EP 60: Investing in Your 60s

by Peter Lazaroff | Aug 10, 2022 | Podcast

In your 60s, retirement is approaching quickly. The decisions you make in the few years leading up to retirement and the first few years in retirement are potentially the most impactful financial decisions of your lifetime.

Listen now and learn:

How to prepare for market downturns before retirement
A simple strategy for projecting future expenses
Where to download a comprehensive retirement readiness checklist

Play the episode below or read the detailed show notes.

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RELATED CONTENT: Check out past episodes in this series for Investing in Your 20s, Investing in Your 30s, Investing in Your 40s, and Investing In Your 50’s.

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Show Notes

This is the fifth episode of the Investing by Age series.

People go through different financial stages at different ages, so you will likely find useful information in the episodes outside your age bracket.

If you’re in your 60s, you might find that aspects of episodes on investing in your 50s and investing in retirement are relevant.

But unlike other episodes, this episode is influenced by an eBook I wrote that is specifically for people planning to retire within the next 10 years:

What To Do If You Want to Retire Soon

I can’t cover everything in a single podcast episode, so make sure you download my free retirement guide. There is a comprehensive checklist for people nearing retirement at the end that everyone loves.

The decisions you make in the few years leading up to retirement and the first few years in retirement are potentially the most impactful financial decisions you can make.

As the years count down on your career, nerves set in, and all sorts of questions start flooding your head. Hopefully, this episode along with my comprehensive retirement checklist can help give you more confidence.

With that, let’s dive into the essential aspects for investing in your 60s (assuming you haven’t retired yet).

1. Prepare for Market Downturns

In some sense, everyone should be prepared for downturns, regardless of age.

After all, market losses are incredibly normal. Historically the S&P 500 has lost at least 10% about once every 12 months, 20% every 2-3 years, and 30% or more about once a decade.

If you’re a true long-term investor, you don’t need to panic when these routine losses happen, nor do you need to worry about predicting when or why they will occur. Instead, a true long-term investor plans on losses occurring with a similar frequency and magnitude as they have in the past.

But in your 60s, particularly if you are a year or two from retirement, you need to make sure that one of these regular downturns wouldn’t derail your retirement plans.

When running a Monte Carlo analysis for clients and prospect clients, we will come up with a probability of success that a person or couple doesn’t run out of money before age 95. (Why age 95? Because for married couples age 65 or older, there is a 50% chance that one person will live to age 95.)

So let’s say I’m working with someone that is 62 years old and planning to retire sometime in the next few years. If their financial plan works, say, 85% of the time, that means 15% of the time an adjustment to the plan is required to avoid running out of money before age 95.

The reason I share this is because when I dig into the internals of the 150 failed trials out of 1,000 runs of the model, typically the reason the plan fails is because of a poor sequence of returns in the few years just before or right after retirement.

When I dig into the internals of the 150 failed trials out of 1,000 runs of the model, typically the reason the plan fails is because of a poor sequence of returns in the few years just before or right after retirement.
– Peter Lazaroff

Sequence of return risk is simply the risk of lower returns early on in your withdrawal period. When you run a Monte Carlo analysis, the order of your investment returns are randomized. And whether you realize it or not, that order (or sequence) of your investment returns can significantly impact your portfolio’s ability to fund your retirement, particularly if that market decline is paired with rising inflation.

There are two portfolio considerations that come to mind that can reduce and/or mitigate this sequence of return risk.

The first is adjusting your asset allocation to a more conservative mix of stocks and bonds. Doing this decreases the magnitude of losses your portfolio will experience, which in turn means that you sell at less depressed prices to meet retirement expenses.

A second approach—and my preferred option—is setting aside one to two years’ of living expenses in cash. This has a similar effect as making your asset allocation more conservative, but shifts the focus from the portfolio to the balance sheet. By making this a balance sheet issue rather than a portfolio issue, you remove the need to make timing decisions for multiple portfolio adjustments (once heading into retirement and once when you feel that the sequence of return risk is no longer an issue).

The idea with this approach is that you would live off your cash rather than your portfolio during the first bear market so that your portfolio has time to recover.

We can never predict when or why the next bear market will happen, so that’s why it’s important to plan on them.

2. Project Your Future Expenses

There are two components of this process.

The first is knowing what you currently spend. This is a fairly common blind spot I see among new clients, regardless of their age.

Because most retirement planning revolves around at least maintaining your current lifestyle, knowing what you currently spend is a crucial input.

Underestimating your current spending increases your chances of not having enough money in retirement.

Conversely, overestimating your current spending – and a little conservatism in measuring your current expenditures is okay, but I’m talking about wildly overestimating what you spend today – that could result in you working longer than what’s really necessary. Or missing out on the opportunity to work less or work in a role that makes you happier. Overestimating your current expenses could also lead to you missing out on experiences that you would like to enjoy.

