Are You Ready for Retirementville?

Are you on the road to ‘retirementville’? Does this excite you or scare you?

If you’re like most investors, the transition from saving for retirement to withdrawing from your savings is full of trepidation. One big reason for this fear is that you’re planning for things that you’ve probably never done before.

The shift from working to not working and spending your savings can elicit a wide range of fears. Here are some things to consider while deciding whether you’re ready for retirement.

Experiencing Fear While Getting Ready for Retirement?

Fear is an innate human emotion and takes form early in life. Your fears originate from personal experiences as well as observing others around you like your parents and friends.

Your fears about entering ‘retirementville’ center around the difficulty of trying to arrange your finances in order to sustain your lifestyle for the long-term. This fear is amplified by the fact that the period of time that constitutes long-term for your specific situation is by definition unknown. Will your retirement last 20 years? 30 years or longer? No one knows in advance.

Retirement Tips From a Financial Advisor: Understanding Risk

A couple observations from my work with clients over the years: you probably are underestimating your purchasing power losses over time; you also are likely overestimating your investment losses.

Both of these factors play into how you access ‘risk’. The psychology of fear guides your money choices. Most investors, however, don’t properly understand “risk”.

The most damaging financial risk is the gradual loss of purchasing power which negatively impacts your lifestyle over time.

Because “risk” is future oriented, you probably don’t know what “risk” is; you just remember what “risk” was from past experiences.

When you look at long-term inflation alongside short-term interest bearing investments, you quickly see the problem. For the past 20 years (2004-2023), one-month U.S. Treasury Bills generated a return of 1.4% per year. However, the Consumer Price Index increased by 2.6% per year during this time. Therefore, you lost 1.2% per year in purchasing power over this 20 year period utilizing this “riskless” investment.

For the same 20 year timeframe, the S&P 500 Index produced a 9.7% per year return. While the next 20 years could be much different, the past provides a baseline to help you set future expectations.

If you can think and act long-term, you stand a good chance of being able to maintain purchasing power once you have arrived in ‘retirementville.’

Short-term vs. Long-term Considerations for Retirement

The problem we see routinely, however, is a disconnect between what you say that you believe and your actual money decisions. In my opinion, this relates directly to the fears discussed earlier. The impulse to act in the short-term can overwhelm your belief in the long-term.

While feelings and fears are part of being human, it’s not productive to act on these fears. There will always be scary headlines, bad markets, and geopolitical issues. Just remember, your long-term financial well being depends largely on how you keep these fears from upending your financial plan.

Throughout your working life, and even more so during your retirement years, maintaining clarity about your long-term aspirations is key. The barrage of short-term concerns are always in competition for your attention. Do yourself a favor and totally tune out the short-term noise. Your time in ‘retirementville’ will be much more enjoyable. Start there. Ready for a real conversation?

Related: The Real Volatility: It’s Not the Investments, It’s the People