Credit: Shutterstock photoAutomatic, hands-off, fire-and-forget: Whatever you call the idea of investing and then letting nature (and the market) take its course, the idea may tempt you. Beware forgetting your controls for too long, though.
My first airplane ride was in 1988. I remember the anxiety and the thrill. My bride and I passed through security and boarding, got on the plane, popped Dramamine for airsickness and held hands during takeoff.
The crew efficiently served beverages and 40 minutes later we were back on the ground. For Barb and me, the plane ride was seamless: same plane, pilot and crew, and just a new location after landing.
The crew experienced the flight differently, of course, and in three distinct stages. They helped us board the plane and place our luggage before takeoff, served us a snack at 30,000 feet and then reminded us to buckle up for landing.
Similarly, you as an investor may perceive (even pursue) a similar seamlessness when doing retirement planning. Just as location was the only change I truly noticed on my plane ride, all you might note as an investor is a changed account balance when your statement arrives. You might easily tend to get caught on auto-pilot without noting the three investment stages you need to manage moving toward retirement.
Accumulation: Just as a flight crew considers weight distribution during loading, the same holds true for your accumulation strategies as you save money. Your primary goal in this stage is saving the correct percentage of income and building diversification to benefit your tax situation.
Your nest egg ought to include more than your 401(k) plan. Your goal is a mix of tax-deferred (such as traditional individual retirement accounts), tax-free (Roth IRAs) and taxable accounts. Investment returns are nice; retirement success comes from tax diversification.
Preservation: Here, although you may still save, the amount that you invest becomes secondary to preserving the nest egg.
This is the only phase where your average investment return truly matters. You need to exercise discipline when dealing with seasons of volatility and resolve to stick to your decisions and long-term goals.
Distribution: In airline terms, you try to achieve a safe investment landing. This phase requires relentless attention to volatility and awareness of the tax treatment on every dollar needed.
If an advisor mentions "average investment return" during the distribution period, end the conversation - the advisor clearly does not understand math. Taxation and volatility are paramount in landing the investment plan safely.
As investors, we like to think in average returns, but markets don't move in straight lines. When you take distributions (withdraw from your retirement account), the funds are gone. "Average return" doesn't take that into consideration; your experience might be much better or worse than average.
Landing a plane is an art that stems from learning and experience. Ditto planning for distributions in your retirement.
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Joseph "Big Joe" Clark, CFP, is managing partner ofFinancial Enhancement Group, LLC, an SEC-registered investment advisor. He is the host of "Consider This" on Indiana's WQME and is also is a former adjunct assistant professor atPurdue Universitywhere he taught the capstone course for a degree in financial counseling and planning.
Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Tax advice provided by CPAs affiliated with Financial Enhancement Group, LLC. Big Joe can be reached at bigjoe@yourlifeafterwork.com, or (765) 640-1524.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
