If you are a retiree, you need different investment solutions compared to people who are still working. My experience tells me that this is so for two reasons.
First, a retiree usually can’t add to her retirement nest egg. Once she stops working, that’s all she’s going to ever have. As a result, she is (rightly) going to be ultra-protective of what she’s got. (Read “How Much Money Do I Need to Retire?”)
The second reason is that once retirees start drawing on their retirement savings, a switch goes off in their heads. They understand that they are drawing down their assets, and that often scares them. They realize any mistakes or wrong moves might mean the end of those income checks. Most retirees I know are unwilling to take that chance. This also contributes to their natural inclination to be conservative with their investments.
So good investment solutions for retirees have to be both financial and emotional in nature. On the one hand, they have to provide inflation-adjusted income that will last their lifetimes. For most people in their sixties, that means the investments will have to provide income for a good 20, 30 or more years. The best investments for long periods of time usually include equity. And that means volatility.
But the right investment solutions can’t expose retirees to too much short-term volatility. Volatility is the hot button that pushes retirees over the edge. It makes investing unbearable and pulls them out of their long-term investments when they are very frightened. This might feel great to them over the short term, but is usually a big mistake over the long term. But having said that, volatility is much more than an emotional hurdle. If the market is in decline just when you retire and start tapping into your savings, you’ll see your retirement assets decline in value quickly. Numerous studies show that if you are unlucky enough to begin your retirement just as the market goes into decline, your odds of staying retired are significantly reduced. The reason for this is that you are eating into your principle while the market is chipping away at it too. So given all this, what is a retiree to do?
First, let’s look at some of the obvious solutions. If you retire in your sixties or seventies, the odds are you’re going to need retirement income investments for 20 or 30 years. That being the case, equity should be at least part of your solution. I don’t advocate buying and holding, as you know, but I do advocate having a portion of your assets in equity if you are in this age group. As I’ve pointed out in my book, How Smart People Lose a Fortune, it’s important to “take the market’s temperature and do your best to avoid catastrophic mistakes.” But even if you do the best you can, you can never guarantee you won’t make mistakes when you invest in the market.
To reduce volatility, you should diversify your holdings. That means you should have a portion in bonds, real estate and precious metals. You shouldn’t try to make a killing in any investment du jour of course, but focus on your long-term goals.
I believe we are in the midst of a change where conventional wisdom may be less helpful than it was before in planning your retirement future. Keeping a good chunk of your money in low-paying Treasuries may be comforting over the short run, but I don’t believe it’s a winning strategy for most people.
What investment solutions are you most focused on right now?