Decisions, Discipline, Direction
Decisions
Today, retirees are faced with making decisions about their future that are significantly more complex than in the heyday of corporate pensions. Back then, workers were only concerned about working 30 years at the company, picking a retirement date, and collecting a monthly pension check for life. As great as 401ks and 403bs are, a significant challenge has been created by these plans. The challenge is navigating all the decisions you have to make to set yourself up for a secure retirement.
About 40 years ago, a massive reduction of corporate pensions began. Today’s retirement system makes you pick investments and choose your mix of stocks and bonds in your company plan. Then, once you retire, you have to figure out how to create a retirement paycheck from your stocks and bonds.
Unfortunately, spending your money wisely during your retirement is considerably more complicated than savings and investing your money over your working career. Retirees must choose when and how to spend certain assets. Which account should be used first? Should you take money from an IRA, or a savings account? How will taxes impact your choices?
Now more than ever, retirees need a plan to guide decisions to help ensure they are maximizing their resources. A plan can model a wide range of decisions and illustrate possible outcomes and options. It can also help set expectations of how market declines could affect your planning goals.
A financial plan should be an intricate balance of goals coordinated with a complete list of behavioral and monetary factors. Some of these factors include, Social Security timing (and coordinating with a spouse), required minimum distribution (RMD) planning, Roth conversions, qualified charitable distributions (QCD), part-time work, cognitive decline, strategies for long term care, estate simplification, inflation assumptions, asset consolidation, etc.
Retirement is not all about money. On top of all the decisions about your money, retirement demands a decision about your mindset. Go into retirement with a focus and excitement about new experiences and the opportunity of an open schedule that you can fill productively. Retirement is not just leaving behind the grind of work. For many, leaving work means losing an identity. Work has provided purpose, satisfaction, and fulfillment for decades. So having the mindset that retirement is a transition, not an end can help you relocate and find your new purpose(s).
Research shows that spending your energy pursuing a new experiences, staying connected and engaged with family and friends, and maintaining your health (exercise, sleep, and healthy eating) will lead to better outcomes in retirement. Better outcomes, depend on deciding your mindset.
Discipline
A word advisors frequently use related to investing is discipline, but many really do not explain it. So, what is it? Let’s rephrase and expand on the term discipline. The word is code for an investor to acknowledge your emotions, but don’t act upon them. This admonition to keep emotional responses in check is much easier when you have a financial plan in place. Even though nothing can take the negative feelings away, if you have a plan you can override your feelings by choosing portfolio actions according to your plan. It is in preparation for the storms of life and the market turmoil that you should have and follow a plan. We know with certainty that markets will go through price declines. When this happens, a plan can remind you of the actions you should take: rebalance your investments back to your strategic allocation, tax loss harvest in your taxable accounts, and wait.
Negative feelings are so hard to live with, but waiting for markets that have fallen to recover may be the worst. Jack Bogle, Founder of Vanguard, famously said during an interview with CNBC, “Don't do something, stand there! " as markets were experiencing broad price declines.
The reason we need to manage our own emotional responses is that when things go bad, it’s especially hard to make the right decisions because it literally feels so bad. Recently, I had a friend who was packing for a trip find $20 in a suitcase - has that ever happened to you? She reported being happy for a few minutes about the find, but quickly moved on with her day. Then, this week, she lost a $10 bill. She told me that she was irritated by losing the $10 bill and thought about it all day. Talk about the difference between finding or losing!
Psychologist Daniel Kahneman’s (Nobel Prize, 2002) research demonstrated that losing may hurt twice as much as gains make you feel good (Thinking Fast & Slow, 2011). This is especially relevant and quantifiable when dealing with money. The volatility of the stock market challenges investors who have a plan to override their innate tendencies to act on fear, and instead allow discipline to restrain a response based on negative emotion.
For those who are unable to control their emotions during down markets and sell out, the long-term results can be devastating to their overall financial plan success. Historically, the largest percentage gains tend to come after market declines. Investors have to stay invested in order to experience the recovery stocks make over time.
Direction
Whether you hire an advisor or not, every investor should be diligent in their decisions around retirement. Discipline in investing can be helped by using a financial plan as a guide for decisions. If you do not have a financial plan, what tools will you use to offer direction when discipline is needed?
Life is full of twists and turns and sometimes we need direction from outside of ourselves. When it comes to retirement planning, advisors can offer directions along the retirement journey. Studies show better success rates when there is accountability and guidance from a fiduciary advisor. Because decisions are magnified and more consequential in retirement, deciding on a positive mindset, maintaining investment discipline, and seeking direction from a qualified advisor can increase your odds of long-term success.
1. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5906725/
2. https://www.cnbc.com/2016/01/20/investing-legend-jack-bogle-stay-the-co…
3. https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR12…
RAND_RR1289.pdf
Disclosures: The information provided in this report is for informational purposes and should not be considered a recommendation or solicitation to purchase or sell any particular security or investment strategy. Investments are not insured, subject to market risk, including the loss of principal. Investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods. The information contained does not consider any investor's investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate. Information in this presentation has been obtained from sources believed to be reliable but cannot be guaranteed. Additional information is available upon request.
