement and. Honestly again, right? The, their balance sheet, they probably could have done everything right. They probably could have shored up their finances if they had been given time. But the state of California said, we're not risking it.
We're not giving you the ability to try to recover this. We're taking you over, right? You're, you are the 16th largest bank in the country. We're not risking that you're going to go under and take the rest of the financial sector with you.
The Big Lesson for Retirees
biggest lesson that I want you to take away is that it has that success or failure. Success or failure in retirement in life really has nothing to do with how big your bank account balance is, right? This Bengal failed and it failed for one simple reason.
It did not have access to the cash when it needed it, right? Cash flow. Is more important than how much money you have, right? That income stream that you have in retirement, how do you get that income stream in a dependable, predictable manner that is sustainable throughout retirement? Because that's the key word over there, sustainable, right?
The state of California looked at Silicon Valley Bank and. We don't know that you're sustainable. Even though you have all this money on your balance sheet, we're taking you over in retirement. The federal government doesn't look at us and say, we think you're managing your finances bad. We're taking you over.
No, they wait until you're at zero and then you're lucky if the, if you got city resources, that will help you out. This is the challenge of retirement. The challenge of retirement is that we need to be good shepherds of our money. We have to be good stewards, and we have to make sure that we turn our finite sum of money into a essentially infinite stream in retirement.
And the way we do that is by making sure that we don't take our money out at the wrong time. And that sounds simple. But as we see with Silicon Valley Bank, we're not always in control of when we have to take our money out in retirement. The i r S dictates when we have to take it out for required minimum distributions.
Life dictates when we have to take it out because we have an sudden unexpected expense. The biggest fear that I have for my clients is that they will have a sudden. An unexpected medical expense or home expense. Their basement gets flooded and all of a sudden they have to pay for, $10,000, $15,000 to fix something.
And it's not a large sum of money, but they take it from the wrong place at the wrong time, which is why having a plan is so important, right? It's not about what you have, but how do you access it in a sustainable and predictable fashion? How do you ensure that a single bad year, a single unexpected expenses doesn't upset your retirement? That's the biggest concern for retirees.
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!"