How the rules change in retirement
Show notes:
This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…
Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…
He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…
And now… here’s Mike…
Are you getting ready to retire soon? If so… you’re going to be playing a game where the rules are different than what you’re used to…
But fear not… I’m going to talk you through them today so you’ll be ready…
On this episode of the Help Me Retire podcast…
In today’s episode… we’re going to be focusing on making the transition… into a successful retirement…
You might be years away from that transition… or you might have already made it…
I think you’re going to get some good ideas today… regardless of where you are in the journey to True Wealth…
And I hope by now… that you’ve tapped into some of the other resources we’ve created to make that journey easier…
Every week… you should be getting our free e-letter: Wealth and Wisdom…
For specific advice and guidance on how to retire… you’ll want to visit our educational website… helpmeretirepod.com…
Every quarter… we put on webinars for our clients… and we record them all… so you have access to them…
You’ll find those recordings on our home page… Brown-F-W-A.com… under the Blog tab…
And don’t forget… Brown Family Wealth Advisors is also on Facebook and LinkedIn… so connect with us there as well…
We’ve got lots of ways to help you retire…
Okay… I want you to imagine… you’re at the big game…
Well… you’re not just at the big game… you’re actually coaching one of the teams playing in the big game…
As a good coach… you’ve been working with your team all season…
You’ve practiced hard every week… won most of your games…
And for the big game… you designed and followed a detailed game plan… that helps you take advantage of all the rules of football…
That game plan seems to be working… you’ve got a slim lead… your team’s got possession of the football…
And you’re watching the final seconds tick down… three… two… one…
Zero!
Your team starts jumping up and down… your family runs out on the field to join you… the fans are celebrating in the stands…
Taylor Swift is up there in the VIP suite… she’s just going crazy, too…
And then… across the field… you spot the referee…
He’s holding the football… and he makes his way over to you…
And then he tells you something you weren’t expecting to hear…
Coach… he says… you do realize it’s only halftime, don’t you?
Can you imagine how shocked you’d be?
And then he says… by the way, coach… all the rules you’ve known… all the ones you based your game plan on…
Well… they’re about to change… in fact… some of them are almost the exact opposite of what you’ve been used to…
Oh… and one more thing… the second half is set to start… right now…
Changing the rules at halftime… you didn’t see this coming… no time to prepare… can you imagine?
Well… that’s what it feels like for a lot of people… maybe most people… when they decide to retire…
You followed the rules… you saved… you invested… you paid off your debts…
You quit your job… life’s just one big celebration now…
And somebody like me tells you… no… it’s only halftime…
The second half is going to last 20… 25… maybe 30 years…
And yes… the rules are different from here on out…
So, before you make that leap into retirement… let’s talk about those new rules…
Let’s make sure you know what’s different after you retire…
So you can not only adapt to these changes… but maybe even turn them to your advantage…
Let’s start with one of the biggest ones…
Before you retire… it’s all about making your money grow…
Saving something out of each paycheck… living on less than you earn…
Then investing that money… making it compound over the years…
Building wealth…
After you retire… it’s all about making money… last…
Can you understand how different those two approaches can be? And how your strategy IN retirement might also need to be different?
Can you see how the strategies that got you here… to the point of retirement… might not be the best ones to take you the rest of the way?
Here’s another big rule change… before retirement… you have a known time horizon…
When you were 45-years old… and you’d set a goal to retire at age 65… that’s a 20-year time horizon…
It’s one of the few things you really know for sure… and you needed a 20-year game plan to reach your goal on time by age 65…
When you reach age-65… and you do retire… now what’s your time horizon?
Exactly… it’s unknown…
You might have some idea about how long your life in retirement will be…
Maybe based on how long your ancestors lived… how long your spouse’s ancestors lived…
But unless you know something the rest of us don’t… you have no idea exactly how many years you and your spouse have to plan for…
And you have to take that uncertainty into consideration when it comes to how you manage your money in retirement…
And here’s one more big change… that has to do with how you invest… and what happens to those investments along the way…
If you’ve owned stocks up to this point… and I’ll bet you have in one way or another… they’ve historically been one of the best ways to build wealth over time…
If you own stocks… you know they can be volatile… that’s one thing many people don’t like about them… they’re up one day and down the next…
Well… if you’ve been putting a fixed percentage of every paycheck into a 401-k plan… or some other retirement vehicle… and if some of that money has been going into a fund that invests in stocks…
You’ve been doing something called dollar-cost averaging… and I’ll bet you already understand how it works…
You invest the same dollar amount from each paycheck… and you automatically buy more shares of your stock fund when prices are relatively low…
And you buy fewer shares when prices are high… so over time… you wind up with a portfolio that’s more heavily weighted with cheaper shares…
With dollar-cost averaging… volatility can actually improve your results without you even having to think about it… the more volatility… in most cases… the better…
So, what happens once you retire? Does dollar-cost averaging work just as well in reverse?
What if instead of buying the same dollar-amount of your stock fund every month… you withdrew an equal dollar amount?
