It’s easy to think about what you want in the future when you’re younger and saving for that ideal retirement. But once you’ve retired, you don’t suddenly stop wanting things, or stop having a future!
Before retirement, you probably have long-term goals and growth investments. When you hit retirement, you still need both of those things. That’s why step four of our 5-step Retirement Revelation Process is dedicated to helping you get what you want in the future. We really emphasize the word “want” because you want money in the future, you just don't have it yet. And it’s a want because it’s not something that is guaranteed. Your money is not guaranteed to grow. This is why we need to set your investments up so that whether the market goes up or down, you’re prepared.
Read on to find out what goes into planning for what you want in the future!
Planning For Your Wants in the Long-Term
We’re no longer in the days where you could invest in the stock market while you’re working and then take a pension, Social Security, buy a bunch of CDs at the bank, and live off the interest rate once you retire. That's just not how it works anymore.
Now we’re in a low-interest rate situation where you just can't rely on investment vehicles that earn interest, like bonds or CDs, for the long-term.
Instead, when it comes to the long run, the history of the stock market shows that it outperforms over time. The problem is that it doesn't do that day to day. That’s why we want to help you figure out how much risk you should take in the stock market and which investments to look for. When you save for the long term, you need to understand that whatever you need to buy today is most likely going to cost you more in the future. And you have to find something that's probably going to keep up with those costs — and investing in different ways in the market is one of the best ways to help you out in the long run.
Many people think it matters which stocks they buy and are only looking for the next great stock that will help them double or triple (or more!) their money. In our opinion, the stock market is something you can't control. It doesn’t matter how much you trade every day or if you spend a lot of time picking the best investment stock you can find — you can't control the stock market. A lot of advisers think, “Well these are good stocks, so it's very conservative.” But at the end of the day, they're still stocks. It doesn't matter if you call it “good” or not. You can still lose money in the stock market!
Instead, we prefer to focus on things you can control, like risk.
When you go to a financial professional, it’s important to understand what their definition of risk is. When we're looking at risk, our main definition is how much money do you have in the stock market versus how much money is out of the stock market. We like to figure out, based on a scale of one to 10, with 10 being the riskiest, how much risk you are willing to take. Then, we’ll set up your portfolio to match that level.
For example, let’s say we come up with a score of six. You want to be almost in the middle risk-wise, but a little bit more than that. If you happen to have a lot more than 60% in the stock market, that's not a six out of 10. That might actually be a nine or 10 out of 10. That’s why you want to talk to your advisor and make sure that they know how much risk you want to take — and make sure you know how much risk they're taking with your money.
Unfortunately, a lot of times in the investment world, we use big words but don't explain them. And one of those words that can be overlooked is “diversification.”
Diversification is the fancy word for spreading things out. It means don't put all your eggs in one basket. When you buy stocks, have different types of stocks. When you buy bonds, have different types of bonds. Sometimes you might even have more than one bank account because you have different reasons to spread things out. Being diversified is one of the ways you can make sure you have the right level of risk.
The first step in diversifying your investments is deciding how much risk you're willing to take. If you're saying you want your risk level to be at a six out of 10, that probably means you want about 60% in the stock market and maybe 40% in other areas like the bond market, bank accounts, or other investments. After that, you need to spread out your investments within their own categories, like different types of stocks and different types of bonds.
One thing I also want to remind people about is company stocks. A lot of times when you work at a company that has their own stock, you may feel beholden to that stock and can become a victim of something called familiarity bias. It feels safe. It is where you go to work every day. In your mind, it's a safe stock, but there’s no such thing as a safe stock! This bias can lead to you not being well-diversified. People often don't have enough different types of stocks and, unfortunately, one of the biggest ways to hurt yourself is when you have your pension with the company where you get your paycheck and that you own a lot of their stocks. So we very much encourage people to understand how much risk they’re taking with the stocks they have at their company and to think about whether they need to diversify.
The next thing you need to do is rebalance. Diversifying is a great way to spread things out, but chances are, the next day, whatever percentages you put into your investment model are probably going to be different. Why? Because investments will fluctuate at different points in time. The way to get yourself back in alignment is called rebalancing.
Let's say you had two investments and you put half of your money in one investment and half of your money in the other one. Tomorrow, it probably won't be split exactly 50/50 because one investment might've gone up and the other might have gone down. It keeps on changing to the point where eventually you’ve strayed far from where you started and are no longer at the point where you have 50/50 in those two investments — maybe now you’re at 60% in one and 40% in the other. That means your risk is different and your diversification is different. You don't have what you signed up for.
That’s why you need to get that back into alignment by rebalancing. If you only have the two investments, you can take some profit from the one and go buy more of the other one that happens to be lower. We think it’s often beneficial to do this automatically since people have a tough time making this happen when they see profit and want to keep going. But when you've got that profit, that's a good time to rebalance. Grab some of that profit, go buy the securities that went down a bit, and buy it “on sale,” when the price is lower. When you're rebalancing, you're taking some money off the top from things that went up and you're using that money to go buy the things that happen to be lower or are perhaps on sale at the time. And more importantly, when you're out of alignment, rebalancing will bring your investments back into alignment so that you're right at the same risk level that you signed up for.
As for how often you should be rebalancing, I don't think there is a perfect time to do it. But every time you are reviewing your investments, make sure you’re looking at what's up, what's down, and how it affects your risk. And if your investments have moved your risk out of alignment, then rebalancing will bring it back. It’s also important to note that when you're rebalancing automatically, you might not get the top point every time, you might not get the bottom price that you're buying it for every time, but by doing that automatic rebalancing, whatever it's set for is going to help you catch more wins by grabbing some profit and buy some more things that happened to be on sale than it would've happened otherwise.
Why This Is Step Four of Five
It’s important to note that this is the fourth step in the five-step Retirement Revelation process. A lot of advisors and clients think that this should be the first step because they believe that financial planning is only about trying to make more money in the stock market. But at Keil Financial Partners we don't think that's the answer - we believe that it’s about controlling the things you can control. And you can't control what the stock market is doing.
Instead, focus on the things that you do have control over. That's why we start with figuring out how much you're going to spend in retirement, and then move on to helping you make decisions on Social Security, pensions, and the lifetime income areas that you only get one shot at deciding. After that, we focus on how much money you need to set aside out of the stock market. It's not until we've completed all those areas that we start looking at your investments in the stock market.
And it's not a matter of picking the best stocks or being a better investment advisor. It's about the things you can control — like your risk, diversification, and rebalancing. You have the ability to spread things out. You have the ability to rebalance. You have the ability to set it up automatically if you want to do it that way.
So when it comes to planning for your wants in the future, focus on the things you can control. And remember: Investing is an important piece of your retirement puzzle, but it’s more important to look at the things you can control, in the first three steps of the Retirement Revelation process, before thinking about the investment stage.