Chapter 1
What? Me? Retire?
Who needs a book on retirement investing?
Maybe youâre youngerâearly in your career. To you, retirement investing is something you do when youâre retired. Or close to it. Too boring to think about now. Too far away to bother. (Wrong.)
Maybe youâre in retirement now or close to it. And you already have a plan. Canât be bothered. But are you sure your plan is appropriate? Whatâs more, are you sure your plan is in fact a planâand not just a collection of tactics?
Either way, however old you are or however far along in your career, the time to think about a retirement investing plan is now. This book isnât just for retirees or soon-to-be retirees, but anyone at all who plans to retire everâwhether thatâs next week or in three decades.
The Imagined Dichotomy
Many investors and even some professionals distinguish between financial planning and retirement planningâlike theyâre two distinct phases, or the two are, inherently, radically different.
But in my view, this imagined dichotomy is wrongâthis idea you should invest one way for a period of years and then you need a whole separate set of rules upon hitting some milestone.
For most investors, whether youâre 22, 52 or 82, financial planning is retirement planning is financial planning. Whether youâre saving your first dollar or your four millionth (good for you!), you should consider the ultimate long-term purpose for your money. Which, for many investors, is to provide for them (and their spouse) in retirement and/or leave something behind for the loved ones, a beloved cause, etc.
But maybe not! Maybe this doesnât apply to you. You donât need to think about the ultimate purpose for your money now. Maybe youâre heir to a billion-dollar fortune. Your future is amply covered, you donât want to think about it, you bought this book only to level your kitchen table, and your entire purpose in life is to fritter. Fine! But for most everyone else, if youâre holding this book, however old you are, you should be thinking, now, about your future prosperity.
Two Goals . . . and Some Non-Goals
I have two primary and very specific goals with this bookâand some specific goals this book is not aimed at.
First, I hope to help you stop thinking about investing in a spliced-up wayâthat you should invest for a number of years one way, then one day, a buzzer goes off signaling itâs time to think about retirement. No! Instead, from the first time you fund an IRA or otherwise set money aside, I hope to get you thinking not just about retirement, but about investing for your whole life. And if you havenât been thinking that way all along, thereâs no time like the present to change.
Sure, there can be nearer-term goals not about retirement and beyond. Youâre young and newly married and want to save for a new home. Or you want to save to upgrade to a bigger home. Or youâre saving for your kidâs college or your college or a boat or whatever floats that boat. However, these should all be seen and felt as near-term sidesteps on whatâs otherwise a lifelong pursuit.
So I want you, right now, to stop thinking about investing and retirement investing and start thinking about investing for the entirety of your life. I want you to think about making plans now that increase the odds you achieve your goals, whatever they may be. (Heck, at this point, you may not even be able to easily and clearly express what those goals are! Or know whatâs feasible. This book will help there, too.)
By the same token, if you start thinking, now and always, about the long future ahead (instead of chopped-up phases), that doesnât mean nothing ever changes about how you invest as you near retirement. It might! But not just because on Tuesday, you woke up, went to work, went to a good party in your honorâand on Wednesday, you were retired. And now there are new rules because youâre retirement investing. Noâthis is selling yourself short and potentially exposing you to investing errors.
Maybe, as part of your longer-term thinking, you will need to make a change, whether big or small, at some later point. Maybe multiple changes. But when that change (or those changes) is (or are) made should be driven by your circumstances and your goals, not just a circled date on the calendar.
An investing shiftâbig or smallâmight be appropriate . . . but perhaps 7 or 10 years before you retire. Or 5 years after. Or 12 years after. Or . . . or . . . or . . . or. . .. But you wonât know that if you think the primary driving factor is your retirement party, not your goals and the effort to increase the likelihood you reach them.
Benchmark for Better Results
My second goal is helping you choose an appropriate benchmark. If you get nothing else out of this book, I hope you understand what a benchmark is, how important it is, and what goes into choosing an appropriate one.
Maybe right now you donât even know what a benchmark is. Thatâs fineâwe cover that much more in Chapter 3 and beyond. But for now, think of your benchmark as an essential investing lifeline. Itâs a road map, showing your planned routeâand how to take detours when necessary. It lets you know how youâre doingâif youâre going too slow or even too fast or getting lost in the weeds or utterly turned around. It can help you stay disciplined (an incredibly important yet often overlooked facet of successful investing). Overall, the benchmark, picked appropriately, can increase the odds you achieve your long-term goals.
The first operative word being appropriately.
Far too many investors invest without a benchmark at allânever mind an appropriate one. They effectively stick their thumbs in the air, hitchhiking along with whatever tactics suit their fancy at a point in time. Whatâs worse, they may not even realize theyâre doing that! They may assume theyâve got a rock-solid plan that makes good and smart senseâbut if you donât have a benchmark (and if you donât know what a benchmark is, you donât have one), the odds increase you may be meandering. And meandering is a bad path to prosperity.
It can happen! You can stumble into a portfolio that can provide the kind of life you need down the road through luck (sometimes known as dumb luckâand in effect, the same thing). But if given the choice between dumb luck and smart planning, my guess is most folks would opt for the smart planning.
And the benchmark being appropriate for you is key. If your goal is to drive from New York City to San Francisco, a map of DĂźsseldorf wonât help much. A map of the US Eastern Seaboard is better but still falls short. You need a map that consistently shows the way and highlights the âdo not goâ areas. A good benchmark can do that.
Second operative words: increase the odds.
