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Dear Retirement Investor, What if You're Wrong? (2020)

Originally published 6/12/2018. This post has been updated. If you’d like to read the original post, click here.
 

Since the beginning of the pandemic, we have seen whirlwind of headlines coming from the financial media. We began the year on relatively strong economic footing. To be fair, I personally felt the largest economic threat was the possibility for administration change in DC. I say this from the perspective that Wall Street loathes uncertainty, and until more recently, the front runner for the Democratic nomination was Bernie Sanders. That feels like a lifetime ago.

What happened next felt like an economic horror film. We had the fastest 30% market decline in history. Millions of jobs were furloughed or eliminated overnight. GDP projections fell through the floor. Oh, Did I mention there was a mysterious virus invading our country? This invisible enemy seemed to be moving faster than we could assimilate data, and it hit our economy like a wrecking ball. 

I’ll be the first to admit that I didn’t see this coming. Who could have? 

This is the nature of investing. Just when you think you’ve got it covered, a Black Swan appears. This event was particularly frightful, as it not only attacked our economic security but our human fragility. We were simultaneously forced into a conversation about the potential for economic ruin and death. 

For the last few years, we had increasingly heard more projections about another “Big One.” The question I should have been asking in our retirement planning meetings is “How do you define a ‘Big One’?” The technical definition of a Bear Market is a 20% decline from the previous market high.

What do you call a bear market that happens at warp speed?

Before this latest round of economic bloodletting, I would expect many investors to be anchored to their 2008-2009 financial crisis experience. I don’t think we’ll have to worry about that wound being re-opened for a while. 

In the title of this post, I ask “What If You’re Wrong?”

Whether you realize it or not, there’s a story you tell yourself about your financial future and the impact of equity markets on that future. Some people believe that in the long-run, equity market returns will be positive. You simply have to hang in there when the seas get rough. Other investors believe that the next market crash inevitable, and it’s only a matter of time before the house of cards comes tumbling down. Even worse, there are some who believe that it should be possible to predict the onset of the next crisis. 

Let’s look at each of these scenarios using our freshly cleaned lens.

(Note: most of the following information is going to be more relevant for investors who are either in retirement or very close to their retirement date.)

In the Long Run, You Win— unless you don’t. There are many proverbs about investing that are thrown out to investors to encourage them to not panic out of the market. While we do want to encourage good investor behavior, we financial professionals should also make sure that clients have the financial ability to actually do what we are telling them to do. Some investors have the risk tolerance to be invested in growth allocations, but they do not have the risk capacity to invest the way they are being coached to invest. For instance, certain clients may want a lifestyle in retirement that would be considered “constrained” under some retirement income metrics. These investors can be the most vulnerable to a market shock that could derail their retirement income plan. In some cases, this derailment could be a permanent setback. I spoke with someone recently who told me that he “didn’t want to have to go back to work.”  Why leave something that critical to market probability and chance? 

Mr. Market, My Hero. This scenario occurs when the stock market is being relied upon to produce a minimum level of return just to make their plan feasible. I use “plan” lightly here because really this is more of a Hope and Change strategy. The investor hopes that the market probabilities don’t change in the future! We all expect to gain meaningful returns by being investors. We wouldn’t risk our hard-earned money otherwise. Yet, in some ways, retirement advice hasn’t changed with the times. Have you heard the phrase “Past performance is no guarantee of future results?” It is often dismissed as a trite disclosure. The truth is that this statement should be heeded by investors headed into their retirement years. Retirement strategies that are built on a required rate of return—either to preserve capital or sustain lifestyle—could be in for a rocky ride. 

Ask yourself, “Are you ready to have an allowance?”

Trust me, the big institutional firms that still rely on a systematic withdrawal approach to retirement will be telling you when / how much / how little / go / stop…..and everything in between. This approach can get tested when markets show extreme volatility. I will tell attendees at our retirement education workshops that I know for a fact that they aren’t going broke in retirement because of the market.  What will likely happen is that folks who finally grow weary of the market uncertainty or the lack of control will simply cash in their chips and put their money in the bank. 

