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The Cost of Procrastination It Was the Best of Times, It Was the Worst of Times The Latte Lie and Other Myths


 | April 16th, 2020

Paying attention is usually more helpful than putting your head in the sand, but TMI - Too Much Information - might be less than helpful. I Googled retirement and got 848,000,000 hits.

"Remove the nonsense in your information diet ... "  Focus on accurate and helpful information from trusted reliable known sources. Try to ignore or at least downplay emotions, scare tactics and even hysteria of others, including media of all kinds, eg social media, internet etc. (See Ritholtz article and below.)

Three phases of Financial & Retirement Planning

A. Growth

  • At the beginning of your working life, a key goal probably is to accumulate enough to meet your retirement income goal.

  • Time is your friend. Ups and downs of markets are unimportant.  Perhaps counterintuitively, market drops are your friend, assuming your income is consistent and you continue to make regular contributions into retirement account(s,) e.g. 401(k) etc.

  • At this stage your earning ability is typically your largest financial asset, when you calculate the "Net Present Value" (NPV) of your estimated earnings for your entire working life. (As such, Long-Term Disability Income Insurance, provided by Group, Employer or Yourself, is critical.)

B. Protection

  • At some point, if you have been investing consistently & regularly for 2-4+ decades, your retirement net worth is meaningful. (And the NPV of your future earnings, even with raises and skills improvements, eventually decreases as you age.) So protection of your retirement investments is very important.

  • As such, adjustments to your retirement investment risk level might be important or even critical.

C. "Spend" also known as "Decumulation"

  • While some feel capital should never be touched, sometimes, while a good idea in theory, it is not practical. So at retirement many must withdraw from retirement funds.

  • At the same time, market losses take on much greater importance.

  • By this (sometimes oversimplified) definition of retirement, you have no more income from work so you might not be able to make any additions to your retirement funds. And for the sake of this analysis you need to withdraw some to meet your living expenses in retirement.

  • A double whammy.

  • So retirement investments again typically should have risk reduced some more.

Ritholtz recommends the following:

1) Develop Situational Awareness

  • Objectively assess and re-assess risks that might affect you.

  • Understand the (maybe wide) range of possible outcomes in your financial life (Changes in expenses eg health, family. Investments. Income from all sources. Inflation.) Prioritize your needs and wants. "Remove the nonsense in your information diet ... " Focus on accurate and helpful information from trusted reliable known sources. Try to ignore or at least downplay emotions, scare tactics and even hysteria of others, including media of all kinds, eg social media, internet etc.

  • Focus on what you can control.

2) Have a Decumulation (Withdrawal) Strategy

How much can you safely withdraw each year to last your lifetime(s?) That number is very difficult to forecast because it could include many variables, including

  1. Inflation
  2. Interest rates
  3. Bond yields
  4. Personal cash flow needs
  5. Longevity

My Stanford Business finance professor and Nobel Prize winner William Sharpe calls this "the nastiest, hardest problem in finance." (He's written a free but very dense eBook about it to try to improve the research. Google Retirement Income Analysis by William F. Sharpe. FYI 750 pages.)

Having a plan is critical. So you can have a retirement as pleasant as realistically possible and still not outlive your money!

3) Understand the risks of fixed income

Bonds - especially individual bonds owned by you - typically promise a return of (not just "on") capital at maturity. These days low interest rates are challenging so riskier bonds and bond funds are tempting. Maybe you would benefit from a small proportion. Your individual circumstances dictate.

4) Reduce risk, cost and concentration in equities

Because of potential inflation and increasing longevity, you might need equities in some form. Please see this link:

5) Pivot from saving to spending

Sounds easy but for those with a saving mindset it can be emotionally challenging. And at least consider some due diligence on some CFPs®. Certified Financial Planners®. Take a peek at the brochure attached about what questions to ask beforehand. 

"You traded decades of your life on the job in return for the chance to enjoy your retirement. Do it right and the tradeoff will have been well worth it."

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