3 Reasons Why Our Retirement Plans May Be Different
We just want to be like everyone else. A small part of us might want to be exceptional – to be ahead of everyone else… but a louder part of us mostly just wants to not be behind.
At least, that’s what I’ve observed from many of the people I’ve talked to about retirement. (I’m excluding you few overachievers).
I often get questions like, “How do I compare to the other people that talk to you?” and, “Do other people our age have about this much saved?”
I never really know how to answer those questions. Sure, I can compare dollar amounts of 2 people’s portfolios and say yes/no, they are/aren’t comparable. However, I can’t say whether or not their chances of financial success in retirement are the same. There are a lot of reasons why 2 people with the same portfolio value might have dramatically different retirement plans. Let’s explore a few of those reasons:
Someone could come into our office with a $4,000,000 portfolio and their retirement plan can look really unsuccessful. Why? Because they’re used to spending a lot of money. When they were working, they had lots of income, company cars, and could spend as much as they wanted. Once they are used to spending that much, it is hard to dial it back.
In other circumstances, I might see someone with a $400,000 portfolio whose retirement plan looks amazing because they’ve always had a lower income and are accustomed to living within their means.
My answer here: You are not necessarily behind if you are spending within your current AND future means.
Level of grit
We often use the Monte Carlo analysis in our office. That means we run 1,000 tests on your portfolio’s future. In each test, you get a different order of investment returns. Some of these tests will look amazing because you got a lot of great performance in the earlier stages of your retirement. Some of the tests will bomb because there was a string of negative returns right when you retired.
I can control a lot of things. I can’t control your portfolio performance or its timing. I can only prepare you for the reality that negative things in your life could happen.
For some people, I have concerns when I see some failed Monte Carlo results, because I’m not convinced they can adapt and “roll with the punches.” For others, I see that they have grit. They make the best of whatever life throws at them, and they can adapt to mid-course changes. I might advise someone who is a little less “gritty” to save a little extra or work a little longer for that added security than I would for someone else.
My answer here: You are not behind if you can commit to doing what needs to be done (sometimes making sacrifices or changing up your original plan) to meet your goals.
Two young adults sit in front me of. They’re the same age, save the same amount, want to retire the same date, have the same portfolio size… they even spend the same amount. They are the same on every level except for how they invested their 401(k)s.
- Person #1 invests their 401(k) in 100% equities and tolerates the ups and downs along the way.
- Person #2 invests their 401(k) with 10% cash for “safety,” 40% bonds, and the other 50% in equities.
Keep in mind, they plan to just leave their allocations like this for the foreseeable future.
My answer here: Person #1’s retirement plan is going to look much rosier. Person #2 will indeed, be behind. I’m not saying Person #2 is wrong for having a lower risk tolerance. Due to their desire for lower volatility, however, they will need to make concessions elsewhere like working longer, saving more, or spending less in retirement.
Whether you’re approaching retirement or it’s several years down the road, your investment allocation matters. I always want your allocation to fit comfortably within your personal risk tolerance. That being said, those with a higher risk tolerance (more equities) have historically seen greater returns, thus a faster-growing portfolio.
So, this is why I hesitate when you ask me if your retirement plan is like everyone else’s. I don’t want to give you false confidence that you have a great future ahead just because you have a large portfolio. Nor do I want to discourage you by saying your portfolio is too small, when in reality, you might be right on track. Your retirement plan is going to be different than mine, because just like people, no two plans are the same. And that’s a good thing!