The Worst Retirement Investing Mistake

[nun]

I didn't rebalance or have an AA anyway while I was working (i.e. in the accumulation phase). Since I was only in my 20s and 30s, I was focused on maximizing the long-term growth, so I was 100% equities. Since additional savings were invested elsewhere, I was diversifying as best I could from company stock without touching "the mother lode", but I was still 100% equities overall.

Hey, it was the 80s and 90s!!!! But really, my young age had the most to do with it.

I did make one prudent diversification a few years before I retired (as the real possibility came into view). I sold a wee bit of the company stock to pay off our house. We didn't owe a whole lot on it anymore and we no longer had a high mortgage interest deduction - so no tax benefit. Paying off the house was a way to mitigate any "sudden unemployment" risk, and I did have the standard emergency fund set aside as well.

This was obviously successful for you, but the number of people with the opportunity for such gains and the even smaller number that realize them convince me that it is not a practical strategy for most people. I believe that going 100% equities is not a sensible approach to retirement savings and that there should be more emphasis on the protection of principal and guaranteed returns rather than riding the ups and downs of the market right form the start. Maybe put 50% into equities and 50% into an annuity.

 

[cute fuzzy bunny]

Similar story here. A concentrated bet in company stock allowed us to reach FI in our 30s*.

Most people who became wealthy did so by a concentrated bet of one kind or another. Not many get there by peanut buttering stuff around and avoiding risk.

 

[NW-Bound]

Aw, you people are so mean! I don't think the investment personality that was mentioned was that bad, though I am no fan.

She does serve a needed role; there must be somebody to slap the silly spend-thrifts around, so they can see the light. After watching her show for a few times, I do not think I can get much from her show, and when the entertainment value wore off, I stopped watching it. It's just the same with anything else you find on TV, and on the internet for that matter.

 

[audreyh1]

This was obviously successful for you, but the number of people with the opportunity for such gains and the even smaller number that realize them convince me that it is not a practical strategy for most people. I believe that going 100% equities is not a sensible approach to retirement savings and that there should be more emphasis on the protection of principal and guaranteed returns rather than riding the ups and downs of the market right form the start. Maybe put 50% into equities and 50% into an annuity.

No, stock options approach is not a practical approach for most people. You have to be in a position to get options on company stock way early in the game, and for that you really have to be an early employee in a startup or one of the founders. Few people are in that position. Once a company has already grown, stock options aren't nearly as lucrative.

But I simply don't agree that young investors should worry about protecting principal and guaranteed returns. I think they should take advantage of their long investment window and take the most risks. As they get older they can start adding asset classes to reduce volatility. I think I did absolutely the right thing by being 100% equities in my 20s and 30s - it was a perfectly sensible thing to do. A well-diversified group equity funds may get cut in half occasionally, but it won't go to zero, and it will eventually recover.

 

[samclem]

Most people who became wealthy did so by a concentrated bet of one kind or another.

True. And a large percentage of folks who busted their nestegg used the same technique.
For most folks, building an adequate retirement portfolio isn't a matter of hitting the ball out of the park, it's a matter of getting on base consistently.

 

[samclem]

But I simply don't agree that young investors should worry about protecting principle and guaranteed returns. I think they should take advantage of their long investment window and take the most risks.

+1. Absolutely--as long as they are in an investment where higher risks bring higher expected returns, then they should absolutely be loading up on risk in their younger days.
The only caveat: If downturns in their daily/monthly balances cause them to get discouraged and quit the game, then maybe they should invest with less risk. But they should realize they'll likely need to work many extra years to pay for their particular emotional foible.

 

[audreyh1]

+1. Absolutely--as long as they are in an investment where higher risks bring higher expected returns, then they should absolutely be loading up on risk in their younger days.
The only caveat: If downturns in their daily/monthly balances cause them to get discouraged and quit the game, then maybe they should invest with less risk. But they should realize they'll likely need to work many extra years to pay for their particular emotional foible.

