A Retirement Misconception

It is absolutely amazing to me when I talk to people I know about retirement. There is a vast constellation of ideas regarding retirement earnings when I talk to my own friends and family, but in this short article, I’d like to address one of them. Managing retirement into retirement.

Quotable Quotes

Here are some quotes that I’ve made up and/or paraphrased to capture some of the common concerns around retirement and retirement investments:

“I’m a little worried about the market because I am going to be retiring in a few years and if the market goes down, I won’t have any money when I’m retired, so I am going to put it in something safe.” — 50 year old

“If the market goes down, I won’t be able to afford my bills because all of my money will be gone.” — 65 year old

“I have two million dollars now, but I am going to retire in 3 years. Sure, I’d love to have 5 million, but I will never see that kind of money. That’s the kind of money only rich people have.” — 62 year old

Age Matters

Of course the main issue here is the lack of funds with regard to the stock market down turns once these people are in retirement. There are horror stories around from these people’s parents and grandparents and friends about black Monday and the stock market crash and depression of 1929. These engender fear and distrust of the stock market; the real danger, however is not really stock market volatility for the average person in their 50s and 60s. Instead, the real danger is inflation.

Upsetting The Apple Cart

I know that I am going to be bucking the traditional conservative trend here but I think that my grandfather has the right idea on this one. Not long ago I spoke to him and he is working on getting his investments out of the market. The stock market is going well right now, but in the case of a downturn, there is not much time left for him. He is in his late seventies. That is the key difference.

As people get older, the time horizon is much shorter to make money back if there is a down turn in the markets. But unless you are expecting something catastrophic like a 40-50% loss of money in a single year, it is unlikely that you are going to lose any significant amount of money that will put your retirement in jeopardy if you are more than 5 years from retirement. Will a crash hurt? Sure. But will it end your retirement, probably not, provided that the markets come back.

Should you be easing your way out of stocks as you draw close to retirement? Certainly. But taking 100% of it out because you are worried about a possible downturn at some point in the future is too conservative for most people and it has been proven in studies that you won’t accurately time the markets to know when to get back in.

Drawing the Line Somewhere

If you are an aggressive investor with an 80/20 or 70/30 stock/bond split, you might go down to 60/40 or 50/50 as you approach retirement. However, anything more than that might spell disaster as inflation continues to erode the value of your nest egg throughout your retirement years. Indeed, if you tuck your nest egg into a savings account making 5% but are drawing down 4% and losing 3% each year to inflation, you are actually losing 2% a year. If you factor in the taxes for non exempt accounts, it is even more.

Figuring the Upside

According to the rule of 72, if you get a nice return of 8%, we would double our money in 9 years. If you retire at age 62, it is quite likely that you will live to 72. More than enough time to get to 4 million dollars if you retire with 2 million and remain frugal. The point is, your money can continue to grow at a healthy clip throughout your retirement if you continue to be savvy, watch your investments, and stay diversified.

Not Spending Enough

The continued growth is great, but consider what you’ve been saving for. Once you get into your retirement, you want to balance out the amount of money you spend with the amount of money you might need in the future. One huge mistake that frugal investors make with their retirement money is not spending enough of the wealth that they’ve worked hard to accumulate. All of this is just food for thought, but hopefully it has led you to think differently about your retirement money and perhaps make some different decisions which will lead you to really enjoy your golden years.