You have been a good saver and savvy investor for most of your life.
Living beneath your means for years, you have contributed the maximum to your retirement plan at work. Not satisfied with putting away $22,000 a year, you have other savings: a rental property, a joint investment account or an additional retirement plan.
You have amassed what most people would consider significant wealth.
Let’s say you own your house outright and have $1.5 million in additional assets. Your friends and family may have an idea of how well you’ve done, but they probably don’t. You don’t flaunt it. You’re not spendthrifts. You don’t lease expensive cars every three years.
When you hear about the millionaire next door, they are talking about you. You have a hard time admitting that you’re a millionaire. It sounds grandiose. You feel solidly upper middle class.
Now the time has come that you’re considering retirement. You spend about $8,000 a month, living a comfortable but certainly not a princely life. You’re easily able to cover those expenses with the salary from both of your jobs. But what happens after you stop working?
You take great comfort that you are always putting away money for the future. Even in the face of the financial meltdown in 2008, you kept investing according to plan. Sure, you were worried. Everyone was. But you didn’t abandon your strategy because you knew that your portfolio was for the future.
But now as you contemplate retiring for good, what happens when the market goes down? You were able to maintain your optimism in bear markets with the security of two well-paying jobs. You reasoned stocks would turn around, and the declining value of your retirement accounts didn’t cause dread.
Now instead of putting away money for the future, you must accept the future is now. This is time you’ve had in mind for a lifetime of savings. How will you feel when you start depleting those savings?
The mental shift from saver-worker to spender-retiree can be stressful for even the most experienced investors. Savers have always counted on the market to build their nest egg over time, but now its purpose changes. Now their investment accounts must provide a stream of income to supplement Social Security.
Retirees tend to polarize when it comes to investing and retirement distributions. Their money may be dying a safe, slow death through paltry 1 percent interest payments. Or they may figure that 8 percent annual returns can be achieved with regularity, and thus withdraw $100,000 a year.
But what happens if the market goes down 50 percent as it did at one point in 2008? Their portfolio shrinks by a third. Most retirees will then discover they have a shadow investment strategy architected by their Gut Brain instead of their higher order thinking. The worst investment policy is one that shifts to conservative when the market has declined and aggressive when amidst a rally.
The Gut Brain tells you to go to cash once you have lost 30 percent. The Gut Brain guarantees inferior returns and a lower standard of living. Those who are about to retire must keep their Gut Brain in check. Even if they have resisted its caustic advice in previous downturns, there is something about retirement that kicks our gastric juices into overdrive.
You need a time-tested, proven investment and distribution plan and the steel to stick to it to be successful. You need to hammer it out before the next bear market hits or else the Gut Brain will.