Absolutely agree that if they can't "leave it alone", then they have to lower their exposure to equities.

 

[cute fuzzy bunny]

True. And a large percentage of folks who busted their nestegg used the same technique.
For most folks, building an adequate retirement portfolio isn't a matter of hitting the ball out of the park, it's a matter of getting on base consistently.

I thought it was a well accepted saw around here that you got rich by making concentrated bets, and stayed that way through diversity.

Of course, you can also do it with extreme lbym and a fat pension, but thats no fun.

Audrey is right, a 20 or 30-something buying an annuity or holding a lot of bonds is a few dollars short of a full deck. When I was working I'd tell the 20-somethings when I hired them out of school to put 2% of their pay into the company retirement account s&p 500 plan and in 15-20 years when they started thinking about retirement planning, they'd already be halfway there. A few listened...

 

[richfei]

Echoing audreyh1, FIREd and a few others
100% in a few good stocks and LBYM enabled me to retire in my early 40s
Took on calculated risk in stocks I believed in when I was younger and it paid off big time
If I didn't and continued to put money into S&P or a proportion in bond funds or target funds, I wouldn't forsee myself retiring for another 10+ years, if not longer
I see more risk in playing safe, but each to their own

 

[audreyh1]

True. And a large percentage of folks who busted their nestegg used the same technique.
For most folks, building an adequate retirement portfolio isn't a matter of hitting the ball out of the park, it's a matter of getting on base consistently.

Thinking more on it. Folks who busted their nest egg such that their retirement plans were ruined are often folks who got real aggressive late in their career because they are trying to play "catch up".

Someone investing early in their career can survive a bust up. They're just as likely to take a big hit on their savings due to divorce or other unanticipated events, but they still have time to recover, correct course, etc.

Someone pulling these stunts late in their career doesn't have time for a do-over, even if they are making a much higher salary overall.

 

[nun]

Echoing audreyh1, FIREd and a few others
100% in a few good stocks and LBYM enabled me to retire in my early 40s
Took on calculated risk in stocks I believed in when I was younger and it paid off big time
If I didn't and continued to put money into S&P or a proportion in bond funds or target funds, I wouldn't forsee myself retiring for another 10+ years, if not longer
I see more risk in playing safe, but each to their own

This forum is self selecting for those that were successful in saving for retirement. Some of those made it work with equities, some with pensions. Once you've made it work it seems so obvious, but it would be difficult to persuade the person who had stock in a company the went broke of the benefits of the "risky approach". Personally I'm doing it with a combination of mutual funds and annuity type stuff. I could ER now, at 51, but plan to stay to 55 to get health benefits.

However, if we look at the balance in IRAs and 401ks of Baby Boomers then the move to retirement strategies based on equity and bond mutual funds has been a complete failure. Some of that is because of low savings rates, but a lot is from the interaction of market volatility and investor behavior. Let's face it we are a bizarre bunch on here. I'm thinking of how normal people might best approach retirement saving and investing to give them close to a 100% chance of being able to maintain their lifestyle in retirement. The current approach to retirement saving has been so unsuccessful that people aren't going to be retiring, many will just have to keep working.

 

[samclem]

I'm thinking of how normal people might best approach retirement saving and investing to give them close to a 100% chance of being able to maintain their lifestyle in retirement.

I suppose they can get there with deferred annuities, CDs, and Treasuries, but they'll need to work a very long time.

The current approach to retirement saving has been so unsuccessful that people aren't going to be retiring, many will just have to keep working.

That's an interesting way of putting it--the "approach" is unsuccessful, not the people using it. Overall saving rates are dismal and have been for decades. Overall, total return on US equities has been remarkable over the last 30 years: For the S&P 500, the 1980s saw an average annual real rate of return of 11.6%. For the 1990s it was 14.7% annually. For the "00s" it was -3.4%. $1 invested in the S&P 500 in 1980 was worth $25 by 2010. Other broad indices also did well. It required no special stock-picking skill to achieve these results. That folks spent every penny they made (and more), panicked, sold at the bottoms, listened to the "investment pornography" and CNBC, etc and lost their money is unfortunate, but that's the way the world works, and always has.

