By James Brewer, CFP®, CRPC®, AIF®

Do you dream of retiring one day to a brighter future? Have you thought much about the journey, its uncertainties, twists and turns? I call that the pain. You probably need to invest in the markets to get a return that at least keeps up the rising cost of living. Before the market crash, some enjoyed the idea of the 5% return in a money market account and could not see a scenario where that return would not continue. What risk-adjusted returns or, better stated, pain-adjusted gains will you need? Let’s look at the pain in the gain separately.

As you think of retiring to your ideal retirement you should start by calculating how much money you will need to re-create your paycheck on a monthly basis. How much paycheck you will need has to do with what you plan on doing in retirement. Working backwards from there you need to consider three interrelated factors that make up accumulating a future balance: savings, allocation and time (SAT).

We will focus on allocation in this article. You may not even like hearing the term risk. I often hear people tell me they are conservative. What exactly is meant by conservative? Is that a 2%, 3% or even a 10% gain? Someone once told me she was conservative. I believe what she actually meant was, “I don’t want to endure too much market risk.” However when I think of developing a retirement strategy there are three potential pains that go along with the SAT: giving up your lifestyle today because you’re giving up spending, working longer than you want to and yes, enduring watching your retirement balance go up and down as the market gyrates. 

Would you find it painful to give up your lifestyle today in order to have a better tomorrow? Would you rather work longer to have a better lifestyle now? You might enjoy lattes, shoes, vacations and more today. Might poor health in the future actually compromise that trade-off? (For related reading, see: Save Without Sacrifice.)

Your definition of pain may be, “I don’t want to work that long. I hate what I’m doing and I can’t wait to stop.” There are many ways to judge what the pain of the journey entails. Each one of us has our own definition. That’s why I dislike rules of thumb which don’t address our own thoughts, emotions and values.

Finally, there’s the pain of uncertain investment returns and the roller coaster ride it often puts us on. Are you like many who would prefer a flat or constant rate of return? While some products provide some fixed income, it is at the expense of a bigger upside. I actually haven’t seen anyone who can achieve their retirement goal by investing in something that has the typical low rates of return that come with conservative income products. (For related reading, see: How to Tell if You’re Being Too Conservative With Your Investments.)

I find that when I go to amusement parks with roller coasters there are many people who will take the ride. Walking up to a roller coaster you get some indication of what the ride is likely to feel like. Still there’s another feeling when you are actually experiencing the ride. Some people keep getting on the same roller coaster ride. This tends to be a little less thrilling as they begin to adjust to knowing what their bodies are going to feel as they go through the ride.

Similarly I believe it’s important to discuss your investments with a professional, preferably an investment advisor representative with credentials like a certified financial planner or chartered financial analyst. They can explain to you the expected ups and downs of the ride of various investment portfolios. By combining various types of investments ranging from government bonds and corporate bonds to small and large company stocks, you can put together a series of somewhat predictive portfolios. You may want to check out the Dow Jones Industrial Average index, which has an interactive chart showing you the ups and downs of various combinations of different types of investments over a one, three, five and 10-year period.

Using some statistical analysis we can give you a prediction or probability of the range of expected values you may see. These expectations are based on history. There is no guarantee of the future. Unlike the roller coaster that has already been built we don’t know exactly when the market will go up or go down regarding these expected values. Historically, by finding your comfort level and staying the course you will receive the average of these ups and downs. (For more from this author, see: How Compounding Benefits Your Retirement Savings.)

One gain of this process is understanding what the road ahead is likely to offer. Finding a portfolio that allows you to sleep at night is an important gain for most of us. Then with a clear mind we can stay focused on continuing to save according to plan and staying with our chosen portfolio strategy. (For related reading, see: Finding Your Investing Comfort Zone.)

Another gain is retiring on your terms with a sufficient balance to create as many retirement paychecks as you need for the rest of your life. Having accumulated enough money at the time you would want allows you to continue to work not because you have to but because you choose to. You may have philanthropic desires. You might be able to offer your wisdom to a nonprofit without needing a paycheck.

If you haven’t already done so we encourage you to find out what tradeoffs and pain-adjusted gains are right for you.

(For more from this author, see: Women Need a Wealth Plan That Fits.)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risks, including possible loss of principal. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. 

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Let’s block ads! (Why?)

Latest Articles in Retirement