As we all know, there is a lot of noise out there coming from TV, newspapers, friends and family members as to what we should do with our finances, and how we should plan for our retirement. A lot of it, frankly, isn’t such great advice.
So I’ve been thinking: If I had the ability to speak to everyone close to or in retirement, what would I tell them?
Well, this is what I would say. 15 Things I Wish Every Retiree Knew:
1. Your expenses are the most important thing to determine before you retire.
Nothing else matters until you can answer “how much do I want to spend in retirement?” It’s not how much you have saved up, it’s how much you spend. If you have a million saved but you are used to spending $200K/year, the math simply doesn’t work. If you have $500K saved and you can live on $40-50K/year, then with social security and distributions you can make the math work.
2. The biggest risk to your retirement isn’t that you have volatility (via stocks). Volatility simply means that your stocks go up and down more frequently, and with more force, than something like bonds. But volatility isn’t your biggest risk as a retiree. The biggest risk is that you lose purchasing power over time by having too much in investments that don’t grow as much as you need to make up for inflation as well as distributions from your investments. In other words, if you get too conservative too quickly, have too much in cash and bonds, and not enough in stocks, you will lose purchasing power, which could greatly affect your standard of living in your 70s, 80s and 90s.
3. Gold is not your best protection against inflation or a market meltdown. Don’t listen to those late night commercials featuring C list celebrities. Stocks have been, and I think will remain, the best hedge against inflation.
4. You should think of your retirement like a castle surrounded by the moat. Your investments in the stock market are the castle, and they need to be surrounded by a moat, which is cash and some bonds, to protect against big, temporary, downturns in the market.
5. If you have a retirement that lasts for 30 years or longer, which you might if you can stay healthy, then you need to be prepared for your portfolio to drop by 10% or more dozens of times. And at least once in that period, you should be prepared for your stock portion of your investments to fall by 50%. Those 50% stock drops have happened 3 times in the last century, so I think there’s a pretty good chance that in the next 30 years it will happen again.
6. You need a plan for retirement income, that accounts for good times and bad. How much will you take out in good years of market returns? How much will you take out in bad years of market returns? I hope the answer isn’t the same amount!
7. The first 10 years of returns in your retirement are the most important. If you get great returns your first 10 years of retirement, this puts you in even better shape than when you started retirement. If you get poor returns your first 10 years, then you need to watch things more closely. The technical term is called sequence of return risk, and what it explains is how important the order of your returns are, as opposed to the average return. For instance, it’s better for you to get a 6% return the first 10 years, and 0% return the second 10 years, than it is for you to get a 0% return the first 10 years, and a 6% return the second 10 years. The average return over those 20 years (3%) is the same! But with your distributions, it would greatly benefit you if you got a positive return the first 10 years and nothing the second 10 years as opposed to the opposite.
8. How you spend your time in retirement will be way more important to your happiness than any monetary goal, and it will be way more important than how much money you pass away with. No, I don’t want you, or anyone, to run out of money. But once you have a solid plan that will get you the income you need, your focus shouldn’t be on money but it should be on the things in life that will bring you the most fulfillment and happiness and purpose. People lose a part of themselves when they quit their job. So I want to ask you, how will you replace that time you no longer spend at work? How will you find meaning and purpose in your life?
9. It is perfectly okay to draw down principal from your investments! Too many people I speak to think that this is something to be avoided at all costs. I don’t agree, and I don’t think drawing down your principal in and of itself is a reason to panic. Get comfortable with spending the money you’ve worked so hard to earn.
10. Your 50s and 60s are the best time to enjoy your “bucket list” – enjoy them now while you have the health and energy, and don’t keep pushing it off.
11. Even if you are financially fine, consider starting a small business or a hobby business. Small business owners in their 50s and 60s are the most successful, in large part due to their life experiences. And no, it doesn’t have to cost much to start, so it won’t be a drag on your finances if it doesn’t take off. And the mental stimulation can be quite rewarding.
12. Your time is your most precious asset, so use it as wisely as possible. We all see and know of people passing away way too quickly, so if there’s something else you really want to do with your time, try to make the numbers work on your retirement as soon as possible.
13. Everyone should do some kind of weight lifting as they age. No, this isn’t typical advice you hear from a financial planner! But we lose muscle every year after age 30, and it really accelerates in your 50s and 60s. If you can get to the gym two or three times a week, that will help you slow that down, and maintain your independence.
14. You should stay invested in the stock market regardless of which political party is in power. No exceptions!
15. Use a low cost, broadly diversified investment strategy that encompasses US and international countries, as well as large, medium and small sized companies.