What You MUST Know Before Investing
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 at this critical stage in their lives, 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, “how hard does my Retirement Bucket need to work?”
More specifically, “what rate of return do I need to earn on my Retirement Bucket of investments?”
That rate that you need to earn is NOT chosen arbitrarily. It’s the investment rate of return that allows your Retirement Bucket™ to keep pace with 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, let’s revisit our two couples, Mike and Mary, and Ron and Rose, both age 62. To keep it simple using round numbers, assume each couple has:
- $2,500,000 built up in their Retirement Bucket™,
- the same monthly pensions, and
- the same social security retirement income
Beyond that, here’s what else we know about them:
- Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, 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 still have $370,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions, weddings, cars, 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 Mike and Mary, 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 Mike and Mary!
Given this, Ron and Rose’s Retirement Bucket Strategy will be very different than Mike and Mary’s!
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 disciplined accumulator), 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 a targeted investment allocation with specific investments which provide you with a higher probability of earning that rate of return over the long run.
However, before we move on to that crucial step, we have to determine the investment rate of return that YOU need to earn.
We’ll do that in the next Retirement Coach Strategy of the Week!
Committed to Your Relaxing Retirement,
The Retirement Coach
P.S. Arm yourself with the questions you must ask to determine if your financial advisor has a legal obligation to work in your best interest at all times vs. the best interest of the company they represent. To receive a free copy of the Consumer Guide titled: “The 13 Questions You Must Ask Your Retirement Advisor (or Any Financial Advisor You’re Thinking of Working With) Before You Hire Them”, simply click this link: https://www.theretirementcoach.com/free-consumer-guide-how-to-protect-yourself
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Thank you for the trust you place in us.
(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.)