Reason #2: Current Yield vs. Total Return

Let’s continue our discussion from last week into the reasons why Dalbar, Inc. statistics demonstrate that retirees earned 77% to 90% less than market averages over the last 20 years.

You may recall that Reason #1 was the wrong governing issue that dominates retiree’s goals.

The second “behavioral mistake” that can easily be curtailed is investing only for current yield vs. investing for total return.

Let me explain what I mean.

The Need to “Create” an Income

As most individuals transition over to retirement, their thought process is that they need to create an income. And, that’s correct.

Where the behavioral mistake occurs is when they believe that the only source of that income comes from fixed income investments, like bonds, money markets, CDs, or fixed annuities, etc.

Because of this, most go out and hold most of their investments in those with the highest “current” yield. Or, in other words, what pays them the most income right now.

The problem with this practice is that investments with the highest current yield, by definition, have the lowest long term total return.

And the converse is also true. Investments with the highest long term total return have the lowest “current” yield.

The market has to compensate for that lower current yield by providing a higher long term total return.

If we only judge an investment based on current yield (or the income it produces), you’ll have all your investments in those with the lowest overall total long term rate of return.

And, you may very well need that long term total rate of return to make it all work for you (based on following the Relaxing Retirement Equation™ we’ve talked about).

This is the classic American mistake when it comes to investing in retirement.

Now Before It’s Too Late

The biggest challenge is “when” retirees find this out!

If they find out early in their retirement years, they can potentially resurrect their retirement.

However, most people find out way too late. They find out when they’re 78 or 80 or 82 years of age. Their costs have doubled or tripled and their income has remained the same because they invested all their eggs in the highest current yielding investments, which are fixed income investments.

The horrific result of this is they run out of money.

This is the crux of everything we’re trying to help you prepare for. It’s not that we want to earn a great rate of return just for the sake of earning a great rate of return.

We need to earn the returns we need to earn in order for us to continue the lifestyle that we’ve become accustomed to living.

It’s not a bonus. It’s a necessity.

Health insurance and health care costs, condo fees, gas for our cars, oil to heat our homes….they’re all going to increase in price each and every year. You can count on it.

The question is will your Retirement Bucket™ be able to keep pace and continue to throw off the increased lifestyle sustaining income you need and have worked so hard for?

Next week, we’ll continue our discussion and lay out Reason #3 why retirees averaged 77% to 90% less than market averages over the last 20 years.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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