Troy Sharpe: [00:00:00] Sometimes I feel like I’ve lived through my 60s and 70s thousands of times. Sitting with people in retirement, or those that are entering retirement, we come across a lot of the same fears, negative thoughts, and feelings that really hold people back from having a happier retirement. Now we try to address those through retirement strategy and implementing plans, but in today’s video, instead of talking about strategy, I want to talk to you about how we look at retirement, so you can hopefully look at retirement through a different lens, and I believe this will help you have a happier retirement.
I was watching Happy Gilmore recently, and there’s this place that he goes to, and he calls it his happy place. If you remember the movie, the lead actress, she’s sitting there by a fountain of beer with pictures and Happy’s grandmother’s there. It’s just his happy place and this helps Happy Gilmore putt a little bit better.
1st Key: Shift Your Focus Away From Trying to Maximize Your Return
To find your happy place in retirement, I want you to shift your focus away from simply trying to maximize return. In retirement, it’s not about growing your nest egg anymore, what we want to do is have an acceptable level of risk, something that when the market goes down, we can still stay invested, we can stay committed to that plan.
At the same time, for that level of risk, we have an expected return that can help make sure that you don’t run out of money, and generate enough growth to provide the income that you need to maintain your standard of living. Here’s one of the tools that we use to help understand your willingness to take risk. Risk tolerance really has two components, it has a capacity component, meaning given a certain level of income that you desire from your portfolio, can your portfolio withstand a certain level of risk and still provide that income? That’s what we call risk capacity.
Then you have your willingness to stay invested in a down market. When we look here, this is a standard 60/40 portfolio, [00:02:00] 600,000 stocks, 400,000 in bonds, has a risk number, on a scale of 1 to 99, of 54. Now, in isolation, that means absolutely nothing to you, but when we start to break it down into percentages, and also, or I should say more importantly, dollars, over a six-month period your standard 60/40 portfolio has the potential to lose $100,000 with $1 million invested. This is a statistical quantitative analysis of volatility of this portfolio going back many years.
Now, over a 12-month period, that means you could lose $212,000 mathematically speaking. Is that a comfortable level of risk for you if you have $1 million? It’s not for me to answer, that’s for you to answer. That’s your willingness to take risk. Over a 12-month period, mathematically, you should expect to lose at some point in time, up to 20%. You could lose more, of course. This is a 95% probability or what we call two standard deviations, but what we want to achieve here is a more optimal level of risk for an expected return. We have asymmetry here, where the possible upside, mathematically speaking, is 15.92% over a six-month period.
We do have some asymmetry here, but when we look a little bit deeper, the annual range midpoint is 5.27%, so this would be the expected return moving forward with a 2% dividend. This GPA, this is a pretty cool feature of this software. It’s designed to help you understand what we call risk-adjusted returns. This concept is what I’m talking about here. They’ve developed this GPA and a 4.3 would be most optimal. Now, not every portfolio that fits your particular needs is going to be a 4.3. We’re not necessarily trying to achieve that, but the higher we can get to that, [00:04:00] it means we have a more expected return for less risk.
The question really becomes, are you comfortable with this range of expected outcome? If not, this is too aggressive of a portfolio for you, but instead of just focusing on, like most people do, the upside, we need to focus more on this downside, and having a plan that is optimized or having an investment strategy that’s optimized for your happy place.
2nd Key: Look at Your Investments for What They Actually Are: Tools for Retirement Planning
Number two, I want you to start to look at all of your investment choices in retirement for what they actually are. Now, this is much different than in the accumulation phase. In the retirement phase, your financial investments, all the various choices out there, they’re really nothing more than tools.
Tools that are used to accomplish a certain objective. Similar to ingredients in a recipe. If you have too much sugar or too much salt, or not enough herbs or spices, it may not come out the way you want it to taste. We want to use the appropriate tools to accomplish the objectives that you have in retirement. Stocks, for example, they aren’t used to accumulate anymore. Stocks are designed to help keep you ahead of inflation so you can generate income that lasts as long as you do. Now, in the accumulation phase, that’s exactly what stocks are designed to do. They’re designed to give you the best opportunity, historically speaking, to accumulate a larger and larger nest egg.
Of course, that assumes that you save enough money, but in retirement, you are no longer accumulating. You are distributing. Stocks are used to help keep you ahead of inflation. The downside to stocks, you could lose a lot of money, especially if you get too aggressive or if you invest in things that don’t perform well. Does that make stocks bad because you could lose a whole bunch of money? No, they’re just a tool. Once you understand how to use that tool in conjunction with other tools, now you can actually construct whatever project that you’re building, or have a retirement plan that provides you the income you need to maintain your standard of living.
3rd Key: Accept That You’re in the Distribution Phase
The number three key for a happier retirement, I want you to accept that you’re in the distribution phase. Don’t [00:06:00] expect your accounts to continue to grow each and every single year. This may seem like common sense, but in reality and in practice, it’s much harder for many people to do. You’ve seen your accounts hopefully grow, grow, grow, grow. You’ve been putting money in, the market has performed well over most years in the past. Even when the market performed poorly, you were still putting money into your 401(k), getting that match, hopefully saving money elsewhere.
