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  • Mark Fonville, CFP®

How to Invest in Retirement: A Comprehensive Guide

How to invest in retirement: A Comprehensive Guide

When you think about how to invest in retirement, what comes to mind?

Chances are, it’s something related to how to invest so you don’t run out of money. If so, you're not the only one who feels this way.

Get your Retirement Checklist of over 30 things that you need to think about for your retirement.

In a 2020 investor survey by Dimensional Fund Advisors, 11,236 investors were asked to state their greatest fear about personal finances.

On average, 49% of investors said that not having enough money to live comfortably in retirement was their number one financial concern!

Greatest fear about personal finances for retirees.

Unfortunately, many people don’t know how to invest in retirement even though they may have significant investable assets.

Before we dive into how to invest, it’s essential to identify the obstacles you face.

Here are three significant obstacles we often encounter when helping clients plan for retirement:

  • Investor behavior gap – Poor investment behavior causes many investors and professional money managers to underperform market returns.

  • Sequence of return risk – Even more important than the returns you receive, the order in which you recieve those returns can mean the difference between maintaining financial security in retirement and running out of money.

  • Income taxes – High taxes and inefficient tax management can destroy your hard earned savings.

Let’s take a look at each obstacle to help you understand what’s at stake before you learn how to invest in retirement.

Investor Behavior Gap in Retirement

Dalbar, a leading financial research firm, released its latest report on investor behavior back in 2019 and the findings, though not surprising, do not bode well for future retirees.

The study showed that the average investor underperformed the market—by a considerable amount.

For example, in 2018, the S&P 500 lost -4.38% vs. the average stock market investor’s return of -9.42% for the year. This means that investors unperformed the market by 5.04%!

The 2019 study results weren’t an anomaly, unfortunately.

If you want to know how to invest in retirement, it’s important to know that the odds of achieving good long term performance are stacked against you.

Over the 20-year period ending December 31st, 2018, the S&P 500 had an annualized return of 5.62%, while the average stock investor’s account balance gained just 3.88% per year, a significant gap.

There are a variety of reasons for investor performance lag, but poor investor behavior tops the list.

The study found that investors hung onto their stock and bond positions for just under four years before selling them for another investment. This frequent trading, or what we call turnover, can ruin the potential for long-term growth.

So much for long-term investing!

Additionally, many investors in retirement gave into “panic selling,” pulling money out of an investment at the worst possible time because market commentators stoked their fears.