“We Don’t Want To Give Back Our Gains”
That’s what a new client from our radio show said as we began to create a retirement plan for him and his wife.
This couple is in their late 50’s, they’re getting closer to retirement and they’re worried. The husband said to me “We’ve had a heck of a run with our portfolio since 2008 but this market’s really making us nervous and we don’t want to give back our gains. Bill, it seems like retirement is just around the corner and we don’t have time to come back from another big loss in our portfolio”.
He’s absolutely right. At this stage of their lives, another 2008 would be devastating!
So how can they protect themselves, still keep up with inflation and create the income they’re going to need for 20 to 30 years in retirement?
Changing Our Portfolio’s Focus
As we get closer to retirement we need to change the way we approach investing. In our 20’s, the ’30s, and 40’s it’s all about growth. We may not have a plan for how to retire but we know that bigger has got to be better. So we save as much as we can and to one degree or another, we swing for the fences with our investments. If we have a big loss we’re not happy but we’ve got 20 years to make it back again.
When we’re in our late 50’s and early 60’s we don’t have 20 years to make it back. A major loss in our portfolio will change the way we retire. We’ll either have to work longer or not have the lifestyle we’ve planned on.
As we get closer to retirement we need to re-focus our portfolios away from blindly riding the market’s ups and downs and towards protected growth and income creation. We need to first protect ourselves from devastating losses and then focus on both growth and creating income to live on in retirement.
Three Major Challenges to Retiring Well
You see, the three major challenges to retiring well are growing your portfolio safely to keep up with inflation, creating income to supplement Social Security, and not getting wiped out along the way.
Protected Growth for Inflation
Let’s look at protected growth to keep up with inflation first. Chances are that we’re going to spent somewhere between 20 to 30 years in retirement. That’s a lot of years of inflation. Think about what you paid for your first house. Now think about what you paid for the last car you purchased. Chances are you spent close to the same amount or more on your car as you did on your first home. That’s inflation. It doesn’t stop and we need growth in our portfolios to keep up. Ironically, managing your portfolio first to protect against losses should provide a greater return over time than spending 5 years digging yourself out of a hole, as we have twice in the last 15 years.
Income to Protect Your Lifestyle
Now let’s look at the income you’ll need for retirement. For most people, Social Security is not going to be enough. There will be a gap between what we need to maintain our current lifestyle and what we’ll have coming in from Social Security. The time to begin creating the income to fill that gap is not when we retire but long before that. Time can be a very powerful ally in creating income for retirement. By reallocating a portion of our portfolio to income creation we can again reduce our risk of devastating losses. Our goal here should be to fill our future income gap in a safe, dependable, and as close as a humanly possible guaranteed way. We shouldn’t have to worry about how to pay our bills during a bear market.
Not Getting Wiped Out
Getting wiped out in retirement basically comes down to running out of money. If you have large losses like 2001 or 2008 while you’re retired the probability of running out of money increases dramatically. Taken together, managing a portion of your portfolio for protected growth and a portion for creating safe dependable income will go a long way towards achieving our third goal of retirement, not getting wiped out.