The other day I met with a potential new client. The woman was in her early 60s and was recently divorced. She received a lump-sum settlement on her divorce and she came in to discuss with me how the money should be invested. She has never invested money before and has never had an interest about money until now. As with all new clients, whether they are seasoned, sophisticated or novice investors, I generally start the conversation the same way and that is to discuss goals and objectives. After all, if you don’t know what someone is seeking from their money, how can you invest it? It’s sort of like packing for a vacation before you know where you’re going; it just doesn’t make sense. The same thing applies to investing. You can’t invest unless you know what you want from your money and the risk level that you feel comfortable with.

The potential client told me that her main goal was for retirement. She was going to work for a few more years and then retire and collect Social Security. My next question for her was when she anticipated needing income from the portfolio. As I explained to her, the fact that she is going to retire is neither here nor there; rather, the key is determining when she is going to need income from her investments.

One of the mistakes people make with their portfolio is that they assume that once they retire they should no longer invest in equities but rather, pull their horns in and invest in things such as CDs and U.S. treasuries. In fact, my potential client was stunned when I had recommended that upwards of 50 percent of her portfolio should be invested in equities. As I explained to her, it is not sufficient that she only worry about the first 10 years of retirement but rather, she has to have a portfolio that will provide her with a rising income the rest of her life; which could be 30 plus years.

The strategy of becoming ultra-conservative in retirement is no longer valid. If you go back 50 plus years ago when people only lived five to 10 years in retirement, a rising income was not that important. After all, back then someone in their 60s was considered old. Fast forward to today and we look at age differently. In addition, a 20 to 30 year retirement is much more the norm than a five or 10 year retirement. When you factor that we’re in an era of unprecedented change, it is more important than ever to have a strategy that provides you with a rising income for the rest of your life and the way to do that is to make sure that you have equities in your portfolio.

I recognize the common belief of retirees is that if the market goes down, they don’t have time to make up the loss. That may have made sense 50 years ago; it doesn’t make sense today. Not only are markets different than they were 50 years ago, but the mere fact that we all are living longer is something that has to be considered. In the old days when you retired, the older you got the less money you needed. That is the exact opposite of today. The longer you live, the more expensive life will become. If you don’t prepare to have a rising income throughout your lifetime, you could find that the last decade or so of your retirement can be very challenging. After all, as I’ve always said, we live in the greatest country in the history of the world; however, there’s nothing worse than to be old and poor. Therefore, when you do retire, in order to prevent becoming old and poor, you need to at least have a portion of your portfolio invested for the long term and the best way to do that, despite the volatility and the unpredictability, is through equities.

Good luck!

If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.