A Critical Retirement Lesson to Implement

A Critical Retirement Lesson to Implement

Over the last 33 years of coaching individuals and couples to a seamless transition to their retirement years, I’ve witnessed many similarities among those I’ve worked with.

Some of those similarities were positive like the tremendous discipline and dedication employed to save and build up a sizable Retirement Bucket™ of investments which eliminated their dependence on a paycheck from work and provided them with the option to retire or keep working.

On the flip side, however, I’ve also witnessed far too many who have no system in place for their decision-making, and it costs them dearly.

I’ve recently had the pleasure of working with a terrific couple who was referred to us by one of our Relaxing Retirement members.

Their “story” is one I’ve witnessed far too many times, but there’s a great lesson for everyone, so I’d like to share it with you.

In order to protect their privacy, I’m going to refer to this couple as Ron and Rita.

Ron and Rita are both 63 years old and they now find themselves in the same place many of our Relaxing Retirement members found themselves in. 

They’ve hit a threshold!  While they’ve enjoyed working up until now, they’re now emotionally ready to make the transition to Phase II of their financial lives and retire.

Can We Afford to Retire if We Choose to?

What Ron and Rita first wanted to know is if they could afford to stop working if they chose to.

And, if they can, how do they generate lifestyle sustaining cash flow they need because they’ve never done this before.

This is a key commonality that I see so much. They’ve never done this before and they’re just not confident making the transition.

One of the big reasons why they lacked 100% confidence is their investment performance over the last few years.

During Step 2 in our program, their Retirement Confidence Preparation System meeting, in addition to having an extensive conversation about their experiences and their priorities, I also had the opportunity to review their investment holdings going back a few years as Ron was a “spreadsheet guy.”

While reviewing their spreadsheets during our meeting, I noticed that there was a lot of activity (buying and selling) at random times, so I asked what triggered all of that movement.

Ron’s answer was one that I hear far too often: “I evaluate what’s doing well and what’s not and I reallocate.

My response was, “how do you determine what to sell and then what to buy?

Ron’s answer: “I sell what isn’t performing well and buy what is performing better.”

His answer was so matter-of-fact suggesting he thought that’s obviously what everyone should be doing.

Yes, They Can Afford to Retire

Before I comment on Ron’s answer, let me share with you what our analysis showed them.

When we designed their Retirement Blueprint™ and ran their Retirement Resource Forecasters™, taking into account all of their priorities and all their resources, we discovered that they had built up enough in their Retirement Bucket™ of investments to make it all work!

Enough money and income from social security and a small pension to continue living exactly the way they wanted without running out of money over their expected lifetime.

Now, as you can imagine, this was a huge relief for them, and something they did not realize before we met and designed their Retirement Blueprint™.

As you can imagine, they were on a real high at this point.  However, that soon simmered as I alerted them that there was a gigantic “BUT.

But, Not if They Continue on the Same Path

After carefully evaluating Ron’s spreadsheet of their investment activity, the gigantic “BUT” I had to report to them was if they continued doing what they had been doing, there was a high likelihood that they would run out of money within 8 or 9 years!

I know…ouch!

Now, why did I have to tell Ron and Rita this when I just told them that they had enough money built up to support their lifestyle for the duration of their life expectancy?

The reason I had to tell them this was their Retirement Resource Forecasters™ had some assumptions built into them.

First, we have to account for the fact that they’ll need higher and higher income each year just to remain in the same position due to inflation which has now reared its ugly head.

And second, we have to assume that they can earn the investment rate of return they need to earn in order to keep pace with inflation, which, for them, is not a very high return.

However, given Ron and Rita’s “system” of investing, they had little or no chance of accomplishing that.

What they actually employed was not a system, but random selection and timing.

Their allocation actually wasn’t that bad three years ago.  It was fairly well diversified.

However, they continuously killed that diversification by trying to shift out of “what just performed poorly” over to “what had performed better.”

What Ron and Rita Were Missing

Unfortunately, Ron and Rita’s investment “system,” or better stated: “behavior” is not unusual.

Statistics tell us that it’s the norm.

According to Boston-based research firm, DALBAR, here is what their 2020 Quantitative Analysis of Investor Behavior revealed about the 30 year period from January, 1990 through December, 2019:

  • The Average annual return of the S&P 500 Stock Market Index from was 96% (including dividends reinvested)
  • Over the same 30 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 04%

Take a moment to stop and re-read those two numbers for a moment and let them sink in.

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 30 years of 9.96%, the average stock mutual fund investor (a person, not an investment) only achieved 5.04%!

That means that the average stock mutual fund investor’s return was only half of what the broad stock market index provided each and every year!

How incredible is that!

It’s mind boggling, but it doesn’t surprise me after what I’ve witnessed over the last 32 years coaching couples through this retirement transition.

Just think about Ron and Rita’s story that I just shared with you!

They’re Fighting the Wrong Battle

What you can’t help but take away from those statistics is that, while it makes all the news, markets (or bad investments) are not our biggest problem.

The BIG problem is what the average investor does with markets, i.e. investor behavior, which is driven by their “strategy” or lack thereof.

Forget for a moment about trying to “beat the market” which is what everybody loves to talk about and talk shows are built on.

The average stock mutual fund investor earned 49.4% less each and every year than the broad market S&P 500 index.

Think about that for a moment.  Something that we all can control is what our biggest problem is.

It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the results of this research report.  What else could possibly explain the massive difference in real life returns that people receive?

The obvious question is why, and what can we do to close this performance gap?

Well, there are several easily correctable “strategic mistakes” that I’ve personally witnessed over the last 33 years that I’d like to share with you.

Stay tuned.  I’m not sure there’s anything more important about investing during your retirement years than what I’m going to reveal to you in the coming episode.

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