In Retirement, You Can’t Invest
Until You Know This
Good Morning Relaxing Retirement Member,
Every “retirement calculator” I’ve come across from any financial firm always begins with you assuming an investment rate of return you either want to earn or think you can earn.
This completely puts the cart before the horse.
It’s what gets so many people into trouble, and what causes so much confusion and anxiety.
Once you’re past the first steps in The Relaxing Retirement Formula™, and you know just how dependent you are on your Retirement Bucket™, the next question is, “what rate of return do I need to earn on my investments?”
That rate is NOT chosen arbitrarily. It’s the investment rate of return that allows your Retirement Bucket™ to outpace inflation and remain intact year after year while allowing you to continue to spend what you want.
And, it’s different for everybody so there’s no ‘rule of thumb’.
Why This Rate Is Different For Everybody
To illustrate why it’s different for everybody, let’s revisit what we know about our two couples who we’ve been discussing over the last few weeks:
For simple round numbers, let’s assume each couple has:
- $2.0 million dollars in investments,
- the same social security retirement income, and
- the same pensions.
Beyond that, here’s what else we know about them:
Bill and Linda Independent have no mortgage or home equity line of credit, and have recently completed many of the major upgrades to their home, i.e. a new roof, new indoor and outdoor paint, a new furnace, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years since they put very little mileage on their cars.
Ron and Rose Reactionary still have $365,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions and weddings, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.
Ron and Rose are clearly more dependent on their Retirement Bucket™ than Bill and Linda, meaning they need to withdraw a lot more money each year to support their more expensive lifestyle.
If they need to withdraw a lot more money each year, then their Retirement Bucket™ needs to grow faster just to remain full so they don’t run out of money.
If their Retirement Bucket™ needs to grow faster, then Ron and Rose need to earn a greater investment rate of return than Bill and Linda!
When you’ve reached the stage where the money you’ve saved must now support you for the rest of your life, when you’re dependent on your money to “live” as opposed to receiving a paycheck from the work you do, you have to think very differently about how you’re investing your money.
This is no longer a game. It’s no longer a race. You can’t afford to lose this time because, if you do, you’ll be forced to do one of two things:
- make drastic cutbacks in your lifestyle (who wants to do that after working all these years in preparation for this stage in your life where you get to reap all the rewards of being a diligent saver), or
- you will have to go back to work to make up for the losses, something your health could prevent you from doing in the future.
Neither of those sound like very good outcomes, so that’s why you have to think very differently about investing at your stage in life.
And, it’s why you have to know the investment rate of return you must earn, as opposed to randomly investing your money in whatever appears to be the ‘hot’ thing at the moment.
The Medical Analogy
To draw an analogy, it would be like you taking a new medication without a doctor first analyzing your symptoms and doing a thorough examination to determine if you even need any medication at all.
When asked why you’re about to take this new potent drug, the doctor tells you that it’s a really popular drug right now. It’s all over the news and everyone’s taking it.
Now, if that sounds ridiculous to you, you’re right. However, this is how millions of Americans select their investments in retirement.
They don’t have a carefully calculated rate of return they’re aiming for. And, because they don’t, they’re at the mercy of the next salesperson who sells them whatever makes that salesperson the most money, or whatever appears to be “hot”.
For all the reasons I mentioned above, this is extremely dangerous. Don’t be lazy and fall into this trap. Take the time to figure out the rate of return you need to earn first.
Then you can go about crafting an investment matrix with specific investments that have the highest likelihood of generating that investment rate of return over the long run.
In the next edition of The Retirement Coach Strategy of the Week, we will help you determine the investment rate of return that YOU need to earn.
Committed to Your Relaxing Retirement,
The Retirement Coach
P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.
I appreciate the trust you place in me. Thank you! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)