Now that you’re in the retirement phase, you’re putting a lot of stress on your portfolio through distributions. I’m not saying your accounts can’t still continue to accumulate, especially if we have consecutive years in the market that does really, really, really well, but what I’m saying is don’t expect it. You are in the distribution phase. That means you’re probably taking 3%, 4%, 5% out. When we have years where the market is also down, your portfolio is down. You’re digging a bigger hole than you were in the accumulation phase. That means that hole is harder and harder to climb out of.
This is why the allocation of your investments is so important and not taking too much risk. You don’t want to dig such a big hole that you can never get out, but at the same time, you need a certain level of risk to achieve a return that can give you a secure retirement. Mentally, let’s not look at our accounts every single year and say, “Oh, man, they’re not going up. They’re not increasing in value. I’m going to run out. I need to stop spending my money.” Actually, if you look at it appropriately, you should not expect your accounts to continue to appreciate every single year in retirement.
That very may well happen, but if it doesn’t, if you’re just staying level or even going down a little bit, it’s okay. You just need to have a plan, monitor your progress with respect to your goals, and stay on top of it.
4th Key: Understand the Value of Secure Income in Retirement
Number four, I want you to understand the value of secure income in retirement. The more secure income you have, the less you have to withdraw from your portfolio and the less emotionally you’re impacted by the stock market ups and downs, by political goings-on, by economic slowdowns. If you don’t have to withdraw large percentages from your investments because you’re living on passive income [00:08:00] from real estate, from Social Security, from annuities, from a pension.
The point is, the more income you have coming in from multiple different places, that is independent of the stock market going up, typically the happier you’ll be in retirement. Also, I don’t want you to underestimate the power of Social Security as part of your overall retirement income plan. I hear a lot of people making comments on some of the Social Security videos that we do, and also just day-to-day having conversations with clients that Social Security seems to be an extremely underestimated part of retirement. Many people want to take it early, and that may be the case.
Maybe it makes sense for you to take it early, but if a husband and wife have combined Social Security of $60,000 a year and you live, let’s say 25 years, that’s $600,000, $1.2 million, $1.5 million of retirement income. For many of you watching this, your Social Security is going to be a lot more than $60,000 per year. We’re talking anywhere from $1 million to possibly over $3 million of retirement income for a married couple. For someone who’s single, Social Security, you can just basically cut that in half. It’s a significant part. Don’t underestimate the power of secure sources of income in retirement, and also don’t underestimate how valuable deferring Social Security could potentially be if you’re going to live past age 80, 81 or so.
5th Key: Stop Looking at Short-Term Outcomes
Number five, I would like you to stop looking at short-term outcomes, whether your portfolio is up or down, whether you pulled too much out, whether you had an unforeseen expense and you had to spend X amount of dollars. I’d like you to start looking at the short-term outcomes of things that happened to you or decisions that you’ve made as nothing more than bumps in the road. Don’t get too high, don’t get too low. Retirement is a very long and windy, and arduous journey. This is why it’s so important to have a plan and stay connected to that plan because when you have visibility into the future, and you’re looking at things not in the short-term lens, but over a 20, 25 [00:10:00] 30-year time frame, you can see a lot of times how actually unimportant these short-term events are, so don’t get too high, don’t get too low.
What to Do When Your Portfolio or the Market is Down
Understand that these are bumps in the road in the short term, but if you have a plan, these bumps in the road have been accounted for. Next time the market is down and your portfolio is down 10% or 12% or 15% or more, say, “You know what? I have a plan. I expected this to happen. This is not a surprise and retirement is a very long journey. This is nothing more than a bump in the road.”
6th Key: Don’t Look at Your Accounts More Than Once a Month
The number six key to a happier retirement, and I know this is going to be virtually impossible for many of you watching, but the number six key, probably the number one, is to not look at your accounts more than once a month.
I would prefer it once a quarter. I know some of you right now are saying, “Troy, that’s impossible. I look at it every single day. I need to know what my stocks are doing, what my accounts are doing. How am I ever going to know if I’m going to be okay?” There are numerous studies on this. I encourage you to look some of them up. The more frequently you look at your accounts, typically, the worst performance you’ll have over long periods of time. I don’t remember the name of the exact study, but there are several out there, and these are roundabout numbers here, but the person who looks at it every single day over a long period of time, I think it’s 25 or 30 years, averages somewhere around 2% to 3% per year.
The person who looks at it once a month averages somewhere around 4% to 5%. The person who looks at it once a year averages somewhere around 6% to 7%, and the person who never looks at it has averaged around 10% or 11%. It makes sense because we are emotional beings. When we see that something isn’t going right, we want to tinker, we want to make adjustments. This typically leads to holding on to bad investments maybe a little bit too long or getting rid of good investments that just haven’t really had the catalyst that maybe you were expecting and selling them too soon, or we’re selling our winners and cutting our losers without giving them a chance to really perform well.
Whatever the [00:12:00] situation may be, studies have proven this over and over again. The more frequently you look at your portfolio, the worse you should expect to do. Instead of discussing strategy and execution in today’s video, hopefully, today’s content helps shift your perspective just a little bit with the goal of helping you to have a happier retirement.
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