Flipping the switch from work to retirement mode is not quite like flipping a switch to light a room. It's not a black and white transition, and neither is handling your investment accounts during the change.
Have you asked anyone recently retired about this adjustment process? It can be difficult in fact, many of us are so hard-wired to work that we don't want to quit, not to mention that many will need additional jobs to supplement social security. A 2014 report from the American Psychological Association showed that, for one reason or another, about 60% of workers over 60 will look for other jobs later in life. For some, it's economic necessity, but for many others, it's a way to stay active, fulfilled and happy!
I suspect that many of those disenchanted retirees follow a similar pattern: hit the local coffee shop in the morning, hang out with the other retirees, drink too much coffee, listen to the same stories over and over, and, finally, one morning, you end up saying to yourself, "Is this all there is to life?"
Our way of thinking about retirement needs an overhaul. We are geared to think of retirement the way it was defined 100 years ago: work until you turn 60 years old (never mind that life expectancies were 46 back then), then completely retire from work. We persist in asking our retirees to make what author Mitch Anthony (The New Retirementality) calls 'age-adjustments,' or to simply turn off who they are and the activities that define their lives, simply because they reached the age of retirement.
In reality, retirement is more of a process with three phases.
The first phase occurs between 50 and 65, when the kids leave and the focus for many of us becomes wealth accumulation. At this time, we concentrate on building the nest egg, paying off education bills, and thinking about where and how we wish to live the last third of our life. Our investment focus is growth-oriented, and the larger portion of our portfolios will be in equities.
The next phase extends from age 65 (when social security kicks in) to 75. Real change begins, as we leave the work life behind, without necessarily abandoning it completely. At this point, we begin to trade leisure time for human capital with the latter defined as the present value of future earnings.
This is probably the most misunderstood phase of retirement, because to retire does not simply mean quitting work. It is more about the choices we make for the use of our time.
A study done by the Gallup organization found that 60% of retirees want to become entrepreneurs or seek a new job to fulfill their dreams, 10% seek a new work-life balance, 15% hope to enjoy a traditional retirement and the remaining 15% do not want to retire. Clearly, this phase is not about quitting work; it's more about having the freedom to do what we want, without having the 'economics of the endeavor' as the chief motivating factor.
From an investment perspective, those who continue to work and earn, at whatever they choose to do, are continuing to build human capital and can afford to take more risk with their investments. Their portfolios should reflect a bias toward equity or growth investments, consistent with their willingness to accept investment risk. As their production of human capital tapers off, and the need to depend upon investments for support or other retirement goals increases, this more risky strategy should begin to give way to less risky investments.
The third and final phase of retirement begins about age 75. Now health concerns manifest themselves, and we cut down on the expensive travel and recreation that we pursued with such abandon 10 years before. The option of generating human capital has all but disappeared, and with it, so should the risk in our portfolio. This does not mean that we throw out all stocks in favor of bonds.Instead, it means that we begin to take a more cautious approach to investing, with preservation of capital as a key goal.
A person's life, as with all things in nature, has seasons. Your investment strategy should reflect these seasons as well.
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