PIMCO is a leader in fixed income markets with more than $2 trillion of assets under management. They recently completed a study involving 750 wealthy investors who were either near retirement or already retired. The research focused on the changing psychology of retirees versus the ‘numbers’…how much money you need to retire and how much you can afford to withdraw each year. The conclusions provide valuable insights for retirees.
1. Overconfidence. 83% of investors said they were confident or highly confident they had the financial resources to meet their retirement needs. Digging a little deeper, the reality was that 55% of these investors had unrealistic expectations, and 19% had no spending plan at all.
Takeaway: Too often, people approach their retirement plan with a ‘pie-in-the-sky’ mentality, thinking, “It will all work out,” when in fact, their current saving strategy will fall far short of what they need to maintain a lifestyle during retirement. The solution is better planning…now, more delayed gratification…now; more thoughtful saving and investing…now.
2. Fear of the market. 33% of these investors have what’s called ‘risk-aversion bias,’ meaning that they were much more concerned with losing money than making money as a retiree. This risk-aversion bias is much more pronounced when the person no longer has a paycheck or other source of income to rely on.
People with a high risk-aversion bias will tend to either: exit the stock market during turbulent times, stay the course but experience high levels of anxiety during turbulent markets, or invest in a way that minimizes stock market exposure (i.e., primarily CDs, bonds, etc.). Each of these scenarios is counter-productive to a successful retirement.
Takeaway: Most successful retirement investment strategies rely on a significant allocation to stocks/equities for long-term growth. It is important to develop a strategy that will allow you to ride out bear markets confidently.
3. Estate plan impacts spending. Legacy planning significantly impacted their willingness to ‘spend down’ their assets during retirement. Those who had a legacy plan were willing to spend down their liquid assets by only 35%, while those with no legacy plan were willing to spend down 67%.
Takeaway: Most people who have enough for their retirement have spent much of their careers as good savers…accumulators. The shift from accumulation to decumulation as a retiree can be a difficult transition for many people. Failure to make the change often translates into a much less satisfying retirement experience and a much larger inheritance to the next generation, who will have no trouble being decumulators! Your best strategy is a well-thought-out estate plan.
If you struggle in any of these areas, consider meeting with an experienced professional financial advisor. To find the right advisor for you, ask these questions.
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Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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