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The Difference 50 Makes
Age 50 is a turning point. And, it is a time of opportunity. If you approach it with some thought and preparation, you can begin a journey toward lifelong financial security. You still have the chance to build your portfolio to a sufficient size if you haven't done so. If you have, you can take steps to protect those assets and turn them into a stream of income for retirement.
Age 50 is also a time of consequences. At this age, actions have greater impact. A 30-year-old who loses 85 percent of his $1,000 investment in technology stocks can replace those assets much more easily than the 75-year-old who places the same trades and loses $850,000 of his $1 million retirement fund. Investable sums tend to be larger after 50. Losses hurt more. Money lost cannot be replaced in the same way it was acquired. This realization alone can help give you invaluable insight as to how to approach your own investment decisions from this point forward.
If you saved all your working career and chose an investment strategy that lost you a significant amount, how would you replace it at the age of 70? Would you go back to work? If it took you 20 years to accumulate those assets, how long would it take you to replace the amount you lost? When considering your personal situation, you may find it helpful to think of your assets in terms of how easily you could replace them if necessary.
The same is true for assets you might acquire through an inheritance, buyout, divorce or legal settlement, pension distribution, sale of a home, sale of a business, or an insurance deathbenefit. If you lost a substantial part of this money, would you be able to replace it in the same manner? Usually the answer is no.
It helps to think of lifelong savings and assets acquired through once-in-a-lifetime events as "irreplaceable," since that gives them a certain importance that distinguishes the type of investing that you might have done at a younger age. Irreplaceable assets is a term I use to distinguish investments made from current earnings. Irreplaceable assets must be invested with more care, no matter the dollar amount involved. At this point in life, the problem investors need to solve is not how to make money, but how to make it last. At this point, there is less margin for error.
TIPWhen considering your personal situation, you may find it helpful to think of your assets in terms of how easily you could replace them if necessary.
Goals may also be different at this stage of life. A young person normally supports himself* through current earnings and invests for growth. These days, a retired individual will probably need to support himself with his own private savings, at least in part. At some point after 50, your portfolio may need to be structured to produce cash flow for living expenses.
In some cases, a person over 50 may take on more risk than is prudent, probably because he did not build sufficient assets when young. A younger investor will be more focused on compounding to help build assets over time. Due to a shorter investment horizon, an older individual cannot expect to see the multiplier factor create as much wealth as he would like.
NOTECompounding is the mathematical phenomenon that affects rates of growth of an investment over time. It is the multiplier effect.
Changes in Pension Expectations
Before retirement, your living expenses are covered by your paycheck. Not too long ago, workers could expect their pension to support them through retirement. When added to Social Security retirement benefits, such pensions generally covered the lifelong expenses of long-term employees.
That was yesterday. Today, there are four strong reasons why this is no longer economic reality:
- People are living much longer than 68 or 70, the life span of a working male just a few years ago.
- People change jobs much more frequently and do not qualify for lifelong pensions of any significance.
- Fewer companies offer lifelong pensions.
- Social Security benefits may not be meaningful. The maximum annual benefit you will receive from Social Security usually pays for only a fraction of your living expenses.
Realistically, today, an individual must look to himself as the primary source of retirement income.
CAUTIONRealistically, today, an individual must look to himself as the primary source of retirement income.
While it is always important to invest against a plan, strategy becomes even more important after 50. A 30-year-old may get away with occasional stock picking without a plan. But, at 50 and beyond, random activity will not be very productive. At this stage in life, it helps to have a good strategy that takes into account your particular situation based on your particular needs in retirement.
Monitoring your progress also takes on more importance after 50. Many investors go through life without knowing whether they are saving enough for retirement. Part of the problem is that they have not discovered a way to monitor their results. At this time in life, you need to monitor against your own personal goals, instead of arbitrary benchmarks set by common wisdom.
Regular monitoring against personal goals helps assure that you are making the right investment decisions. Monitoring is also important for another reason. Reviewing your results regularly gives you a chance to correct an error or a bad decision if you need to do so, before getting too far afield. At this point in life, you need to limit mistakes to a minimum, by catching them before they cause irreparable damage.
NOTEA benchmark is a standard used to evaluate the performance of investment. A common benchmark for stock performance is the S&P 500 index.
Today, you need to look to your own assets as a source of financial stability going forward into the future. In some cases, you may need to pay for a good part of your own living expenses with the money you saved throughout your life. Many people who are entering their 50s have been saving money through their company savings plans, Individual Retirement Accounts (IRAs), and personal investment accounts. Lawyers, doctors, businesspeople, nurses, teachers, and social workers, alike, often have accumulated sizable sums of money for retirement. Acquiring or having significant savings does not mean you have the wherewithal to know what to do with it.
In Chapter 2, let's take a look at common misperceptions about the financial markets and then in Chapter 3, let's consider what you can reasonably expect to achieve with your own investments.