The Portfolio is NOT the Plan

The Portfolio is NOT the Plan

When the topic of retirement planning comes up, most people concentrate on the portfolio and what it’s invested in.  Are they in the right funds?  Should they buy individual stocks instead? Certainly, when establishing retirement projections, you need to establish a baseline rate of return necessary to achieve your goals.  Then you need to structure a portfolio that given a long enough time horizon should hopefully approach that hypothetical rate of return.  But, let’s not confuse that as the primary driver of retirement success.  The portfolio is not the plan.

So, what are the drivers of retirement success?  There are three primary issues that will determine if most people will achieve whatever they define as a successful retirement.

The first one is time.  The most popular statement I hear from folks saving for retirement (successful people to be sure) is that they ALL wish they would have started earlier.  The best time to have started planning for your eventual retirement is always yesterday.  But better than yesterday, would have been the day before yesterday, and so on.  The sooner you get started, the better.

The younger you are, the more you can use the power of compounding interest to your benefit.  But even if you are already close to retirement, but haven’t done much planning, don’t use that as an excuse to avoid saving further.  What you could save between now and retirement could amount to a great deal of flexibility.

Second, is the amount of money you contribute towards your retirement.  Next to time, the next best thing you can do is save as much as possible as a percentage of income.  This has a two-fold effect.  The first obvious effect is simply that you’re saving more money.  But it goes a step further.

Let’s say you manage to save 15% of your income.  This means that you are living off approximately 85% of your income (before taxes, etc…).  Then let’s say that you are on pace to pay your home off by retirement which is another 15% of your income.  This would effectively mean that you could have a goal of only 70% of your pre-retirement pay and not have a reduction in your standard of living.  The more you contribute to your plan, the easier it is to maintain your standard of living.

Last, but not least is controlling your behavior.  No matter how many years you give yourself or the amount of money that you invest towards your plan, if you continually blow yourself up, it won’t matter too much.

How might somebody kill their plan?  A few examples are trying to time the market, making poor investment choices, or taking early withdrawals from their retirement plan investments to fund their lifestyle.  In the long run, these negative effects can compound in the wrong direction keeping people from ever reaching their goals.

Behavior may actually be the most difficult to measure.  After all, if these decisions were obvious, why would anyone make them?  If you aren’t 100% confident in the direction of your retirement plan and the tools you are using to get there, seek out the help of a qualified professional to see if you’re on the right path.  The value that a good advisor can add when the going gets tough can be invaluable.

In summary, control what you can control.  There is so much focus on the rate of return, and that the factors that you can actually control are portrayed as minor details.  Just remember, the portfolio is never the plan.  Don’t misunderstand – rate of return is important.  But if you start too late, barely fund your plan, or constantly shoot yourself in the foot, then even the best portfolios will be unlikely to save you.  Making smart choices today and sticking with the right behaviors can make all the difference in the world.



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