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If you’re a younger investor, you have time on your side.
If you have a few financial missteps along the way, it’s okay because you have time to right the financial ship. However, when it comes to investing, time is one of the rarest commodities you have. And you don’t want to overlook it nor do you want to waste it.
I've heard all too often: “Why did I wait so long to start investing in the markets?” A great wealth destroyer is procrastination; in other words, doing nothing. You have worked hard for your money and you want your money working hard for you.
My father once said to me: “Invest, don’t speculate. Invest early and often and have a long-term time horizon.” This is great advice if you are in the wealth accumulation phase of your life. However, it is a very different story if you are in the wealth preservation phase and trying to make your money last as long as you do.
During this time of market volatility, here are two big red flags for retirees.
1. You don’t really know your numbers.
Begin by asking yourself whether you’re taking too much money out of your retirement savings.
I will illustrate with an example from Warren Buffett. On his way to work, he stops are McDonalds and has a range of how much he will spend daily on his breakfast. If he feels prosperous and the markets are up, he might splurge and order a bacon, egg and cheese biscuit. But if the markets are down, he might opt for something a little less and skip the egg. He can afford the full meal deal but his mentality is in tune with market movements.
Your money mindset needs to align with the market reality.
After the recent market pull back, it’s likely too much if you’ve been taking eight-to-10 per cent out of your retirement savings to fund your lifestyle. Understand your cash expenses, cut back temporarily where you can, and appreciate most of analysis done around retirement planning suggests withdrawals from your portfolio can only be sustained at between four-to-five per cent over the long term.
2. Your portfolio is comprised only of stocks.
Look at the composition of your portfolio. The volatility of the stock market coupled with having to withdraw money is a one-two punch. You don’t want to focus on long-term market averages thinking the markets will come back and make up for lost ground – because you may not have the time to smooth things over. If your portfolio is down 10 per cent and you withdraw eight per cent, the chances of portfolio recovery are very low and the odds you outlive your money increase. A balanced portfolio skewed more toward bonds, with a portion still in the market, will reduce your risk. The asset allocation will be driven by the amount of money you have, your time horizon and your risk profile: How much are you willing to lose and how much can you afford to lose.
This is not the time to get a sense of false comfort. Now is the time to discuss how much money you are taking out, and whether or not your portfolio is set up with stocks and bonds for long-term success.
Don’t risk your retirement on hope. Base your retirement on facts.
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