Investors are often driven by emotions, and numerous studies highlight how our human nature can lead to poor investment decisions and pitfalls. Behavioral finance research acknowledges that systematic biases, including loss aversion, fear of regret, and overconfidence, can have detrimental effects on long-term financial goals. Simply put, we tend to buy and sell investments at the least opportune times. The key to achieving long-term success is to adopt a robust and comprehensive financial plan and stick to it.
This is a tale of “John”, a real-life example of what not to do in retirement and how it cost him six figures.
In late 2021, John became a client of Cyr Financial Wealth Advisors. Our retirement team, consisting of a Certified Public Accountant (CPA), two licensed financial advisors, and a Chartered Retirement Planning Counselor (CRPC), dedicated weeks to John and his wife, guiding them through our AIM Retirement System TM. This system, the culmination of over two decades of experience in financial planning, is designed to address all aspects of retirement, encompassing investments, guaranteed income for life, tax considerations, cash flow management, estate planning, and social security, among others. Using one of the industry’s top rated financial planning software packages, our trademarked planning process aims to optimize all these components to enhance the probability of a successful retirement.
During John’s initial months as a client, he was pleased with his experience, mainly due to the rising stock market. However, as we all know, 2022 turned out to be the worst year since 1937 for investors. Such conditions tested even the most seasoned investors, and for John, the consequences were potentially devastating.
In the first 9 1/2 months of 2022, John witnessed a nearly 20% decline in his portfolio, which was initially evenly split between stocks and bonds. By mid-October, the S&P 500 had fallen by over 15%, and the Barclays US Aggregate Bond Index had plummeted by over 22%. Although John was advised of the potential for such a downturn and acknowledged he had been made aware, he succumbed to panic.
Despite our advice, John insisted on moving most of his portfolio into a guaranteed investment, seeking peace of mind. What John didn’t realize at the time of his decision; the U.S. stock market was about to rebound more than 26% over the next 9 1/2 months.
Let’s recap: From January 1st, 2022, to July 31st, 2023, the balanced portfolio we had initially recommended for John would have resulted in approximately a 5% to 6% loss. While not ideal, it was a reasonable outcome considering he had just been through one of the most challenging years on record for most investors. However, due to John’s emotional decision, his portfolio was down nearly 16%. Ultimately, this choice cost John and his wife over $100,000.
It has been said that I have a fiery passion for retirement planning. As a financial advisor, I take pride in regularly sending informative videos on various topics I find compelling and helpful. John’s experience inspired me to create a recent video discussing the importance of maintaining a long-term perspective. This video emphasized the following key points that I believe are critical for all investors, particularly those nearing or in retirement.
· Using John’s suggested portfolio, assuming no fees, no distributions or additions and no taxes. Over the last 20 years (10/25/2003 to 10/25/2023) the 50/50 balanced portfolio would have turned $500,000 into $1.6 million. All despite…
- The ‘07/’08 period where the U.S stock market dropped over 50%
- The 2020 covid-induced 30% drop in 30 days
- The previously mentioned 2022
· The average length of an AIM Retirement SystemTM plan at Cyr Financial Wealth Advisors is 30 years. While this may seem excessive, consider statistics from the Social Security Administration life tables which show that for a 65-year-old couple, there is a 47% percent chance that at least one spouse will reach the age of 90, and a 20 percent chance that one will live past age 95. No one knows what the market will do next week, or next month, or even next year. However, historically markets perform rather predictably over extended periods of time, such as the 30-year time horizon of my average financial plan.
· The AIM Retirement SystemTM attempts to shift a portion of a retiree’s nest egg into guaranteed income products which are guaranteed not to decline in value. They are insured by state insurance funds. At a certain point in retirement, these products turn into a guaranteed check for life… payable to both spouses… even if one lives to 105! What’s more, in certain cases, the payments increase annually to deal with inflation. I have coined these products “Mailbox Money”. The check comes in the mailbox every month for the rest of your life, just like Social Security.
· When going through our planning system, the goal is to cover expenses in retirement with guaranteed income such as pensions, Social Security and the aforementioned mailbox money. In going through this process, we are attempting to maximize income stability. For example, if the guaranteed income in a retirement plan leads to 85% income stability, theoretically only 15% of the retiree’s income needs is dependent on his investments in stocks and bonds. This process tends to lead to much higher chances of retirement success. Simply put, retirement planning is about the need… not the greed!
In brief, retirees should steer clear of the emotional pitfalls associated with investing. It is of utmost importance to seek out a fiduciary financial advisor who specializes in a comprehensive and meticulous retirement planning approach. If you harbor doubts about your advisor or lack a well-vetted 30-year plan, take the necessary steps to find the right one. And, above all else, remain committed to the established plan.