After they retire, most people completely change some of their investment habits—and risk depleting their wealth.
It’s not easy being an investor when you’re young, but it gets even more difficult once you transition into retirement.
The best investors are those that are able to focus on the long term and avoid reacting to the chatter of the daily news stories. This is easier to do when we are younger and gainfully employed, but it becomes increasingly difficult as we age and move out of the workplace and our investment time horizons change.
As a financial advisor for over a quarter of a century, I’ve counseled numerous investors who’ve struggled mightily during their early years of retirement. Here’s why:
First, while we are working we have three things going for us:
- We have time on our side: Over the decades, the markets go through cycles that are impossible to predict. While we are working, we may dislike a downturn in prices, but it’s easier not to worry too much because the money isn’t needed today and we can be reasonably confident that things will recover (just as they always have).
- We are adding to our investments: If we are saving for retirement, we have money that is either deducted from our paycheck or our checking account on a regular basis that is building our retirement account(s). This consistent savings adds growth even when the markets are flat.
- We are too busy to focus on our investments: When we are working full-time, our days are occupied by all of the responsibilities that our work and lives demand. We might glance at our 401(k) statement and think we should spend some time analyzing it, but our busy lives keep most of us from spending much time moving things around. (This prevents us from micro-managing our investments, or falling into the behavioral finance trap of selling when markets are down, or buying when they are up.)
But things change quite a bit when we leave our careers and move into retirement.
- We believe we no longer have time on our side: We’ve been saving for retirement our entire lives and the future is now. The long time-horizon buffer that we perceived while we were younger isn’t there. (At least that’s how we may think about it.) But the reality is that we still potentially have decades to go during retirement. With increasingly long lifespans, we may have 30 years (or more) that our money needs to last, so, technically, we still need to consider ourselves long-term investors.
- We are no longer saving towards retirement and we are probably withdrawing from our accounts: This can be a really difficult thing to get our heads around. We’ve been accustomed to seeing our accounts build each year due to our added savings. Now, as we begin some sort of withdrawal schedule, we may see our accounts decline in value, which is really difficult emotionally because this steady decline is totally foreign to us.
- We have plenty of time to monitor our investments. This may sound counter-intuitive, but for most of us, it’s best to have a solid investment plan in place so we can ignore our investments on a daily basis—particularly if we’ve hired a good financial advisor. What can happen, though, is that with all of the added free time on our hands, we may over analyze our investments and begin to focus on the wrong things. As a result, we could be tempted to make transactions in our accounts that are not only the wrong trades, but are made at the wrong times (we sell low and we buy high).
Unrealized expectations create a lot of the pain and disappointment many of us experience once we retire. Having a clear grasp of how your approach to investing may evolve can ease a lot of the financial stress that occurs when you stop working. I detail the retirement transition process and how to prepare for these changes in my new book: Personal Decision Points: 7 Steps to Your Ideal Retirement Transition.
Your money has to last, but retirement is a time when emotional decisions can really hurt you and your finances. Make it a smooth transition (and a long, fruitful retirement) by, whenever possible, continuing to take the long-view approach to your financial future.