The Problem with “Creating” an Income
Good Morning Relaxing Retirement Member,
If you’ve been following along and reading each edition of my Retirement Coach Strategy of the Week lately, you know that I’ve been spending a lot of time evaluating the reasons why the investment returns achieved by the average retiree are so poor.
At this point, you have to ask why I’m spending so much time on it!
The reason is that the narrative you hear day in and day out in all forms of financial media (television, radio, newspapers, magazines, and on the internet) is that markets are the problem.
In fact, as I write this, here is the lead headline on Wall Street Journal’s MarketWatch: “The stock market is turning into a sloppy, ugly mess – and, it could get worse. Stocks slump as investors shrug at solid earnings to focus on oil’s retreat.”
However, as the DALBAR report I shared with you reveals, the uncomfortable and unreported reality is twofold:
- markets have produced terrific long term investment returns throughout history, yet
- the average stock mutual fund investor (a person and NOT an investment) earned 43% less than the market barometer of “average” returns, not above average, each and every year over the last 20 years.
What we can conclude from the DALBAR report is that the problem is NOT markets because markets have produced terrific long term rates of return.
The average retirees’ problem is how they think about, internalize, and react to markets.
In other words, it’s about what they do with markets.
As you’ve discovered over the last few weeks, there are many reasons why the average retiree earned 43% less than the market barometer of “average” returns over the last 20 years.
The next huge problem to avoid that I’ve witnessed coaching retirees over the last 28 years 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 to supplement their social security and pensions. And, that’s correct.
Where the 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 today), 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 Formula™ we’ve outlined).
This is the classic American mistake when it comes to investing in retirement.
Now Before It’s Too Late
The biggest challenge is “when” most retirees find this out!
If they find out early in their retirement years, they can potentially resurrect the devastating problem.
However, most 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 investment rate of return just for the sake of earning a great rate of return.
We need to earn the returns our Retirement Resource Forecasters™ indicate 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?
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.)