become ill or maybe developed a new pain in your body that you didn’t recognize before? What did you do? Did you go to the doctor? Often one of the most common reactions we have when we recognize a problem with our health or wellness is to self-diagnose. We check the attendance roll for a class at Google University, and we try to browse the web to find a solution for what could possibly match the symptoms we are experiencing. This can often lead us to frightening conclusions. We could determine that we either have some rare African fungal virus with no cure, or we have a serious health condition as a result of that new “weight loss” supplement we took last year in which we are entitled to a share of a sizable lawsuit settlement. Either way, both conclusions are likely way off base. When we introduce the opinions of the masses into our personal situation we can often be led far astray, and the cost can be far more than if we had just made an appointment with the doctor. The same thing can happen with your retirement portfolio. When you try to “do-it-yourself”, you can easily end up hurting yourself more than helping.
I have a great friend who is a DIY king. If you were to see a picture of his home from when he purchased it compared to his home today, you’d notice a striking before and after difference. He is the kind of person who believes strongly in the mantra of “why pay someone else to do something I can do on my own?” He’s done some sort of remodel on every room in his home and even added 2 rooms onto the house by himself. He’s somewhat of a “jack of all trades”. He’s even applied that thinking to his finances and investments and has had a fairly successful run over several years while accumulating money into his retirement portfolio. However, unlike remodeling your home or fixing the lawnmower, there are much larger inherent risks that stare you in the face when you approach retirement. You have ONE shot at a great retirement. So, how do you make sure that you are taking advantage of arguably the most coveted years of your life?
1. Have a Plan
The most important thing to have in place when you are considering retiring is to have a plan in place. The “I’ll figure it out” mentality for your retirement would be the equivalent of making a Saturday morning run to Home Depot to purchase the materials to build your dream home. If you were to show up at your plot of land and unload your lumber, cement mix, sheetrock, and shingles with no plan, you wouldn’t know where to start. All homes are built based on a set of blueprints. The very specific calculations in the blueprints dictate how much lumber will be needed, how many bricks, how tall the ceilings are and so forth. Many people show up at retirement with a truckload of investments and no idea how to build their retirement “dream home”.
2. Don’t listen to the guy at the water cooler
Many people have retirement “rules of thumb” to avoid outliving your money. Maybe the guy you chat with at work about the news or investments has told you about the “4% rule, or to just buy stocks and live off the dividends, or just buy the index because you can’t beat the index.” The problem with rules of thumb is they are only good until you nail your thumb with a hammer. They don’t always work. Everyone’s financial picture is different.
The 4% rule – The 4% rule states that if you only take 4% out of your retirement investment portfolio per year, then statistically you should not run out of money. This can be done on a spreadsheet in Excel, but the problem is Excel and reality are often two different things. When you retire and how the market treats your portfolio in the early years of your retirement will have a drastic effect on whether or not you run out of money. If the market drops 20% in the first year of your retirement (just ask anyone who retired in 2007), you’re going to have to take 4% next year from a much smaller number than you did the year before. Do you really want something that is no more in your control than a tornado determining how much retirement income you receive in any given year? This point could also be made about living off the dividends from your stock portfolio. It’s totally unpredictable and ultimately it’s out of your control when, if, and how much money you receive. You also cannot invest directly into an index.
3. Separate your emotion from your finances
Many times when I sit with a client to discuss what is probably their largest asset and what to do with it, it can become very emotional for them. They often times have worked hard for 30 years or more to build their 401(k). When they think about this money, it’s often tied to the past and all of their life’s work. So, how do we take something you’ve spent your whole life working to obtain and flip it to work for you for the rest of your life? It definitely cannot be pursued without help navigating the emotional attachments to your dollars.
If you have a son or daughter, think about how much time, effort, and money you spent pouring into them to raise them. On their wedding day, the tables turn for you as the parent. What once was your job to invest in your children now becomes your responsibility to take a step back and let whomever they are marrying enhance their life. Before you agree to let someone marry your child, if you’re smart you will make sure that you like, trust, and believe what they are telling you about how they plan to treat them. If you’ve chosen wisely, it won’t be long before that stranger becomes as much a part of the family as your own children.
It is the same way when you enter into retirement. The job of a financial advisor is to enhance your life, lift your head, and help you not to unnecessarily worry about what is happening to your money. We help you manage the stress about your income and portfolio. It’s your job to do what you retired to do: make the most of the best years of your life.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.