Retirement is a relatively new phenomenon in the world, but one we’ve become dependent on.
Our new retirement plans are what I like to call a market-driven retirement, meaning instead of relying on pensions and social security to carry you through your retirement, you have most of your money in your 401K and in the stock market. And since this is so new, there are risks to it that we’re still trying to figure out.
A question often comes up with clients when they come in. They want to know what the best way to invest for retirement is and how much growth they should expect.
Not Every Plan Is A Good Plan
A couple came in to see me recently. We ran a process to look at every aspect of their financial situation and evaluate their level of risk. We found what we find with most people walking into retirement. Almost all of their money was in stocks.
Stocks are a great way to grow funds over time, and since we’re at the top of the second-longest bull market in history, you’ve been having great results. It makes sense that people want to invest and with the great returns they’re having, they don’t feel like they’re taking a risk.
But when the market drops you participate in that drop in a significant way.
I told this couple my concerns about their market-driving retirement plan. It was clear that it had paid off well in the past few years and if they retired in the next year or two, they should be perfectly fine. EXCEPT, If the market has a correction sometime soon and they didn’t change how they were invested, it would definitely hurt their assets.
Luckily, they agreed to adjust their level of risk by moving some of their money into low=risk investments like bonds. But they still had some concerns.
But, Isn’t The Goal To Grow Our Wealth?
With my advice of moving away from the most aggressive growth strategies, you may be asking yourself the same thing this couple asked me.
Does growth still matter in retirement?
Totally! Money in the market should be going up and down. Over time this up and down has proven to still beat inflation and you’ll need that extra income in retirement.
But if all your money is dependent on the market going up, that means you’ll lose if the market goes down. You’re also regularly pulling money out for your living expenses, so you’ll have less money and less growth over time. That’s just a mathematical reality.
Growth is important, but it takes a backseat to longevity.
Many planners call the five years before you begin retirement through the five years after you’ve retired, your “red zone.” This is the time your financial future is the most in jeopardy. If there’s a dip in this time, you’ll shorten the time you’re able to pull from your savings and investments. This can lead to stress and frustration further down the line when it may be too late to fix it.
That’s why I continually tell my clients that longevity of your funds is more important than your returns.
What Kind Of Returns Should I Expect?
This is such a tricky question to answer. Since I believe in a more conservative investment plan to help you enjoy the 20, 30 or more years you’ll be retired, you’ll see fewer returns than other planners who would encourage you to be more aggressive.
I can give you an approximate idea of what your returns will be, but no one knows exactly what the future holds. It’s hard to nail down exactly what that number will be for you.
Here’s what I can do for you:
I can help you find a risk level that you really understand and agree with.
I can give you the confidence to ignore people telling you you’re missing out if the market continues to grow.
I can make sure you’re not worried about this year, but feeling confident that you’ll be in a good place ten years from now.
It’s more important that you have money available for you than it is for you to make a slightly higher return this year.
If you have no idea how to evaluate your risk or if you don’t know how to plan for your future, you need to contact me and take advantage of my free consolation. Investments and your future go hand and hand. Your insurance, your investments, your taxes, your estate. These all work together to give you the financial future you’ve dreamed of.
We can help you take all these pieces and put them together to give you the confidence you need to truly retire with peace of mind.