Investing For Retirement

Investing For Retirement So You Can Remain In Retirement

In Investment Management by Adam Cufr

As hard as many investors try to time the stock market, it’s been shown to be almost impossible to do it with even a slight hint of consistency.

That doesn’t stop people from repeated attempts, but it should. Instead, what has been shown to impact investment returns is time IN the market. That is, by staying invested for a long time, during the countless ups and downs, time IN the market allows for compounding to take over and result in substantial wealth creation over the years.

But what about for retirees? A new retiree, by the nature of choosing a time in which to retire, has indirectly applied timing to their investing experience by going from adding money to the nest egg to beginning to withdraw it. How does this timing element affect the nature and the performance of their investments? I’m glad you asked. 

When a working person regularly adds money to their 401(k) or other retirement plan, they’re buying shares of companies when those share prices are sometimes low and other times high. This practice of investing at regular intervals is called dollar cost averaging and actually has a mathematically favorable impact on the average share price of the investments. It’s a very good practice to save regularly. Conversely, when a retiree begins to draw money from their investment in order to pay retirement expenses, a very different scenario can unfold, depending on their timing. 

Imagine retiring at a time when the market is steadily rising. Each time a withdrawal is made from the investment portfolio, that withdrawal amount is replaced by growth of the remaining investments. In this scenario, the nest egg grows while money is being withdrawn; it’s a bit of a magic act. One dollar disappears into the economy while another dollar appears to replace it, and then some, if the rate of growth is high enough! Extend this trend indefinitely and a retiree ends up with more money at the end of retirement than when they started. 

Now, imagine retiring at a time when the market is declining. The retiree has the same expenses but each withdrawal from the retirement account is met with a lower account value in the nest egg. This results in a double-down effect, also called reverse dollar cost averaging. Ask a person who retired during a declining market, and they’ll tell you how painful it is to watch and experience. Not only is the value of the investment portfolio shrinking but this leaves even less money in the account to benefit from a rising market when it eventually does occur. In other words, there’s less money left to grow when times do get better.  

So, what’s a retiree to do? The simple answer, although tongue-in-cheek, is to just retire at the right time. By choosing to retire in say, 1991, a retiree has a huge amount of wind at their back, which makes retirement easy, at least financially. If that person instead retired in 2007, their math and their retirement experience will be wildly different. This, however, isn’t something that any person can predict, and when it’s time to retire, it’s time to retire. Whether it’s a health change, a company downsizing, or just a loss of career motivation, retirement may not be able to wait for the market to give you what you want when you want it. 

It turns out that retiring during any market works best when there’s a formal written plan to serve as a starting point. Knowing which types of investments and income sources will provide strong and consistent income in any market are key to building a successful retirement. Also key are understanding and managing expenses, being aware of taxes, and avoiding major planning mistakes. So, while the market is essentially impossible to time, a person can build a plan that works well in either an up or a down market. This, however, takes some know-how and some planning, but it’s not out-of-reach. Seek good counsel, set your sails and hope for some wind at your back, but have a plan to prosper even if timing isn’t on your side.