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Motel 6 or Four Seasons? Preparing, Not Panicking, for Retirement

Motel 6 or Four Seasons? Preparing, Not Panicking, for Retirement

May 04, 2023

Stock prices go up more often than down, and that was the case again last month. The S&P 500, Dow Jones Industrial Average, and the NASDAQ were all up in April. For the year, the S&P has gained +8.6%, Dow +2.9%, and NASDAQ +16.8%. What’s more, these increases are built upon the appreciation experienced in the fourth quarter of last year – the S&P 500 index has rebounded more than +19% since the last lows seen in the middle of last October.

Even when the unemployment rate currently stands at 3.5%, and GDP continues to grow for the third consecutive quarter, there is never a shortage of concerns (see also A Series of Unfortunate Events) as evidenced by worrying questions like these:

  • Is the Federal Reserve going to increase interest rates again?
  • Has inflation peaked?
  • Are we going into a recession?
  • Is Silicon Valley Bank and First Republic Bank the beginning or the end of bank failures?
  • Will Vladimir Putin use nuclear weapons in Ukraine?
  • What is going to happen with the Debt Ceiling deadline and will the U.S. default on its debt?
  • How will elections affect the economy?
  • Will AI (artificial intelligence) take all our jobs?

Hope is Not a Strategy

We have lived through an endless number of scary headlines in some shape or fashion throughout our lifetimes. These are all interesting and important questions, but preparation for retirement is much more important than panicking over issues you have no control over. For many investors, however, the more important questions to ask and answer relate to your retirement strategy. The answers to your questions should not contain the word hope - hope is not a strategy. Just guessing and waiting out of fear is unlikely to produce optimal results.

Many Americans spend more time planning a vacation than they do preparing for retirement or planning their finances. Rather than constantly scrolling through headlines on your mobile phone news app, here are some areas of focus and questions you should be asking yourself:

·       Investment Strategy: What type of investment strategy should you be utilizing to reach your retirement goals? A passive investment strategy with low-cost index funds and ETFs (Exchange Traded Funds)? Or an active investment strategy with individual stocks, bonds, and mutual funds?

·       Diversification: How diversified are your investments? Are you overly concentrated in one asset class, sector, or individual security? If you are over-tilted on one side of your financial boat, it could tip over.

·       Risk Tolerance: What is your asset allocation? If you are close to retirement, and you have too much exposure to equities, a retrenchment in the stock market could delay your retirement plans by years. This concept highlights the importance of rebalancing your portfolio as you get closer to retirement.

·       Fees: What are you paying in advisor fees and/or product fees? Fees are like a leaky faucet. You may not notice a leak over a day or week, but over a period of a month or longer, you are likely to receive huge water bills. Over the long-run, even a small pin-hole leak can cause extreme water damage to floors, ceilings, and walls just like fees could delay retirement or dramatically reduce your nest egg.

·       Tax Planning: Are you maximizing your tax-deferred investment accounts? Whether you are contributing the limit to your IRA (Individual Retirement Account), 401(k) retirement plan at work, or pension (for larger business owner contributions), these are tremendous tax-deferral savings vehicles. By squirreling away savings during your prime earnings years, your investments can enjoy the snowballing effect of compounding over the long-term.

·       Retirement Timing: When do you plan to retire? Do you have enough money to retire, and what type of liquidity needs will you need during retirement? Figuring out the timing of Social Security can be another variable that may factor into your retirement timing decision (see also Can You Retire? Getting to Your Number).

·       DIY or Hire Advisor: When it comes to managing your investments, do you plan on doing it yourself (DIY) or hiring a financial advisor? Many people are not adequately equipped to manage their own investments, however identifying a proper financial advisor still requires significant legwork and research as well. Check out a recent webinar I produced with key questions to ask when looking for a financial advisor (Click here: Questions to Ask When Looking for a Financial Advisor).

In summary, there are a lot of frightening news headlines, but you will be better off focusing on those things you can control. The harsh reality is Americans are not saving sufficiently for retirement. It is true, you can survive off a smaller nest egg, if you plan to subsist off cat food and live in a tent, but most Americans and retirees have become accustomed to a higher standard of living. Also worth noting, we humans are living longer. Thanks to the miracles of modern medicine, lifespans are expanding, with the pandemic caveat. But inflation remains stubbornly high, and you do not want to outlive your savings. Drained savings during retirement may just land you a job as a greeter at Wal-Mart in your 80s.

Although the summer travel season is fast approaching, if you feel you are not satisfactorily prepared for retirement, this is a perfect time to invest attention to this important area. Do yourself a favor and devote at least as much time to answering the key retirement questions above as you do in planning your summer vacation. You may be partying like a rock star now, but if you have not been properly saving for retirement, I will ask you the following question: During retirement, do you want to vacation at the Motel 6 off a local freeway or would you prefer vacationing at a Four Seasons somewhere in Europe? I know what my answer is.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

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DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.