In this final post about investing in retirement, I want to remind you of some essential steps you need to put into place to make investing successful.
Review
Reviewing your investment portfolio is about just a few steps.
Firstly, review your cashflow needs for the next five years. Remember you’ve used up one of the five years you planned right at the start, so now you need to add another one. You also now have only one year of spending needs in cash, so you need ideally to top up your cash reserves.
This requires looking at the health of your portfolio – what are markets doing right now and how is the portfolio holding up? If you move money down from the years 3-5 pot into cash, where should you take this from?
If the portfolio as a whole is on a profit, then that’s great, you can shift some of the profit to cash. If things are very bad, then you may defer moving any money down the ladder to give things chance to recover.
Then you need to look at the balance of the whole ladder from the top section to the bottom, and move money down accordingly, IF the time is right to do it. If not, then defer the process for a few months.
Time is not critical here – you should have enough in cash or very low-volatility assets to live off for at least 2-3 more years, so there’s really no need to panic. Wait until things look a bit more normal and shift things around then. Or do it in stages.
You’re going to need to be fairly hands-on, but again, don’t obsess about this. You’ve built TIME in to the structure, so chill out and take the time you need. Set a date to review each year. Jim Collins uses his wife’s birthday as his reminder to do this!
Manage Your Behaviour
I have done a whole season on Behavioural Finance as well as various stand-alone episodes, which you can find here and here. Behavioural Finance or Behavioural Economics is the study of why and how we make financial decisions. Let me summarise it as follows:
Generally, we suck at making rational logical decisions, thanks to our evolutionary history and the way our brains are wired. This is particularly true when it comes to money, because money is important. We know we need it to survive; we know we have a limited supply of it, particularly in retirement, and so we amplify our tendencies to make bad decisions around money.
And so we need to eliminate as many of those decisions as possible by building frameworks such as the Cashflow Ladder. Awareness is a large part of the cure. Well, never a cure because we can’t be ‘cured’ of our evolutionary biology, but being aware of our tendencies, both as a species and ourselves as individuals, will go some way to reducing the frequency and seriousness of our bad decisions.
So listen to the past episodes and start to be aware. Dare I say it, let’s be intentional about the decisions we make as much as possible. Let’s try to be mindful of our thought processes, rather than coasting through life as we might ordinarily do.
All of our good work in planning our cashflow and building our ladder to fit can be undone if we panic at the wrong moment, potentially doing irreparable harm to our wealth in the process. Behaviour is important, and it’s a life’s work to understand.
Stay Focused
Finally, in a final soap-box plea here, stay focused on the job at hand. While I always advocate simplicity and being as light-touch as possible with our finances for the reason I said at the beginning – it isn’t healthy to obsess – at the same time, you are going to need to be more hands-on with your finances in retirement as there are more things to think about.
This requires continual laser-focus. We cannot drop the ball – our later years might be singularly crap if we do, and no-one wants that.
So keep the faith and continually readjust your ladder and your cashflow needs based on ever-changing circumstances, unpredictable life events and all the confusing, challenging exhilarating stuff that comes with being human people. Stay focused.
So really, investing in retirement isn’t the difficult part. It’s more about organising than some magical methodology that’s guaranteed to make everything align perfectly. It’s about planning and then staying nimble enough through regular reviews to adjust to changing circumstances.
We really don’t need to panic and get anxious about it. If we’re not retired yet, we need to amass enough to be able to enjoy retirement, no matter how long it ends up being. And that’s key word – enough. There’s no point in having too much, and we really don’t want to have too little.
We just need enough, and then to put that money to the best use possible in the time we’re given. And that, really, is your ultimate guide to investing in retirement, even if I do feel like I’ve only scratched the surface!
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