Investors in the stock market sometimes fall into the trap of assuming the result you expect must follow when you "do everything right" in your retirement planning.
It is frustrating to believe you have done things correctly only to find the rules have changed.
Investing "correctly" in the stock market is not a guarantee of the results you expect.
The best you can do by investing correctly is give yourself the best possible chance for success, but you can't be assured of success.
What do I mean by investing correctly?
- You have properly diversified you holdings
- You have an appropriate asset allocation strategy
- You move from growth to protection of capital at the proper age
- You have done a thorough job of your homework on each investment
- You have a realistic goal
The final 10 years before retirement (defined as leaving your career and full-time job) can be the most critical to investors in the stock market.
During this period you are at most risk from a catastrophic loss, such as was precipitated by the financial crisis which began in 2008.
In many cases, your income has dropped or will drop significantly and you are counting on investment returns to make up the difference.
If that doesn't happen because you suffer a dramatic loss (or the cost of living rises dramatically through inflation), you must make adjustments in your plan.
That may include continuing to work in some capacity past the age you had planned to retire.
Others make the dangerous mistake of trying to play catch-up with their retirement fund by making risky investments hoping of a big payoff. This is gambler thinking and the reason most gamblers end up broke.
The future is unknown and unknowable despite what you may hear from pundits selling pat answers to the future.
For investors who have faithfully built a retirement fund using stocks and other investments, the most important question to answer is: Will it be enough?
That answer, of course, will be different for each investor, however it doesn't change the fact that the answer is almost impossible to predict.
If you are sitting on piles of cash, you can calculate the answer. For most everyone else, the answer is more complicated.
It is complicated because you must use certain assumptions to arrive at an answer, such as:
- What will interest rates do in the future?
- How will stocks, bonds, savings accounts perform?
- How about inflation - up, down, flat?
- How long will you live?
- What will be your financial needs in retirement? Still have a mortgage? What about health issues?
We could go on with the assumptions you must make to come up with an answer.
The reality is your retirement plan should be a living document that is regularly updated to reflect changed assumptions and new assumptions.
While doing everything correctly won't guarantee you success, it is still the best way to protect your retirement fund.
Don't let your ego stand in the way of making good decisions.
A fee-based financial planner may be the best choice to help you do the math and make adjustments as you go. A fee-based financial planner can also help you with the best asset mix for your retirement fund.
It is money well spent.
In the end, we have to accept the reality that a lifetime of hard work is no guarantee of a comfortable retirement.