As a financial planner, I meet with several clients at different stage of life and with different investor profile. Some of them come to see me to borrow money and invest massively in index funds. Some others are panicking and think that the world will collapse. A lot of clients are asking me the following question:
“I’m about to retire, should I withdraw my money from the markets now?”
If you have asked your financial planner, he already told you that you should definitely not withdraw your money from the market right now. However, you probably have a small doubt that he is thinking about his commission being affected by withdrawals than your own good. Well if it’s the case, you should be better of getting rid of your financial planner now and start looking for another one.
However, I can tell you that he is right (why leaving your financial planner then? Because you don’t trust him!). The very first reason why you should deal with a financial advisor is trust. Then, you look which kind of answers (and explanations) he gives you to your financial questions.
Even if you are about to retire, you won’t be withdrawing all your money the first year.
People have the false belief that they should revise their investment strategy upon retirement. That they should get most of their money into fixed income and other secure investment product. The truth is that if you do that at the age of 55, 60 or even 65, chances are that you will survive your capital (unless you are awfully rich or awfully cheap!). Don’t you want to live the life you always dreamt about? This is why you need a good portion of your money invested in the stock market.
When we are looking at current CD (certificate of deposit) rate, we are barely making 3 or 4%. After the evil inflation got its dirty hands over your yield, you are left with almost nothing. The stock market always gave about 9% over long term (10 year +). Therefore, even if you live through fluctuations, you are still better off with stocks or aggressive mutual funds than with CD’s and bonds.
Let say that you have 1M$ at retirement. If you plan on withdrawing $35,000 every year and your investment drop by 10% the same year, you will still get 868K at the end of the year ((1M$ – 35K) times 90%). Then, if your investment portfolio increases the next year by 10%, you will end the year with 916K. However, if you withdraw your money from the stock market after the first year and you go into a 3.5% CD, your investment will worth 862K after the second year. That’s 50K, or 18 months of retirement gone because you leave the stock market at a wrong time!
The key here is not to try to time the market, but to not cash in your money from the market when you are in a down slump. Wait until it goes back up and then, you will be in a better position to get more secured.
image source: tornatore
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