The Mother (and Father) of All Retirement Investing Misconceptions
September 2022
Broadly diversified, high quality, long-term equity investing must progressively enrich the disciplined, patient retirement investor, in both the accumulation and distribution phase of life. It cannot do otherwise.
Assuming a temperate withdrawal rate and robust cash reserves, this enrichment is all but a force of nature, and will surely convey growing wealth to the next generation of a family, and the next, unless and until a succeeding generation loses the formula.
Yet we see all around us people who had remunerative careers, and who retired with fairly substantial assets, running out of money and ending their lives in circumstances straitened almost to the point of penury.
Your and my default explanation of this conundrum—inarguably true as far as it goes, but no further—is the very reason we were put here: human nature is a failed investor. Simply stated, the intuitive and quite overwhelming perversity with which people process the experience of investing dooms them. (Again, it cannot do otherwise. It is a force of nature—unless one of us intervenes.)
Thus we might accurately say that human nature itself is the Great-Grandfather—the uncaused cause—of All Retirement Investing Misconceptions.
But closer to home—in the lives of a soon-to-retire couple, on their way to your office even as we speak—are two corollary and sharply pointed misconceptions. If you will, they are the Mother and Father
of financial failure late in life.
First, of course, is people's grotesque overestimation of any lasting financial damage that can be done to their retirement by “volatility,” also misperceived as “the risk of the stock market.” This tracks back to the fundamental inability of human nature to distinguish, during episodes of market stress, between temporary decline and permanent loss. That perceptual failure has the tragic effect of rendering permanent loss a self-fulfilling prophecy.
The other—subtler, and thus in its own way even more deadly: people wildly underestimate both their own longevity as well as the spiraling cost of care in the last decade of life. How often these days do we encounter a mid-60s couple who—immediately after bewailing the financial and emotional stresses of caring for her mid-90s mom—insist that in their own retirement they prefer to be mostly in the “safety” of bonds? Isn't that marvelous? The Mother and Father of Retirement Investment Misconceptions from the same people, within 15 minutes!
All this suggests to me that we advisors should consciously practice speaking about these two great misconceptions together—twinning them into essentially one concept: too much worry about the one thing hand in glove with too little worry about the other.
Try it out a few times. I think it has the potential to bring the essential retirement planning conversation into a new and much sharper focus.