I say that (or some variation) throughout the bookâthe aim is to increase the odds you reach your goals. Note I didnât (and wonât) say, âThe aim is to definitively get you to your goalâI promise.â Why? This is a book on investing. Investing in anything requires some riskâwhat type (there are myriad) and how much depend on your unique goals and circumstances.
Plus, no one can guarantee you anything. US Treasurys are guaranteed in the sense theyâre backed by the full faith and credit of the US government, and so long as the US government doesnât go belly up, you will get your principal back, plus interest. (And no, Iâm not one of those who thinks the US is teetering on a precipice. You need a different sort of book for that. Or a therapist.) But you can still lose money investing in Treasurys if you donât hold them to maturity. (Never mind inflationâs impactâwhich we get to later.)
No one can guarantee you reach your goals. Not even you can. First, investing involves the risk of loss. Canât escape it. You could bury cash in your backyard and avoid all volatility riskâbut youâre still fully exposed to inflation risk. Which means having to earn and save a lot more, and/or downgrading your future cash needs and/or not minding your purchasing power being eroded over time. (More in Chapter 4.)
Thatâs the investing side, but there is also tremendous room for your brain to go haywire. If you have wildly unrealistic goals (e.g., âI want my money to double every year!â or, âI want market-like returns but donât want to ever experience downside!â), that can decrease the odds you reach them. If you have a great plan and a sound strategy and an appropriate benchmark, but not the fortitude to stay disciplined over the long haul, that also decreases your odds.
Your aim should be taking steps to identify goals, picking a benchmark and an appropriate plan, then doing whatâs necessary to stick to it. And my aim is to help you. Thatâs how we increase the odds.
And, again, this should be a deliberate undertaking, whether you go it alone or with a professional. Because not only is it critical you pick an appropriate benchmark, but you must also understand the risk and return characteristics of that specific benchmark. You must understand them so you can be prepared (mentally and emotionally) to accept the shorter-term volatility of your benchmark. (And yes, unless investing in cash, all benchmarks will experience shorter-term volatility.) And no matter how prepared you are, shorter-term downside volatility can sometimes be difficult to experience. But the value of an appropriate benchmark is it can aid you in remaining disciplined (as discussed further in Chapter 3). Whatâs more, this is where a good professional can add value as wellâin helping you remain disciplined to an appropriate strategy when the going gets tough.
The Non-Goals
Full disclosure, right up front: This book wonât make a benchmark recommendation or an asset allocation recommendation or provide a specific investing plan. You may think, âThen why the heck buy and read this book if itâs not giving me a concrete plan?â
Because no book can do that. No website can do that. No Internet article can do that. They may try! But in my view, what theyâre giving are cookie-cutter static plans or lists of rules of thumb (which are often partially or wholly wrong).
Fact is, I donât know you. I canât hope to know you via this format.
Instead, my aim is to help you help yourself pick a benchmark thatâs the foundation for a plan thatâs appropriate. Or if you choose to work with a professional, give you a framework for improving the dialogue you have with him/her/them.
This book also isnât meant to supplant professional advice or serve as a shortcut to retirement planning. There are no shortcuts. No doubt, many readers hope such a book exists. In my view, it doesnât. Rather, my goal is to share some general principles and concepts I believe can help you (or you and your chosen professional) better shape your long-term investing plan. No book ever written (nor any group of books together) is the silver bullet to investing success. I say that with confidence, having written nine books and read hundreds more, at least. And whether you set up your plan on your own or with a professional, that process should be careful and deliberate.
Also, this book isnât on the nitty-gritty of portfolio managementâhow to pick securities and which ones and when. To cover that would require vastly more pages. Plus, thatâs generally what my other books are about. Read this one first, and, when youâre ready, read The Only Three Questions That Still Count, Debunkery and/or Markets Never Forget (my 2007, 2010 and 2011 books). But you canât start deciding what to buy and sell and when and why if you donât have your road mapâyour benchmark.
Definitions and a Pencil
There are other aspects of financial/retirement planning this book wonât address. If youâre confused about what those aspects are, the official definition of financial planning is:
There isnât one.
Financial planning can be a catchall for a wide array of financial services. To call yourself a âfinancial plannerâ may not require any testing or certificationâdepending on what you do or sell. (Though, under the Dodd-Frank financial reform law, there are some rules that may or may not more strictly define âfinancial planning.â But like much of Dodd-Frank, the rules remain unwritten thus far.)
Yes, there is certification for financial planners who choose itâlike the âcertified financial plannerâ (CFP). And there are professional financial-planning organizations. And if you want to be a financial planner and sell mutual funds or insurance, you must adhere to certification and testing standards for those specific product categories.
In fact, thereâs no official definition for what a financial plan is. A financial plan may include things like a budget or maybe some long-range projections based on a variety of assumptions. Or a financial plan might address insurance and estate planning needs. Or there could be some investment advice included. Or not! Or a planner might also be an accountant (whether certified or not) and do taxes. Or . . . or . . . or. . ..
The financial plan is, often, a way for practitioners to get a foot in the door and sell something (or somethings) else that pays a commissionâlike a mutual fund, insurance, annuity or tax services. Because being a commission-based or fee-based salesperson is often more lucrative than being a fee-based planner getting paid to do one plan, once, for a householdâsimply because such a strategy requires a relatively non-stop influx of new customers, which can be tough to keep up long term. Not that there arenât plenty of fee-based planners making a fine living doing just that. Up to the practitioners how they want to run their businesses. And I donât have a view on which format is better for them or for you.
But in general, when folks talk about financial planning, the major buckets included are investing, saving and budgeting, and insurance and estate planning.
There are plenty of excellent books on how to budget and save, and I donât have anything else to say on this yo...