Retirees are Different
By Brad Thomason, CPA
1/16/2015
Early in my career I recall hearing the phrase, “The difference is just commas and zeroes.” The person who said it was making the point that what was going on in a small company was the same as occurred in large corporations. At the time, it seemed like a reasonable notion. But I’ve always remembered it because it wasn’t too much later that I started to realize just how wrong he was.
When I began doing audit work at Ernst & Young I got my first exposure to large organizations. Both my employer and our clients were far bigger than anything I’d ever had any contact with during my time interning at a local firm. The size of these entities created inter-relationships and complexities that a small business owner would never have to deal with in a million years. Sure, both types of companies had to hire employees, sell goods, and bring in more than they spent. But the computer systems, lawyers, internal controls, management hierarchy and processes for supervising workers was astoundingly more complex for large companies than small.
It didn’t take too long before I came to understand the very real differences that exist when dealing with entities that are different in size. In fact, they are far more expansive than anything that a handful of commas and zeroes can explain.
The same can be said of different kinds of investors. Individual investors vary from institutions and other professional investors in very significant ways. Furthermore, even among individuals, the investor who is building a nest egg is not the same investor as someone who already has a nest egg and is working to convert it back into life-long income. At least they shouldn’t be thought of as the same.
But unfortunately, a lot of advisors out there don’t understand this most fundamental difference; and as a result they give advice to the one type which is really more applicable to the other.
If a retired person has what they need for funding the life they want to live, then it becomes hard, in our view, to justify any activity which would put that condition in jeopardy. As a practical matter, it is probably impossible to move all risk from the equation. But that doesn’t mean that there aren’t steps which a retiree can take to dramatically dial that risk level down. One of the easiest is moving out of stocks.
The stock market is great for building wealth. If you are growing a nest egg, or if you run a professional portfolio which is going to remain intact for decades or longer, then stocks are probably a fine place to allocate some of your money (though even these types of investors need to diversify into other asset classes, too).
But retirees are different because of the need to withdraw from the portfolio for living expenses. Retirees who have to make withdrawals during market downturns burn through their money much faster than they had originally projected and don’t get to participate in the eventual recovery that those other investors are hoping for. The loss is permanent, and may be enough to flip the situation from probable win to definite loss.
The easiest way to avoid that? Don’t be there in the first place. Explore what’s available in the alternative investment space. Many of the assets in this category have more stable historical price trends, and often have strong income or cash flow aspects too.
Many retirees understand that their situation is fundamentally different than other investors, but they invest in stocks anyway because they feel like they don’t have a choice. But they do have a choice. So the case for remaining in stocks is not a nearly as strong as the case for looking into the alternatives.