Investing in Your 60s (Rewind) (EP.131)

0:28We all need to make smart decisions with our money. but maybe you haven't heard before. So I'd love for you to check it out. And don't forget, if you're enjoying the podcast, the best way to say thank you is to leave a quick review or forward an episode to a friend. Now, let's get into this popular episode from my Investing by Age series.

0:49Welcome to the Long-Term Investor. This is the fifth episode of the Investing by Age series. People go through different financial stages at different ages, so you'll likely find useful information in the episodes outside your age bracket. If you're in your 60s, you might find that aspects of episodes on investing in your 50s and investing in retirement are relevant. But unlike other episodes, this episode is influenced by an ebook I wrote that is specifically for people planning to retire within the next 10 years. Here's why I'm mentioning that. At the end of the ebook is a comprehensive checklist for people nearing retirement that everybody seems to love.

1:31The decisions you make in the few years leading up to retirement and the first few years in retirement are potentially the most impactful financial decisions you can make. I can't possibly cover everything in a single podcast episode, so I'm going to include a link to this ebook in the show notes at thelongterminvestor.com, or you can get the download directly by visiting peterlazaroff.com slash retirement. I really hope you check out this resource because as the years count down on your career, nerves set in and all sorts of questions start flooding your head. Hopefully, this episode, along with the more comprehensive checklist, can help give you more confidence.

2:13With that, let's dive into the essential aspects for investing in your 60s, assuming you haven't retired yet. Number one, prepare for market downturns. In some sense, everyone should be prepared for downturns regardless of age. After all, market losses are incredibly normal. Historically, the S &P 500 has lost at least 10 % about once every 12 months, 20 % every two to three years, and 30 % or more about once a decade. If you're a true long-term investor, you don't need to panic when these routine losses happen, nor do you need to worry about predicting when or why they will occur. Instead, a true long-term investor plans on losses occurring with a similar magnitude and frequency as they have in the past.

3:03But in your 60s, particularly if you're a year or two from retirement, you need to make sure that one of these regular downturns wouldn't derail your retirement plans. When running a Monte Carlo analysis for clients and prospective clients, we'll come up with a probability of success that a person or a couple doesn't run out of money before age 95. Why age 95? Well, because for a married couple age 65 or older, there's a 50 % chance that at least one of those people will live to age 95. So let's say I'm working with someone that is 62 years old and planning to retire sometime in the next few years.

3:42If their financial plan works, say, 85 % of the time, that means that 15 % of the time, an adjustment to the plan is required to avoid running out of money before age 95. Now, the reason I share this is because when I dig into the internals of the 150 failed trials out of 1 ,000 runs of the model, typically the reason the plan fails is because of a poor sequence of returns in the few years just before or right after retirement. it. Sequence of return risk is simply the risk of lower returns early on in your withdrawal period. When you run a Monte Carlo analysis, the order of your investment returns are randomized, and whether you realize it or not, that order or sequence of your investment returns can significantly impact your portfolio's ability to fund your retirement, particularly if that market decline is paired with rising inflation.

4:40There are two portfolio considerations that come to mind that can reduce and or mitigate this sequence of return risk. The first is adjusting your asset allocation to a more conservative mix of stocks and bonds. Doing this decreases the magnitude of losses your portfolio would experience during a downturn, which in turn means that you sell at less depressed prices to meet retirement expenses. A second approach, and my preferred option, is setting aside one to two years of living expenses in cash. This has a similar effect as making your asset allocation a bit more conservative, but it shifts the focus from the portfolio to the balance sheet.

5:20And by making this a balance sheet issue rather than a portfolio issue, you remove the need to make multiple timing decisions that would go along with multiple portfolio adjustments once heading into retirement and once when you feel that the sequence of return risk is no longer an issue. Now, the idea with this approach of building up cash is that you would live off your cash rather than your portfolio during the first bear market so that your portfolio has time to recover. We can really never predict when or why the next bear market will happen, so that's why it's so important to plan on them.

5:55Okay, number two, project your future expenses. There are two components to this process. The first is knowing what you currently spend. This is a fairly common blind spot I see among new clients, regardless of their age. Because retirement planning revolves around at least maintaining your current lifestyle, knowing what you currently spend is a crucial input. Underestimating your current spending increases your chances of not having enough money in retirement. Conversely, overestimating your current spending, and a little conservatism in measuring your current expenditures is okay, but I'm talking about wildly overestimating what you spend today, that could result in you working longer than what's really necessary, or missing out on an opportunity to work less, or work in a role that makes you happier.

6:49Overestimating your current expenses could also lead you to missing out on experiences that you'd really enjoy. I have a cashflow worksheet that you can download in the show notes at thelongterminvestor.com, but the simplest way to measure your current spending is to download transactions from your bank account. As long as the same bank account is used to pay all your bills and credit cards, then it should capture what you spend in a year. Now, sometimes I hear people say, well, last year had some unusual expenses, But trust me, every year has some unusual expenses. One-time expenses are just part of life.