I have a cash flow worksheet you can download in the show notes at thelongterminvestor.com, but the simplest way to measure your spending is to download transactions from your bank account. As long as the same bank account is used to pay all of your bills and credit cards, then it will capture what you spend in a year.

Now sometimes I hear people say: “Well, last year had some unusual expenses.” Trust me, every year has some unusual expenses. One-time expenses are just part of life.

If you have the data to take the average of two or three years of spending, perhaps that smooths out the one-time expenses to give you a better estimate for the purposes of projecting future expenses.

So that’s the first piece of projecting your future expenses: knowing what your currently spend.

The second component is understanding the types of new expenses you will have in retirement. It’s fairly common to see an uptick in expenses during the first few years of retirement.

Think about it, there’s less opportunity to spend money when you spend a large portion of your days at work. But when you’re retired, you have lots of free time.

So while the current expense number is a good starting point for retirement expenses, you will want to account for at least a temporary bump in spending. Knowing that you want to take X number of trips per year that cost Y dollars goes a long way. Maybe you’ll want to help out your kids or grandkids in one way or another.

To recap, so far we’ve talked about preparing for market downturns and projecting your future expenses. The next item is related to expenses and that is…

3. Eliminate Your Debt

I’m going to make this pretty short because the case here is pretty simple: eliminating debt helps reduce the fixed costs you have to cover in retirement.

Now is the time to get more aggressive with making principal payments to your highest-interest debt that is not a traditional mortgage.

If your only debt remaining is your mortgage, you don’t want to necessarily prepay your mortgage at the expense of, say, building that 1-2 year cash reserve I mentioned earlier or making retirement plan contributions.

The right answer on a mortgage is going to vary from person to person based on the remaining loan balance, terms, how long you plan to stay in the house, etc.

4. Educate Yourself

One thing I notice among many investors approaching retirement is that they tend to pay more attention to their portfolio and/or the overall market.

I’ve always attributed this to nerves about relying primarily on their portfolio for income rather than their human capital. I’ve heard others suggest that it happens because people in their 60s finally have a bit of free time.

Regardless of the reason, I think being intentional with your investment education is a very good investment (no pun intended).

But most people consuming financial, and particularly investing, content aren’t doing so in an intentional manner. The other issue is that the type of content that tends to garner the most attention is forecast-based.

I can tell you from experience that people who consume forecast-based content have a tendency to want to alter their investment strategy. But this becomes a harmful cycle because an investment strategy based on forecasts is inevitably going to lead to some rough patches at some point.

We know this because there is an overwhelming amount of evidence that shows humans are bad at predicting the future, regardless of what topic is being predicted. So when that inevitable rough patch comes, you’re going to change your strategy. And it becomes a harmful cycle of jumping from strategy to strategy.

I suppose a rule of thumb might be: never make a change to your portfolio based on any newsletter or newspaper article or television show or podcast or video – basically, never make a change to your portfolio based on any content other than maybe a book.

If you currently work with a financial advisor, you might consider asking that person for some book recommendations. If you don’t work with an advisor, here are my personal book recommendations:

On to the final item of Investing in Your 60s…

5. Understand Your Advisor’s Succession Plan

As I’ve reiterated throughout the episodes in this Investing By Age series, perhaps the most important step to take before retiring is meeting with a financial advisor.

There are some complicated and potentially stressful elements of retirement planning. A good financial advisor can ease the burden by ensuring you have the best plan to live out your dream retirement.

If you already have an advisor, you owe it to yourself to meet with him or her regularly to discuss your plans at this crucial stage in your financial life.

But even the best advisors will retire at some point in time.

Unfortunately, not all advisors plan for the inevitable. In fact, according to the Financial Planning Association, only 27% of advisors have a formal succession plan in place. And even those with a formal plan haven’t necessarily started the succession process.

But retirement isn’t the only thing to consider. It’s also common for an advisor’s career to shift such that they will no longer be your advisor, whether that’s through internal promotion or leaving their current role for another opportunity.

It’s important to know who would take over your account.

What are their credentials and experience?
How involved are they with your account today, and is there a process in place to get them up to speed if they don’t normally work with you?
Do they work with other clients who are like you, and therefore familiar with your needs and goals at this critical stage of life?

These are the types of questions you need to be asking your advisor. Ideally, you would be able to work with the same person throughout your retirement. But if you know that isn’t possible (either because of your current advisors’ age or the way their business is structured) you should really understand who will be helping you as you age.

Planning for retirement is critical—especially in the years leading up to it. Again, I’d encourage you to download my eBook with the more comprehensive retirement readiness checklist.

Follow these steps to put a strategy in place that allows you to embrace your pending retirement rather than dread it.

In our next episode, we will look at Investing in Retirement.

We cannot predict when market downturns will happen, this is why I help all my clients plan for them in advance.
Peter LAZAROFF

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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

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