In retirement, any mistakes you make with your finances are likely to be more costly simply because you may not have the time to undo them. I want to try and help you side-step them before they become an issue for you, and as always, that starts with awareness.
It’s important to remember that mistakes have degrees; they’re not all binary. Sometimes a mistake is a question of something being sub-optimal rather than outright wrong. But that can still cost you money, so let’s see what we can do to minimise the chance of that, shall we?
Why Being too Cautious is a Problem
It’s a textbook mistake that retirees are too cautious with their investing. This has its roots, I think, in the history of guaranteed income in retirement, whether that was in the form of a company DB pension or an annuity.
If you had investments you would reduce the risk of the asset allocation in the run-up towards retirement because it was a cash event – you were converting assets into income and you didn’t want a market drop right before you annuitised, meaning you had a 20% lower income for the rest of your life.
These days far more people stay invested throughout retirement. For many, since the advent of drawdown and especially the pensions freedoms of 2015, a large part of their retirement income security has been based on the continued investment of pension funds.
That dependence in turn can lead to uncertainty. It’s a huge transference of risk – from employers and pensions schemes onto you as an individual investor to secure your retirement income. No wonder may people err on the safe side.
We talked about risks in the previous blog series within this in-depth look at retirement, and a key risk in retirement is inflation. It erodes the buying power of your money over time, meaning your investments have to work harder to keep up.
I imagine you’re seeing by now that personal finance is one massive balancing act. We have to balance abstract understanding that markets fall with self-awareness about how we might react when they do. I’ve never yet met a completely dispassionate investor.
A lot of people say they are, particularly in the FIRE community, but I’m not convinced. I know I’m not one, and I spend my life talking about and working in this field, so how can laypeople possibly be expected to get these things right?
In a lower return environment, money needs to be subject to risk in order to do its job for you in retirement. Too little equity exposure, and you’re likely to face a completely different risk – that you’ll run out of money before you run out of time. So what on earth can we do to avoid the mistake of taking too little risk? A few things, actually.
We can educate ourselves – that’s why you’re here, right? Increased knowledge and familiarity with anything can help to reduce its scariness. It’s the reason I always ask my dentist to talk me through what he’s going to do to me. Somehow, knowing it in advance makes it less scary.
So, learn about how investments work. Learn about how they have behaved in different market conditions. If you’re going to be the prime mover in your retirement security, you’d better bone up on what you’re doing – don’t cross your fingers and hope for the best.
We can bucket our money using the cashflow ladder – I talked about the cashflow ladder in the previous chapter and in a bit more detail in Season 16 episode 8. If we know that the money we have exposed to the most risk is the money we don’t need in the near term, that’ll help, believe me. Bucketing helps compartmentalise our money and it helps when we’re saving for specific projects and drawing down over specific timescales.
We can guard our media intake – There’s nothing worse than the media for making us worry about stuff unnecessarily. Over the past three months of the COVID-19 lockdown, I’ve had lots of conversations over Zoom and phone calls with clients.
On lots of occasions they have said something to me like: ‘I know my investments are down massively – probably I’ve lost half my money!’ Then I tell them that they are in fact only down about 8% or whatever, and they can’t believe it.
Talk about framing – the media have made my job easier by framing my bad news – ‘down 8%’ – inside much worse news, making my news seem like the best news ever! They’re relieved that it’s not as bad as they thought.
We can set and forget – when we’re able to set up our retirement investments in a good way, we can have the confidence not to meddle – we know it’s set up correctly. That’s really important as meddling rarely leads to anything good…
Ultimately, being too cautious with our investments in retirement (or at any other time) stems from either a lack of understanding or having been burned before. Whenever I have spoken with a client who has been burned with bad investments in the past, it has always been the case that the investments were terribly badly set up. So it wasn’t actually the investments or the markets that were at fault, it was the investor or more usually, their adviser.
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