Some people may say "I cannot stick to an investment plan. Instead I'll buy an annuity and work an extra decade." That seems reasonable.

 

[nun]

I suppose they can get there with deferred annuities, CDs, and Treasuries, but they'll need to work a very long time.

That's an interesting way of putting it--the "approach" is unsuccessful, not the people using it. Overall saving rates are dismal and have been for decades. Overall, total return on US equities has been remarkable over the last 30 years: For the S&P 500, the 1980s saw an average annual real rate of return of 11.6%. For the 1990s it was 14.7% annually. For the "00s" it was -3.4%. $1 invested in the S&P 500 in 1980 was worth $25 by 2010. Other broad indices also did well. It required no special stock-picking skill to achieve these results. That folks spent every penny they made (and more), panicked, sold at the bottoms, listened to the "investment pornography" and CNBC, etc and lost their money is unfortunate, but that's the way the world works, and always has.

Some people may say "I cannot stick to an investment plan. Instead I'll buy an annuity and work an extra decade." That seems reasonable.

I'm not advocating ignoring the stock market, just tempering the AA with some guaranteed income stuff early on as income insurance.

Yes people were unsuccessful. They followed the gurus AA advice, didn't save enough, and got scared and sold at stupid times. Some people are foolish, so for all those people who aren't sitting on our ER pedestal I maintain that some annuity product at the start of their saving would have at least provided a nice supplement to SS irrespective of how poorly they managed their equities. Heck if I lost all of my mutual funds and didn't invest another penny I'd still have $80k in annual income at 65 from rental, small DB plan, TIAA-Traditional, US and UK SS. I bet all the 65 year olds with crappy 401ks who are deferring their retirement would agree with me.

 

[mathjak107]

i just had time to actually read bill's article and i find he isnt as far off the mark as i first thought.

i have a very goal oriented philosophy in life.

if one of my goals was to have a payed off house ,then when that goal is hit that mortgage should be payed off.

there is no 2nd guessing myself because i could make more in the markets then im paying in interest.

i take that money right out of the risk pool and i stop playing because i won that game.

now if i didnt have the money yet then there is no time frame either to get screwed up so i would invest as aggressively as my pucker factor allowed.afterall if i dont have the money yet i didnt win the game yet.

well lets move on to my next goal, retiring.

i was an aggressive investor my entire life and 5 years ago we decided to switch from our growing richer mode to our not growing poorer mode.

now my game is just as bill said ,whats the minimum risk i can take to get the shortfall covered. it looks like about 2% withdrawals will do it.

so at this stage we have established what the minimum amount of risk is in our investments we can take.


i could up the ante to a 40/60 mix or 50/50 and generate a whole lot more income at 4% withdrawals and believe me we would find a place to spend it.

but at this stage we are seeking that balance where risk is enough to meet our income goals and stops there.

bills plan with 20 to 25x the shortfall makes alot of sense to me.
in fact juggling 2 million dollars or so in our scenerio would mean about a 50/50 mix.

50% of our savings would be in the safe secure stuff he spoke of and the rest invested aggressively.

in fact looking at the bucket system we were considering with 7 years in safe secure stuff, another 7 years in bonds and the rest in mutual funds its about the same 50/50 mix.

overall i tend to not really find to much fault in his thinking.

 

[Nords]

She does serve a needed role; there must be somebody to slap the silly spend-thrifts around, so they can see the light. After watching her show for a few times, I do not think I can get much from her show, and when the entertainment value wore off, I stopped watching it.