That seems logical… and I hear a lot of financial advisors recommending that exact strategy to retirees…
But think about what you’re doing…
In those months when prices are relatively high… you sell a certain number of shares to get a certain dollar amount…
But when prices are low… you have to sell more shares…
And the lower prices go… the more shares you have to sell to get the same dollar amount…
Dollar-cost averaging can be an ingenious strategy for building wealth… and market volatility can help you do it…
But it doesn’t work as well when you’re withdrawing money each month… that volatility can destroy wealth… and that’s not what we’re looking to do in retirement…
That’s why we call dollar-cost averaging in reverse… dollar-cost ravaging…
Those are three of the big rule changes you’ll face as you make the transition into retirement…
Just knowing those rules should make things a lot easier…
Because in retirement… your success really comes down to three factors… three things you might not have given much thought to as you’ve been working and saving all these years…
Financial success in retirement is largely based on…
How long you live…
How fast you spend…
And how you invest… and we’ve already seen an example of how investing rules change in retirement…
We don’t have much control over how long we live…
But one thing we do know… is that the longer you live… the longer your money has to last…
The longer money has to last… the more inflation tries to eat away at it…
And if you think that’s not a big deal… think again…
If your parents or grandparents made it to retirement at age 65… they might not have lived beyond their 70s…
Do you know what a lot of 65-year-olds are doing these days?
They’re taking care of their parents!
If you and your spouse are age-65 right now… the odds are better than 50-50 that at least one of you… if not both… will live beyond the age of 90…
And thanks to inflation… it’s safe to assume that whatever you plan to spend each year… will have to more than double… possibly even triple… over the course of your retirement…
Let’s talk about how fast you spend…
If you plan to spend 5-thousand dollars a month when you retire… you’re going to be spending more than 318-thousand dollars in the first five years… assuming 3-percent annual inflation…
Over the first 10 years… almost 690-thousand…
Over the first 20-years… more than 1-point-6 million…
And over a 30-year retirement… spending 5-thousand dollars a month at 3-percent inflation… will add up to more than 2-point-8 million dollars…
Your investments are going to need to work really hard to support that level of spending…
And I hope it’s occurred to you at this point… that if you spend too much… too soon… too early in retirement…
There’s a possibility your nest egg won’t be able to keep pace…
Which brings up how you invest your money… and a big risk associated with that… a risk that only affects retirees… who are trying to make money last for several decades…
It’s called… sequence-of-returns risk… and it has to do with what the market does over the course of your retirement…
If you’re going to own stocks… and chances are you should… then you have to accept the fact that every five to seven years or so… on average… we get bear markets… defined as market averages like the S-and-P 500 falling more than 20-percent from their highs…
So, we can safely assume that over the course of even a 20-year retirement… you’re going to go through at least three… maybe four bear markets… and you probably already realize how scary those can be…
They’re especially scary if you’re selling stocks on a systematic basis to cover your retirement living expenses…
All other things being the same… if you get a really bad market… a serious bear market like the financial crisis of 2008… near the beginning of your retirement… then it’s going to hurt you a lot more than if you got those bad market returns later in retirement…
And since we have no idea when the next bear market will happen… we have no control over how much sequence-of-return risk we’ll be facing in retirement…
But that doesn’t mean we can’t be ready for it… and the key there is to invest your retirement savings in such a way… that you won’t have to sell stocks when you don’t want to… in the middle of a nasty bear market, for example…
How do you minimize the chances of that happening? Simple…
You make sure you have the first five to ten years’ worth of withdrawals invested in something other than stocks… something less volatile and more predictable…
We call that… goals-based investing…
Designing your portfolio based on when you plan to withdraw each dollar over the course of your lifetime…
So… we want to have those first five to ten years’ worth of withdrawals set aside… and then invest the rest of the portfolio in a diversified portfolio of successful businesses that pay regular dividends… and who have a history of increasing those dividends over time… faster than inflation…
Ideally… we would then use those dividends to replenish those more predictable investments… bonds, for example… as we use them to cover your spending needs in retirement…
So I think you can see… the rules of how you invest change significantly once you retire…
And if you don’t know those changes… if you don’t adapt to those new rules… it could really hurt your chances of having a successful retirement…
What have we learned in this episode… what do you know now that you might not have realized until a few minutes ago?
And how can that knowledge help you?
We know that before retirement… it’s about making money grow…
And once you retire… it’s about making money last…
That when you’re planning retirement… you have the luxury of a known time horizon…
But after retirement… you’re dealing with an open-ended time horizon… and you’re probably going to live a long time…
And we understand that when you’re saving… and investing… and building wealth… market volatility can put the wind at your back…
But once you retire… the volatility of owning stocks can hurt you in a bad way… especially if you need to sell shares during a prolonged down-market…
You know that your financial success in retirement comes down to how long you live… how fast you spend… and how you invest your life’s savings…
As with much of life itself… there are plenty of things we just can’t know… so we plan for them… instead of hoping things work out on their own…
But there are some things we can know… the rules that change in retirement for example…
Take advantage of what you know… and plan for what you don’t…
That’s the essence of investing… for the rest of your life…
Hey… I appreciate you spending a little time with me today… and I hope this information proves useful to you…
Spend some time on our website… HelpMeRetirePod.com and keep learning about retirement issues…
And if you ever want to talk… just send me a message through the website… and we’ll set up a time to get together…
In the meantime… be safe and well… and we’ll talk again soon…
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