7:27If you have the data to take the average of two or three years of spending, then perhaps that smooths out the one-time expenses to give you a better estimate for the purposes of projecting future expenses. So that's the first piece of projecting future expenses is just knowing what you currently spend. And the second component is understanding the types of new expenses you'll have in retirement. It's fairly common to see an uptick in expenses during the first few years of retirement. And when you think about it, there's less opportunity to spend money when you spend a large portion of your days at work.

8:02But when you're retired, you have lots of free time. So while the current expense number is a good starting point for retirement expenses, you're going to want to account for at least a temporary bump in spending. For example, knowing that you want to take X number of trips per year that costs Y number of dollars goes really quite a long way. And you might also want to think of things like whether or not you would be helping out kids or grandkids in one way or another. So to recap, so far we've talked about preparing for market downturns and projecting future expenses. The next item is related to expenses, and that is eliminate your debt.

8:41I'm going to make this pretty short because the case here is pretty simple. Eliminating debt helps reduce the fixed costs that you have to cover in retirement. So now is a good time to get more aggressive with making principal payments to your highest interest debt that is not a traditional mortgage. If your only debt remaining is your mortgage, you don't necessarily prepay your mortgage at the expense of building that one to two year cash reserve or making retirement plan contributions, in reality, the right answer on a mortgage is really just going to vary from person to person based on the remaining loan balance, the terms, how long you plan to stay in the house, etc.

9:22Moving on to number four, educate yourself. One thing I notice about investors who are approaching retirement is they tend to pay more attention to their portfolio and or the overall market. Now, I've always attributed this to nerves about relying primarily on their portfolio for income rather than their human capital, but I've heard others suggest that it happens because people in their 60s finally have a bit of free time. Regardless of the reason, I think being intentional with your investment education is a very good investment, no pun intended. But most people consuming financial content, and particularly investing content, aren't doing so in an intentional manner.

10:06The other issue is that the type of content that tends to garner the most attention is forecast-based. Now, I can tell you from experience that people who consume forecast-based content have a tendency to want to alter their investment strategy. But this creates a harmful cycle because an investment strategy based on forecasts is inevitably going to lead to some rough patches at some point. We know this because there's an overwhelming amount of evidence that shows that humans are bad at predicting the future, regardless of what topic is being predicted. So when that inevitable rough patch comes, you're going to change your strategy and it becomes this harmful cycle of jumping from strategy to strategy.

10:49So I suppose a rule of thumb here might be never make a change to your portfolio based on any newsletter or newspaper article or television show or podcast or video. Basically, never make a change to your portfolio based on any content other than maybe a book. Now, if you're currently working with a financial advisor, you might consider asking that person for some book recommendations. And if you don't work with an advisor, I'll go ahead and share some book recommendations in the show notes. Now, on to the final item of investing in your 60s, understand your advisor's succession plan. As I've reiterated throughout the episodes in this Investing by Age series, perhaps the most important step you can take before retiring is meeting with a financial advisor.

11:41There are some complicated and potentially stressful elements of retirement planning. But a good financial advisor can ease the burden by ensuring you have the best plan to live out your dream retirement. If you already have an advisor, you owe it to yourself to meet with him or her regularly to discuss your plans at this crucial stage in your financial life. But even the best advisors will retire at some point. Unfortunately, not all advisors plan for the inevitable. In fact, according to the Financial Planning Association, only 27 % of advisors have a formal succession plan in place. And even those with a formal plan haven't necessarily started the succession process.

12:24But retirement isn't the only thing to consider. It's also common for an advisor's career to shift such that they'll no longer be your advisor, whether that's through internal promotion or leaving their current role for another opportunity. It's important to know in these cases, who would take over your account? What are their credentials and experience? How involved are they with your account today? And is there a process in place to get them up to speed if they don't normally work with you? Do they work with other clients who are like you and therefore familiar with your needs and goals at this critical stage in life?

12:59These are the type of questions you need to be asking your advisor. Ideally, you would be able to work with the same person throughout your own retirement. But if you know that isn't possible, either because of your current advisor's age or the way their business is structured, you should really understand who will be helping you as you age. Planning for retirement is critical, especially in the years leading up to it. Again, I'd encourage you to download my ebook with the more comprehensive retirement readiness checklist. I'll include a link to it in the show notes at thelongterminvestor.com, or you can visit the download page directly at peterlazaroff.com slash retirement.

13:39Follow these steps to put a strategy in place that allows you to embrace your pending retirement rather than dread it. In our next episode, we'll be looking at investing in retirement, but until then, to long-term investing.

13:57Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.