Did You Miss The Bus? A final consideration—one that flies in the face of conventional thinking—is that some investors are going to mess up their retirement future because they invest too conservatively,

“How can this be?”  you ask. 

The financial industry often discusses argues about the changes that need to be considered in a financial plan when one retires. One of those ideas is that people should invest more conservatively in retirement because they cannot afford to lose their retirement funds to market volatility. This idea of “not losing” has somehow become all about the size of one’s account balance and no longer about what is owned or the purchasing power of one’s investments. Retirees need to understand that asset allocation is important, yet it should be discussed as part of a thoughtful retirement income plan. Having a formal, written retirement plan can significantly improve retirement outcomes. It’s true that some retirees will want to be more conservative in their retirement years. This doesn’t mean that we should divorce ourselves from growth assets…actually the opposite. We want to create a plan that will allow us to embrace a growth-oriented allocation for part of our portfolio.  

Longevity is now giving some individuals a retirement that can last 30-plus years. I don’t believe that retirement investors can afford to shy away from growth if they want to maintain the purchasing power of their dollars over a 30 year period. Retirement investors need to have assets that can give us real returns—net of inflation. I believe that many people worry about what their portfolios look like from week to week. Some retirees should be worried what their portfolios could look like 10, 15, 20 years from now if they don’t allow for some growth. 

Take this example:  Investor Jones, age 62, takes a conservative route with $250,000 in assets that aren’t needed for his current retirement income needs. He invests in a portfolio that gives him a 4.5% return over a 15 year period. His account now stands at $483,820. However, if inflation averaged 2.5% during that same period, his real rate of return would be 1.95%. What this means is that, while his account has a balance of $483,820, the purchasing power of those funds is equal to only $334,000 in today’s dollars. This is a significant shift, as Mr Jones is moving into a phase of life where he may need these assets to supplement his lifestyle and where medical expenses tend to increase. 

Note: The example given is hypothetical in nature, for illustrative purposes only and results are not guaranteed.

So, what can YOU do?

As a planner at heart, I suggest you begin with a plan. Make the plan as real as you can. Tailor it to your situation and then commit to implementing your plan. Next, continue to work your plan and adjust it as the years go by. We will continue to read stories about COVID19 and the stock market long after this crisis ends. The eye-popping headlines will remain because that is what helps media platforms drive profits. Do you think the media is going to put a story like Mr. Jones on the front page?  Or, will they give primetime interviews to retirees who got decimated in the market crash?  

Here are 3 steps you can take right now to begin this journey:

1) Find an experienced financial professional that has a fiduciary responsibility to you as a client. Professionals that carry the CFP® marks are a good litmus test for this requirement. Don’t hesitate to look for financial planners with additional layers of expertise that may include investment analysis or financial coaching. I would also encourage you to look for someone that is independent of any major bank or wall street institutional firm. Remember to ask about their specialization in retirement planning. Retirement income planning is its own specialty, and folks preparing for their retirement years should seek professionals with retirement planning expertise. 

2) Ask if you can have a written plan as a deliverable. This is where a good many financial professionals can fall short. When I say written plan, I’m referring to a document that you—the client—can read and understand. I’m not talking about printouts of charts and graphs w/ monte carlo simulation results. I’m referring to a document that you can actually understand. Ask if they have a sample plan to show you. 

3) Participate fully in the discovery and planning process.  A good financial professional will make every effort to make planning for your financial future an engaging process. The more open and involved you are in the planning process, the more you should be able to identify and align with your finalized action items. Your plan should reflect your needs / wants / desires on paper— and give you a roadmap on how to make it all happen. If you don’t actively participate—or worse, the planning team doesn’t ask you to be an active participant— you should look for a different team. Retirement is too important to simply let (insert big firm name here) take the wheel. 

Retirement planning doesn’t have to be tedious or stressful. Let our team guide you through our planning process, where we can align your assets with your values. Contact us today for a free 1 hour consultation!