Everybody knows that old music is far better than new music. In fact, can you even call this new stuff music at all? It’s just noise. Said every generation ever. Elvis was practically criminal when he came on the scene, The Beatles were credited with destroying a generation of kids, and Madonna turned daughters against parents all over the world. And who is this Drake character anyway? Every person with any sense knows that music stopped being music just after you stopped being a teenager.
Why does this seem to be the case? I think it’s two-fold: 1. Older music is simply more familiar to your ears. Because you’ve heard these songs so many times, it just sounds right. The old music fills the category of music in our mind and makes us less willing to adopt new music into that category, and 2. Older music reached you at a time when you were actively seeking new music to help make sense of life as you saw it. In other words, music of your generation tells the story of your generation better than new ‘music’ does. This may be why studies show that most people stop seeking-out new music – at all – by age 33. Done.
I share this because I find it interesting, and it may explain something about investing and planning in retirement. You see, investing for retirement and investing in retirement are two very different things, and most people prefer the former. Just as older music feels better and sounds better, investing to someday retire from paid work feels better than investing once you’ve made the leap into retirement. There are several reasons for this phenomenon:
The stakes are higher when investing in retirement. Without a regular paycheck to fund your lifestyle and fall back on, the stakes of your investing results become much greater when the nest egg must pay the bills, adding stress to the process.
Retirees generally invest more conservatively. Because of the loss of paychecks and higher stakes, retirees must invest differently, generally utilizing more bonds and annuities to derive consistent income. The result is a muted level of growth when the stock market has big gains (like recently). This leads to the frequent question: “Why is my account not growing as quickly as the stock market I’m hearing about on TV?” Thank diversification for that.
Adding money to retirement accounts helps them grow faster. When you’re still working and adding money to your 401(k) or 403(b), not only do you see the account growing during flat periods in the market, but you’re also buying more shares when the market in down – on sale – resulting in higher returns when the market recovers. When you’re done adding money, investing in retirement becomes more like watching paint dry.
Generating income and creating growth are two very different approaches to investing. The biggest shift retirees have to make is moving from a growth mindset to an income mindset. It’s not an easy transition to make. Investing in a company like Twitter may (or may not) result in substantial growth of the value of the stock over years, but you may not want to count on that stock to provide you a steady paycheck to support your retirement lifestyle. Conversely, a company like Procter & Gamble may not have huge growth prospects (they sell things like toilet paper and soap), but they have been paying a dividend to investors every year since 1891, a very fine attribute for people looking to generate income from their investments.
While our ears and hearts will resonate much more with older music, the music of our youth, investors will similarly look to sustain the feelings of growth into their retirement years, only to be reminded that the game has changed for them. Sure, growth still happens during retirement, 2013 saw ‘Moderate’ clients earn 26%, but the nature of a diversified portfolio that is geared toward generating strong and consistent income, will result in more muted gains than during accumulation years. It’s those pesky bonds that drag down the stocks during strong periods of stock growth, but it’s those very same bonds that save a portfolio when stocks experience steep declines.
There will never again be a band as influential as the Beatles, but don’t tell that to Beyoncé fans all over the world. You will only have – and need – one accumulation phase to be able to retire comfortably. Once that game of risk has been won, do you need to keep playing the game in the same way? Investing in retirement is different than investing for retirement, but that’s okay…the activities you do in retirement likely look much different than those you did before retirement. That’s just the way it is, at least that’s the way it should be.
All the best,
Adam Cufr, RICP®