Thanks to technology, many people are able now to work from anywhere in the world at any time. They don’t need to drive to a workplace, put in the time, and eventually enjoy life in retirement. This was an idea popularized decades ago — you may have read about it in The Four Hour Workweek by Tim Ferris — but it was the pandemic that really drove it home.
Maybe you’ve heard it referred to as the “gig” economy, maybe you consider it a “flexible schedule,” or maybe you call it “entrepreneurship.” Regardless of what you call today’s workplace, we can all agree it doesn’t look the same as it used to.
It doesn’t make sense to assume that because work isn’t the same as it was 30+ years ago, we can financially plan the way we did 30+ years ago. We can’t. Very few of us have a pension we can rely on. Social security doesn’t provide enough to cover the entirety of most people’s living expenses. And savings accounts don’t pay over 10% in interest as they did in the ’60s and ’70s, so we can’t squirrel away money in a bank and depend on it the way my grandparents did.
Managing your money today looks different than it did two or three decades ago. Back then you could have a mediocre investment strategy and lean on other avenues — social security, a pension, and a high savings rate — to make you whole in retirement.
The key is to invest, get your money to work now, and let go of any notions of an end date to your investing timeline. You need to plan and invest as though you will live for a very long time.
It’s time to quit planning like you will die at retirement — because chances are high you won’t.
Here are two reasons why traditional retirement planning strategies may not be setting you up for success.
1. Reducing Your Exposure to Equities May Hurt You More Than You Imagine
The first reason why you should reconsider your investing strategies for retirement is that most of us will live longer than we think we will.
In 2019, the average life expectancy at birth was around 79 years — and that’s just the average. What if you are healthier, or have more longevity in your family, or through other factors simply end up living longer than that? Well, that would make a big difference in the way you invest.
Traditionally, mainstream wealth advisors have counseled people to reduce their exposure to equities as they get older. The trouble with this approach is that it makes it difficult for your portfolio (which for most folks is their only “income-producing engine” once they retire) to generate the kind of income they need to keep up with the rising cost of everything.
According to the traditional wealth management approach, you invest in more stock funds than bond funds when you are young because it’s assumed that when you are young you can be exposed to “risk” (make sure to read the blog where we spell out our definition of risk). Traditional wealth management describes stocks as more “risky,” and bonds as more “safe.” Traditional thinking suggests that as you get closer to retirement, you change your asset allocation and own more bonds than stocks.
Let me call out the elephant in the room. You are still alive when you retire at 65, and you presumably still want to enjoy life. And life costs more than ever — thanks to inflation. The average historical rate of inflation, on an annual basis, is around 3% a year, more or less. Assuming this figure of 3%, then what costs $100 today would cost $103 next year, $106.09 the year after, $109.27 the year after, etc.
Let’s say, however, that you have $100 to invest, and you buy bonds with that money, to “play it safe.” Your “safe” 10-year bond will pay you the EXACT same amount in interest every month for the next 10 years, even though the cost of everything is going up at 3% a year.
In other words, your income in retirement will stay flat, but your cost of living will increase by roughly 3% every year, which makes me wonder how “safe” it is to run out of money because your conservative investments aren’t keeping up with the cost of living. That just doesn’t add up.
At Beck Bode we believe that wealth management should be about your entire life’s mission, not simply hitting your retirement date.
2. Traditional Retirement Planning Is About Hitting an End-Date
Your goal of “saving money for retirement” will be a long, slow, arduous one if your focus is only on you. Not only because saving money takes time, but largely because putting money away for the “Future You” isn’t how we are wired.
Deep down inside, our motivation is rarely about us. It's about something that’s bigger than us, like our children, our faith, our community, or whatever it is that’s driving us forward. It’s important to get clear on what’s driving you to save money; a good financial advisor can help you identify your goals and dreams. In our practice, we use the conversations with our clients to develop a goals-planning statement, something we call a GPS. The GPS becomes that compass that guides our work and allows you to connect your investments with what’s most important in your life.
I have a vision of helping clients create not retirement plans, but 100-year plans, paving the way for generations long after they are gone.
Your ability to make and grow your money is a massive opportunity to leave this world better than you found it, to leave a legacy. Based on my conversations with many clients and their children, I know this message speaks to the next generation of wealth in this country.
Try An Alternative Investment Strategy That Can Account For Your “Why”
Investing strategies that focus on what day you leave the workforce are not necessarily built to withstand inflation. They may not even be built to withstand your (hopefully) long life.
Tie your wealth management goals to your purpose for living, not your retirement date, and you’ll create a proper investment discipline for a lifetime. We are here to help. Contact Us.
Ben Beck is Managing Partner and Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business, and life.