Retirement planning involves millions of inputs. When will you retire? Where will you retire? How much money do you need? Will you travel the world? Play golf? Fish? Surf? The list of questions is endless, and it can be overwhelming.
Financial planning can help you alleviate your concerns. It isn’t easy to pinpoint your future goals, particularly if you’re retiring in twenty or thirty years. Financial planning is great until life gets in the way. I was born and raised in Southern California. I thought I’d live there forever, but I’ve lived in three different states because of job transfers. Life happens.
If you’re unsure how to start planning for your retirement, create a file to track the important things to you and your family. For example, if you want to spend your days surfing, you’re not going to retire to Topeka, Kansas. Retirement planning is also a process of elimination. What don’t you like? What can you cross off your list? Narrowing your choices will help you make better decisions on how to spend your golden years. Of course, your plans will change often before you finally decide to retire.
Of the more than one million items to focus on for retirement, I’ve narrowed the list down to four necessary items – all things you can control to grow your nest egg.
- Spending. Spending is a large driver for your retirement, a key component. If your spending level is high, you will need more assets to cover your expenses. Tracking your monthly expenses is vital to determine how much money you need to retire. After you get a handle on your annual spending, multiply your results by twenty-five. If your annual spending is $100,000, then your asset goal is $2.5 million ($100,000 x 25 = $2,500,000). If you’re on pace to reach your target, congratulations. If not, then you need to adjust your spending. When your assets can produce enough income to cover your expenses, you can retire at any time – regardless of your age.
- Savings. Spending and savings go hand in hand. The less you spend, the more you can save. Contributing to your 401(k), IRA, and investment accounts early and often may yield substantial retirement assets. While working, you should be a net buyer of stocks. Don’t worry about the economy, the election, the market, etc. When I started working, the Dow Jones was at 2,376. Today it’s 28,250 – an increase of 1,089%! Who cares what the market is doing daily. It’s a waste of energy to try and time the market, especially if you’re going to work for another ten or twenty years.
- Allocation. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is due to market timing and investment selection. Allocating more money to stocks is your best chance to build substantial wealth. Since 1980, the S&P 500 has generated an average annual return of 11.8%, while short-term bonds returned 4.2%, a difference of 7.6% per year.
- Emotions. Of all the items that will impact your retirement, your emotions will be at the top of the list. You will be your most prominent advocate and your worst enemy. The stock market has produced extraordinary gains for the past century, but several large corrections forced investors out of the market. How you react during the dark days of the stock market will significantly impact your retirement assets. When the market fell in March, investors liquidated $348 billion in assets from mutual funds. They panicked and sold their holdings at the bottom, potentially missing a 52% return as stocks recovered. If you panic and sell during corrections, you will impair your future benefits. It takes courage to be a buy and hold investor, but you must do so if you want to create generational wealth.
It’s essential to plan for your future. Dream big, shoot for the stars, have fun, enjoy the journey, but concentrate on the things you can control and ignore the rest. If you focus on your spending, savings, asset allocation, and emotions, you will give yourself a chance at a successful retirement.
See you at the beach!
If you can’t control your emotions, you can’t control your money. ~ Warren Buffett
October 6, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
Photo credit: DisobeyArt, I Stock Photo
 Dimensional Funds 2020 Matrix Book
 Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.