Have you ever had a friend tell you about the new “awesome” restaurant in town? And they are all-in “gung-ho” about it? So much so that they can’t see how anybody in their right mind would not think this is the best restaurant in town.
I have. And it wasn’t just one person. It was a lot of people that loved this restaurant. So my wife and I ate there one night.
It. Was. Awful.
Either they ran out of their normally served food and were heating up TV dinners, or everyone in my town had forgotten what good food tasted like.
It wasn’t for me. Not my cup of tea.
Everyone is different. Everyone has different tastes.
Not only that, but when it comes to a retirement investment plan, everyone has different needs.
Since you are different from everyone else, the same investment that is perfect for someone else may not be good for you.
So here is a list of 5 things that make a retirement investment good for you
#1: It meets your needs
If you are a racecar driver, you have different needs in what your car should provide. If you are a young family with 4 children, you don’t need a truck, you need a minivan. And if you work in construction you don’t need a hatchback. You need a rugged truck.
This same principle applies to investments.
If you have a lot of guaranteed retirement income sources that easily cover your monthly retirement expenses, you probably don’t need an immediate annuity that pays you additional income.
And if you are so risk averse that you can’t stand even a small decline in your portfolio value of 5%, then you probably don’t need to have money invested in the market.
A retirement investment will be good for you if it meets your needs. If it doesn’t, then you don’t need it. Even if it is perfect for someone else, it may not be right for you.
#2: It is something you feel comfortable owning
One of the hip fashion things nowadays is “skinny jeans.” At least that’s what I’m told. These are tight jeans.
Here’s a story: I had to buy some new jeans last year. I really liked my current pair, but they were worn out. So I looked at the size of them, and I looked at the style and specific number of the jeans. I then hopped online and ordered two pair.
When they arrived… they were skinny jeans. They hugged every inch of my legs.
What had happened? Apparently the manufacturer had changed the “cut” of the specific style of jeans. It seems “relaxed” fit means something entirely different today than it did in the past.
I sent the jeans back.
I didn’t care what the current fashion trend was. I didn’t feel comfortable wearing these jeans.
With investments it can be the same way. Everyone has their reasons for not wanting to own a certain type of investment.
- Rental real estate? “No way am I dealing with renters!”
- Annuities? “I read someone say that they all stink so I don’t want one!”
- Mutual funds? “I’m not putting any of my money at risk in this crazy market!”
- Cash? “Banks won’t pay me anything for cash. I’m not holding much of it!”
You get the idea. Everyone is different and has their reasons for feeling a certain way. And very often the reasons are quite valid, based on years of experience of things that have happened to them in the past.
A retirement investment is not good for you if you do not feel comfortable owning it.
#3: It fits into your overall financial plan
If you put a plan together that works and you are comfortable with it, the investments inside the plan must work together to achieve your goals.
If you (and your financial advisor) put together a plan that is projected to work for you, then you want to make sure you don’t mess up the plan by replacing an investment inside the portfolio without much consideration.
Your portfolio may be projected to generate “X” amount in returns over a 30 year period. If you sell some of the highest growth potential investments in it and buy something very conservative, this may cause your portfolio to not generate the necessary growth.
Another example would be that you need to keep expenses down in your investment. Perhaps that is necessary to get the growth you need to fund your retirement.
But then you buy a traditional variable annuity with high fees. Some can even have fees exceeding 4%! This can throw of your probability of having enough money to meet your retirement expenses.
A retirement investment is not good for you if it does not fit into your overall financial plan.
#4: It can be understood
There are 2 different ways to “understand” something. The first way is to understand all the complexities of how it works. The second way is to understand how it benefits you.
For example, I don’t know all the complexities of how an automobile works. I understand there is an engine, a 4-stroke cycle that combusts gasoline, which turns a shaft that allows my wheels to turn. But if I had to look under the hood of my car and point out what everything does and how to fix it if it broke, sorry… can’t do it.
But what I do know is where to put the key. How to put it in gear. How to gas it up when the tank is empty. I know how to turn the wheel telling it where to go, and most importantly how to apply the brakes.
And I understand the big benefit: It gets me to places.
A retirement investment can have a certain level of complexity. Annuities can have a lot of stuff going on behind the scenes, such as different interest crediting methods and income guarantee calculations.
But at the end of the day, as long as you understand how they benefit you, that’s what matters. As long as you understand they give contractual income guarantees and that “fixed” annuities do not have market risk, that’s the most important thing.
Same thing with market based investments. You may invest in a mutual fund that tracks the S&P index. There are a lot of funds that do that. They have different operating expenses. They must manage their fund with certain rules that cause them to as closely as possible track what the S&P 500 does.
You may not understand all these nuances. But you should at least understand this: A fund that tracks the S&P 500 is giving my portfolio exposure to the large-cap U.S. equity market.
A retirement investment is not good for you if you don’t understand how it benefits you.
#5: It does not have unnecessary benefits that cost you money
There is no sense in paying for services you don’t need.
Have you ever made a New Year’s resolution to get in shape? Then you go buy a year-long membership at the local gym.
By February most of us have quit going to the gym. But guess who’s still locked into a 12-month contract paying gym dues for a service that is never used?
The same thing applies with a retirement investment. If you have a variable annuity that has a high fee for an income rider that you will never need, then why pay for it?
It could cost over 1% of your account value every year. That can add up.
Why throw the money away if you don’t need it? Before you invest in something, make sure that the benefits you are paying for will actually be used. If you don’t need any additional income guarantees in retirement, then there’s no sense paying for an income rider.
A retirement investment is not good for you if its benefits are unnecessary and cost you extra money.
Use this 5-point list before you make another investment for your retirement. Make sure whatever you invest in fits into your overall retirement plan.
It’s really not that hard to have a plan put together. It just involves writing down your income needs and your expenses, understanding how much in guaranteed income sources you have, and understanding the returns and risk of your investments.
If you write these down you can do a quick and dirty calculation to estimate how long your portfolio may last in retirement.
Or if you need some help with this, you can CLICK HERE and choose a time to chat with me. I can help point you in the right direction.