Her show was awesome for teaching our teen about managing money. There were plenty of opportunities for talks about "priorities", "having a plan", and "making choices". Sure, our teen had to understand concepts like 401(k)s and taxes, and there sure seem to be a lot of rules about saving & investing, but after a year she could predict the result of "Can I Afford It?" almost before the caller stopped talking. Our teen's attention was further riveted by Suze's snarky commentary, to say nothing of the funky wardrobe and the contrast between the orange spray-on tan against the fluorescent gleaming [-]fangs[/-] teeth.

As a parent, it's nice to have someone else be the authority figure so that you can just be the coach. Phrases like "Oh, you are so denied" are still part of our household vocabulary.

 

[traineeinvestor]

Thinking more on it. Folks who busted their nest egg such that their retirement plans were ruined are often folks who got real aggressive late in their career because they are trying to play "catch up".

I've seen that a few times as well as:

• people who spent a long part of their career at one company and ended up with a large part of their net worth invested in the company's shares. I knew several people at Bear Sterns and other financial insitutions whose financial plans went down with the ship
• people who invest too agrressively at the top of the market. I've known too many people (including some relatives) who have inflicted huge amounts of damage on their portfolios by borrowing or using derivatives at the top of a bull market

I guess there are as many ways to mess up as there are to succeed.

 

[nun]

[*]people who invest too agrressively at the top of the market. I've known too many people (including some relatives) who have inflicted huge amounts of damage on their portfolios by borrowing or using derivatives at the top of a bull market

Sounds like a losing gambler trying to win it all back......this is the scenario to be avoided....but previous mutual fund AA dogma has lead far too many people into that situation.

 

[traineeinvestor]

Sounds like a losing gambler trying to win it all back......this is the scenario to be avoided....but previous mutual fund AA dogma has lead far too many people into that situation.

In some cases, yes. In others, they either let success get to them and thought the bull would keep running or they stood on the side lines watching other people make money and jumped in too late.

 

[nun]

In some cases, yes. In others, they either let success get to them and thought the bull would keep running or they stood on the side lines watching other people make money and jumped in too late.

Bull or Bear, I have my annuity/double SS Tortoise.

 

[traineeinvestor]

Bull or Bear, I have my annuity/double SS Tortoise.

I nice steady stream of guaranteed income for life would certainly help a lot of people. I have neither so its (mostly) real estate and equities for me.

 

[NW-Bound]

Her show was awesome for teaching our teen about managing money. There were plenty of opportunities for talks about "priorities", "having a plan", and "making choices". Sure, our teen had to understand concepts like 401(k)s and taxes, and there sure seem to be a lot of rules about saving & investing, but after a year she could predict the result of "Can I Afford It?" almost before the caller stopped talking. Our teen's attention was further riveted by Suze's snarky commentary, to say nothing of the funky wardrobe and the contrast between the orange spray-on tan against the fluorescent gleaming [-]fangs[/-] teeth.

As a parent, it's nice to have someone else be the authority figure so that you can just be the coach. Phrases like "Oh, you are so denied" are still part of our household vocabulary.

Have you seen the concurrent thread on how people spend money on iPhone and neglect other financial needs? I guess Suze would be able to help them out, if they would just call in to her show.

 

[rescueme]

I think they should take advantage of their long investment window and take the most risks. As they get older they can start adding asset classes to reduce volatility.

Agree completely (since that's what we did )...

 

[cute fuzzy bunny]

Bull or Bear, I have my annuity/double SS Tortoise.

But...you couldn't buy that now, so why sell it?

 

[nun]

But...you couldn't buy that now, so why sell it?

Sorry.....I don't understand you comment.

 

[HFWR]

I never made "the big bucks", and the few incentive stock options I got over the years all expired so underwater that Jacque Cousteau couldn't find them...

Luckily, I saved as much as I could, didn't screw up buying furniture.com, and lived cheaply while others were doing the $30,000 millionaire thing. So, I wont' retire either super early or super rich, but I will be retired relatively soon, and relatively comfortably.