When I’m not blabbing away about personal finances, one of my hobbies is running. I love it for a multitude of reasons. Obviously, there are many health benefits, but it’s also where I get some of my best thinking done. No wife, no kids, no tv, nothing. Just me and my thoughts. I’ve mentally worked through some of my life’s toughest challenges and had legitimate epiphanies while on some of my longer runs. It really does do the body and mind good.
There are typically three types of runners. Of course, everyone is a bit different, but we’re going to stick with three for my purposes today.
First, you’ve got the burners; these runners come out guns a blazing but then barely hang on to their pace or slow down dramatically before the end of the race. They’ll be the ones that take off like they were shot out of a cannon but barely drag themselves across the finish line. Most runners are not in this group.
Then you have your savers. I would say most runners fall into this category. Attempting to avoid the mistake of the previous burner group, savers will come out at a comfortable pace they can maintain for the duration of their run. Looking to not run out of energy by the end, savers will be left with a lot in the tank when they finish the race. Many times they will regret not being more aggressive and finishing with a better time.
Finally, you have the strong finishers. Similar to the savers, they will come out at a good but not too aggressive pace. However, what these runners will do is get stronger as the race goes on. Each mile faster than the last and finally, turning on the afterburners for the last few miles to really empty the tank. They leave nothing on the table and get the most out of their races. Many runners will fall into this category, but not nearly as many as the saver’s group.
So why am I rambling on about running? You thought this was about retirement investing, right? Well, I love a good analogy, and I’m certainly getting the investing part.
I’m looking at my retirement like a race. I certainly don’t want to be a burner, blowing through all my cash and barely hanging on at the end. Being a saver isn’t so bad; it works out for most of us, basically taking a nice steady pace through our savings. But wouldn’t you rather be a strong finisher? Instead of leaving money on the table to “play it safe,” stay aggressive and really give it everything you got; I’ll explain…
Typical Way of Retirement Investing
For decades the typical way of thinking about investing is to be aggressive when you are younger, and as you get closer to retirement, you start to peel back a bit and invest in safe investment options as to not lose the value of your investments, it’s solid, rational thinking for sure, kind of like the saver group in running (see, told you I’d bring it back around). Stocks, certain mutual funds, and ETFs are your typical aggressive investing, while bonds and dividend-paying options are typically seen as your safer investments for retirement.
So, where does that get you? Obviously, the goal for most is to accumulate as much wealth as possible and then retire. You then use that money to live off of for the rest of your life, and for most of us, it works out just fine. Maybe you have a little bit left over at the end(like a running “saver”), leave it to any offspring when the time comes, and call it a life. But what happens if your race of life is longer than expected and you need to keep going? Or you run into medical issues toward the end of your life when funds are low? Wouldn’t it be nice if, instead of coasting to your 90’s with your retirement fund, you made ten of thousand or even hundreds of thousands more before you let off the gas pedal?
Being a “Strong Finisher”
Risky investments could drop in value quickly and leave with you nothing. But, to me, there is a difference between risky investments and aggressive. Would I invest in something that could be worthless in a few months during retirement? Hell no. However, stocks and other investments that are typically seen for younger investors shouldn’t be let go of just because you’ve hit retirement age.
And why is that, you might ask? Well, I’m so happy you did, let me explain because I have a few reasons.
I’m sure over the many different investing articles you’ve read, you’ve read the phrase, “It’s not timing the market, but time in the market.’ Probably countless times you’ve seen a chart like this one.
So, why now that you have all this money and TIME IN THE MARKET, would you stop your momentum? Seriously, think about it. It took you decades to get to the point where you could watch that line shoot up, and you’re going to flatten it out? Remember, I’m not saying to put your money in something that could be worthless overnight; just keep it in the same investments that got you here in the first place.
But this money is for my retirement; what if there is a bear market and I lose lots of money? I want to be a running “saver” and make sure I have something at the end. Here’s my answer, more than likely, if you follow this advice, you will lose lots of money, but guess what will happen next, you’ll make back even more money! Yes, if you keep investing like a youngin’, you’re bound to lose lots of money since you have so much invested, but here’s the thing, you still have plenty of time to make it back! Finish strong!
When you hit 65, in theory, you’ll have a mountain of cash at your disposal. Let say you earned an even 1 million, yup you were that good. Now you have 30 years to go throw that mountain of cash. Using the 4% rule, let’s say you are going to withdrawal about 40k per year, great. Now, after two years, you’ve taken out 80k, but the market has done its average thing, and you’ve gained about 7% on what’s left. My math isn’t perfect, but that would leave you with more money at about 1.05 million dollars.
Let’s says you can’t live on 40k and take out 80k per year. Still not perfect math, but after two average years, you’ll be down to roughly 967k, still doing good.
But, as we know, the market doesn’t do great forever. Now we hit a bear market, and you lose 36%(average bear market loss). Let’s work with the 80k scenario as the value of your nest egg was actually being reduced even with a good market. Now you’re down to about 619k, minus your 80k for living, roughly 539k for easy math. Not doomed, but not great, right.
Here’s the thing to remember, the stock market always comes back! Your average bear market is only about ten months long and historically speaking, it’s taken about 26 months to recover those losses; that’s just over two years. You’re only 67 at this point; you’ve still got decades left; two years is nothing! Better yet, if you take out the worst bear market in history, the great depression, the average time to recover your losses is only 20 months or not even two years!
So, all in all, you’ll be down for about 30 months, less than three years, but then comes the fun part. The average bull market lasts for just about four years and gains 112%, you’ll still have plenty in the war chest, and then you can watch it come roaring back, as long as you didn’t change your investments, right? Otherwise, you’ll be missing out on tons of gains. So, yes, your losses would have been less, but the gains at this point would be worth it.
Now, I’m not saying to stay with the stocks until the very end, no at some point, you will need to have some guaranteed income and play it safe, but you just don’t need to do it before you retire and certainly not at 65 since you still have plenty of time to make back any loses and continue to make money.
Be like the running “strong finisher” and make the most significant gains at the end of your investing career instead of building up all that momentum and coasting to the end.
Could it be a bit scary? Sure. But doing things differently always is. Otherwise, more people would do it. It’s a smaller, elite group, but being a “Strong Finisher” is certainly something to strive for, wouldn’t you think?
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.