In Retirement, Conventional Wisdom Can Bankrupt You

Written by Jeff Helms

The financial world is complex and constantly changing. Those changes can impact our clients and their plans for the future. As the firms founder and Managing Partner, making sense of these changes is my job. We try to simplify communication on market dynamics to make it meaningful and useful for our clients.

June 2, 2015


In Retirement, Conventional Wisdom Can Bankrupt You-media-1When we were all kids, we were told to wear hats in the winter, because you lose most of your body heat through your head. It turns out that’s not true. Studies have shown that you lose the same amount of body heat everywhere. So much for conventional wisdom!

We were all raised with these “rules of thumb” handed down from parents and grandparents. But when it comes to planning for today’s retirement, conventional wisdom may not be so wise. Let’s look at a few examples:

“Before you retire, pay off all your debt – even if it kills you.”

This advice made lots of sense for your parents in the late 1970s, when mortgage rates were at 16%, but it might not be the best advice today. With interest rates still at historic lows, debt in retirement may not be such a bad deal. Simply put, if you can pay 4% for a mortgage and earn, say, 6% on your investments over time, then debt doesn’t sound like such a bad deal. If you work hard to pay off all your debt before you retire, but you don’t save any money for retirement, you might find yourself in a difficult position later in life.

“When you retire, put all your money in the safe stuff.”

This bit of wisdom got handed down from your parents and grandparents when the average age of retirement was 65 and life expectancy was in the low 70s. It made perfect sense if you were only going to live another 10 years or so. However, today retirees may live 25 – 30 years (or more) in retirement. Buying CDs and savings accounts, which do not keep pace with inflation, will most certainly result in many retirees outliving their savings. Keeping your investments diversified in a portfolio designed for moderate growth gives you a better chance of not outliving your assets.

“Just withdraw 4% a year and you’ll be fine.”

Conventional wisdom holds that a well-diversified portfolio will support a 4% annual withdrawal rate for at least 30 years, so just set it and forget it. This approach may have worked when fixed income investments were averaging 5%-7% per year in annual returns, but it won’t work when yields are near zero. Each year, you’ll need to gauge your withdrawals on your age and your prior year’s investment results. The older you are, the less likely you are to outlive your assets. The first decade or so of retirement requires a sharper eye on results to make sure you are successful in the long run.

“Protect your principal at all costs.”

This lesson most certainly originated with your grandparents, who experienced the Great Depression. Your grandmother knew that a dollar in 1929 would by 5 apples, but by next month it might buy 6 apples, because prices of goods were falling. If you were born after 1932, the prices of goods and services have been rising your whole life. A dollar today won’t be worth a dollar tomorrow. We all need some reserves on the sidelines, but putting your investment dollars in bank accounts and CDs is the least aggressive investment you can make, because history shows us that inflation will destroy your purchasing power.

New Wisdom for a New Era of Investing

If your investment strategies have been following conventional wisdom, it’s time to give us a call. We are North Florida’s Wealth Management experts, helping families maximize their wealth through smart financial planning and investment management. We can develop a comprehensive financial plan that takes into consideration all of your goals and then take action that will lead to your success. Give us a call at (904) 824-4349 to get started.